Canadian Fall Economic Statement Regarding Tax Treatment of Employee Stock Options

In the 2019 federal budget, the Canadian federal government announced changes to the taxation of employee stock options. On November 30, 2020, in its Fall Economic Statement, the federal government announced it was moving forward with plans to amend the tax treatment of employee stock options and released further information. Beginning July 1, 2021, stock options granted on or after this date will be impacted by these new rules.

Under the current rules, when an employer (a corporation, either Canadian or foreign, or a mutual fund trust) grants an employee a stock option, which the employee exercises, a taxable employment benefit will arise equal to the difference between the exercise price and the fair market value (or market price) of the shares on the date of the acquisition of the options. Where certain conditions are met, employees are entitled to a 50 percent deduction against the taxable employment benefit. In effect, only half the benefit is included in income of the employee and subject to tax at marginal rates. While normally the benefit (either 100 percent or 50 percent of the taxable employment benefit, if qualifying) is included in the employee’s income on the date of exercising the stock options, if the employee exercises a stock option of a Canadian-controlled private corporation (“CCPC”), the taxable employment benefit is deferred until the employee disposes of the shares acquired on exercising the options.

For an employee who is granted stock options from an employer impacted by the new rules, a $200,000 annual vesting limit (based on the value of an option’s underlying shares at the date of grant) is imposed for options that can qualify for the 50 percent employee stock option deduction. The amount of the benefit arising from the exercise of the stock options over the $200,000 vesting limit will not be entitled to the 50 percent deduction and will be fully included in income.

For employee stock options in excess of the $200,000 limit, the employer will be entitled to an income tax deduction in respect of the stock option benefit fully included in the employee’s income. An employer may also elect to claim a deduction for stock options below the $200,000 limit but the employee will not be entitled to the 50 percent reduction against the taxable employment benefit in respect of the amount claimed as a deduction by the employer.

Corporations that are CCPCs, or not CCPCs but it, or the consolidated group of which it is part, have annual gross revenues of less than $500 million, are exempt from these new rules. This may include American employer corporations with Canadian employees, so those will existing stock option plans, or those considering the set-up of a new plan, may wish to consult their tax advisors.

If you have any questions or would like further information, please contact Jennifer C. Leve in the Toronto, Canada office of Dickinson Wright at 416-777-4043.

‘Tis the Season of Charitable Giving

As the year winds down, the fundraising efforts of many charitable organizations ramp up. This is for good reason as, on average, charitable organizations raise around 40% of their annual revenues during the holiday season.

As we’ve written earlier in the year on the DW Tax Blog, this year’s “giving season” comes with a new wrinkle – generous tax benefits for charitable contributions provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was signed into law on March 27, 2020. A summary of these benefits, some of which are only available with respect to contributions made in 2020, follows.

New Charitable Deduction Available: A taxpayer who takes the standard deduction may deduct up to $300 in cash contributions to charities (other than private non-operating foundations, supporting organizations, and donor advised funds). This deduction is an “above the line” adjustment which reduces a taxpayer’s adjusted gross income (AGI).

Increased Charitable Deduction Limits: Individual and corporate taxpayers that itemize may take advantage of increased limits on charitable deductions. An individual taxpayer may deduct cash contributions to public charities of up to 100% of the taxpayer’s AGI (compared to 60% in 2019). A corporate taxpayer may deduct contributions to public charities of up to 25% of the taxpayer’s taxable income (compared to 10% in 2019). These higher limitations do not apply to contributions to private foundations or donor advised funds.

Qualified Charitable Distributions: While the CARES Act suspended Required Minimum Distributions from many retirement accounts for 2020, qualified charitable distributions (QCDs) remain a viable strategy for the satisfaction of charitable goals for the year. Under the QCD strategy, an individual taxpayer may transfer up to $100,000 from the taxpayer’s IRAs directly to one or more public charities and exclude such amount from the taxpayer’s AGI. Such transfers also serve to reduce the taxpayer’s taxable IRA balance. The QCD strategy is available to all individual taxpayers – itemizers and non-itemizers.

Many charitable organizations find themselves struggling during these unprecedented times. The need for their services has increased, while their donations and revenues have fallen behind. To combat this issue, the CARES Act provides additional incentive to taxpayers with the hope of stimulating philanthropy throughout the country. To what charity will you contribute?

For more information on charitable giving, please contact Joe Owens in the Troy, Michigan office of Dickinson Wright at 248-433-7515 or any member of Dickinson Wright’s tax team.

Impact of the Presidential Election on Personal Income Taxes

Now that the results of the presidential election are in and former Vice-President Joe Biden has become President-elect Biden, it is important to remember the tax policy changes for personal income taxes announced by Mr. Biden during his campaign that he would propose if elected.  As we review three of these changes, keep in mind that the likelihood of these proposed changes being enacted into law will in large part depend on the results of the January, 2021 runoffs in the two Georgia U. S. Senate races.  If the Republican nominee wins at least one of these two seats, the Republican party will maintain control of the U. S. Senate and the likelihood of these changes being enacted effective for 2021 will decrease significantly.  The lingering effects of the COVID-19 pandemic on the US economy and the need for additional fiscal stimulus could also impact the timing and nature of any tax law changes.

Change #1-      Increases in Income Tax Rates on Ordinary Income

During his campaign, President-elect Biden announced plans to increase the personal income tax rates for the “wealthy” by increasing the marginal income tax rates to 39.6% for married taxpayers who file joint income tax returns and whose taxable income is in excess of $400,000.  Under present tax laws, the taxable income of joint married taxpayers in excess of $400,000 is taxed at rates of 32%, 35% or 37%.  See Table 1 at the end of this article for a chart that shows the 2020 income tax rates and the possible 2021 income tax rates if this proposed increase in the marginal income tax rates becomes effective in 2021.[1]

Change #2-  Income Tax Rate Changes for Qualified Dividends and Capital Gains

Another policy change that President-elect Biden announced he would pursue is removal of the tax rate cap of 20% for qualified dividends and capital gains for taxpayers with taxable income in excess of $1,000,000.  Under present law, qualified dividends and long term capital gains are taxed at rates of 0%, 15% or 20% depending on the taxpayer’s taxable income.  For 2020, capital gains of married taxpayers who file joint returns and whose taxable income exceeds $496,600 is taxed at 20%.  Both types of income (qualified dividends and capital gains) are subject to additional taxation at 3.8% (Net Investment Income Tax, or NIIT).  Mr. Biden has not announced any plans to repeal or modify the NIIT, which was originally enacted to help pay for the health care provisions of the Affordable Care Act.

In addition, Mr. Biden has proposed a limitation on itemized deductions for taxpayers with taxable income taxed at the 28% and higher brackets.   As noted in Table 1, if this change had been in effect for 2020, it would apply to married taxpayers who file joint returns with taxable income in excess of $326,600.

Change #3-  Increase in Earned Income Subject to Social Security Taxes

President-elect Biden has announced his intention to propose a change in the amount of earned income subject to Social Security taxes so that earned income of taxpayers in excess of $400,000 will become subject to Social Security taxes.  Under present law, earned income up to $137,700 is subject to Social Security taxes[2].  For individuals who are self-employed, the Social Security tax rate is 12.4% with a deduction for half the Social Security taxes paid.  For employees, employers pay 6.2% and employees pay 6.2%.  Social Security taxes are payable by each taxpayer (and his or her employer) on a per individual basis regardless of the tax filing status of the taxpayer.  In addition, earned income is subject to a Medicare tax of 1.45% without any limit.  Mr. Biden has not announced any plans to change the present Medicare tax.

In conclusion, individuals, particularly the “wealthy”, should monitor closely the political intrigue that will ensue over the next few months in order to determine if their personal income tax planning will need to be changed for 2021 and future years.

If you have questions about how the proposed tax policy changes will affect your tax planning if enacted by Congress, Dickinson Wright attorneys are here to help.  For more information, call Ralph Z. Levy Jr., Esq., at 615-620-1733 in the Firm’s Nashville, TN office or any other Dickinson Wright PLLC attorney who is part of the Firm’s Tax Practice Group.

Table 1- Possible Tax Rate Changes
2020 Tax Rates (Joint Married Taxpayers)   Potential 2021 Tax Rates (Biden Plan)
$0 – $19,750 10% 0 $0 – $19,750 10% 0
19,751  –  80,250 12% $  1,975.00 19,751  –  80,250 12% $  1,975.00
80,251 – 171,050 22% $  9,235.00 80,251 – 171,050 22% $  9,235.00
171,051 – 326,600 24% $29,211.00 171,051 – 326,600 24% $29,211.00
326,601 – 414,700 32% $66,543.00 326,601 – 400,000 32% $66,543.00
414,701 – 622,050 35% $94,735.00 over $400,000 39.6% $90,031.00
over $622,050 37% $167,307.50

[1]           The tax rates and brackets shown in Table 1 are in effect in 2020 for married taxpayers who file joint income tax returns.  The seven income tax brackets shown in Table 1 do not reflect the increases to the tax brackets that will become effective in 2021 based on annual inflation adjustments.  For example, married taxpayers who file joint income tax returns and who have 2021 taxable income in excess of $628,300 will be taxed at the highest 37% rate.  This is a $6,250 increase from the $622,050 bracket amount shown in Table 1.

[2]           Based on an annual inflation adjustment, 2021 earned income up to $142,800 will be subject to Social Security taxes.