This tax perk for wealthy CEOs will cost Canada $840M this year

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It’s conscripted the stock option deduction — a tax break for employees that critics say in great measure benefits wealthy corporate executives. According to the finance department, safeguard this perk intact will cost Ottawa a projected $840 million this year.

That’s one motive many critics would like to see the deduction eliminated.

«It’s outrageous,» bring ups Dennis Howlett with the advocacy group, Canadians for Tax Fairness. «Why longing we give more money to those who are already overpaid and extremely rolling in it?»

The federal Liberal Party at one time agreed. As part of its 2015 manoeuvres promise «to target tax loopholes that particularly benefit Canada’s top one per cent,» it cheered to cap the stock option deduction.

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During the 2015 election, the Liberals contracted to cap the stock option deduction. (Fred Chartrand/Canadian Press)

Then five months after sweet the election, the new Liberal government quietly abandoned the plan in its first budget.

Howlett and other critics upon that in Wednesday’s second budget, Ottawa will finally complete up to its election promise and claw back the perk. Howlett claims the transfer would generate millions of dollars for social programs.

«To not do anything leave be totally unjustifiable,» he says. «We’re throwing the money away.»

Income strained at a discount

Stock options are a potentially lucrative part of employee compensation where executives and at times other employees can purchase company stock at a set price. When they dough in the stock, if certain conditions are met, any profit is typically taxed at only half the place of regular income.

In other words, people who already benefit from clichd options also get an added bonus of a major tax discount.

Advocates of the perk make a case that it encourages innovation by helping startups and smaller companies appeal to new talent.

«It’s just part of the small company culture, really, because they can’t pay stocky salaries,» Rod Thomas, president of the Prospectors & Developers Association of Canada, acknowledged CBC News in March.

But most employees who are granted stock options are already withdrawing in fat salaries, argues David Macdonald, senior economist with the Canadian Core for Policy Alternatives. The organization is a left-leaning think-tank focused on economic and communal policy.

«If you are getting paid in stock options, it’s fairly likely you’re lyrical wealthy,» says Macdonald. «It’s incredibly concentrated among the richest CEOs.»

Tax reveals for top earning CEOs

A recent study by the Centre for Policy Alternatives recounted that in 2011, about 99 per cent of the benefits from the stockpile option deduction went to Canada’s top 10 per cent of income earners.

In a more recent study on CEO salaries, the organization reported that among the highest clear 100 CEOs in Canada in 2015, 75 received stock options as let go of their pay package.

Top earners included Hunter Harrison, then the CEO of Canadian Pacific Railroad. According to the report, he earned $2.8 million in base pay. On top of that, his beasts options were worth an estimated $5.2 million.

If he had cashed them in, most likely that $5.2 million would be taxed at half the rate of his draw salary. 

«[CEOs] get big breaks on this,» says Macdonald. 

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When Tracker Harrison was CEO of CP Rail, his stock options were worth an estimated $5.2 million in 2015. (Shaun Master/Reuters)

Howlett says the government could protect smaller tasks by capping the amount that is taxed at the lower rate, instead of axing the stoop stock option deduction altogether.

The Liberals came up with this stance themselves during the election, pledging to fully tax individual stock opportunities gains over $100,000.

Then in March, according to the Canadian Press, Underwrite Minister Bill Morneau halted the plan, stating that he was cultivated by «many small firms and innovators that they use stock selections as a legitimate form of compensation for their employees.»

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in March, Finance Plenipotentiary Bill Morneau shelved a plan to change the taxation rate for deal in options. (Adrian Wyld/Canadian Press)

«I don’t know why they weren’t sharp enough to say, ‘OK, we’ll just put a cap on it so it still helps the startups but closes this quibble that helps all the big rich CEOs,'» says Howlett.

CBC Account asked the government why it backtracked on its plan to cap the stock option deduction. 

«Our supervision is committed to strengthening the middle class,» wrote department of finance spokesperson Annie Donolo in an email to CBC Dope. As part of its commitment, the government is reviewing the tax system as a whole «to ensure fairness, intelligibility and effectiveness,» she said.

She made no mention of the deduction helping startups, the fitting the Liberals gave last year for not changing it.

Donolo would not say if the taxation of trite options will be addressed in the upcoming budget. 

A federal budget study issued last week by RBC stated that there is speculation that the budget resolve increase taxes on capital gains — profit from the sale of a wherewithal asset which is also currently taxed at half the rate of level income.

Any change to the capital gains tax could also affect the make available options deduction.

«That move could be hard to square with the supervision’s billing of the document as an innovation budget, given that some sectors use stock-based compensation to appeal to talent,» said the RBC report.

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