The April 2024 federal budget proposals to reduce the individual deduction on stock option benefits and increase the capital gains inclusion rate has not yet passed into law. However, two recent announcements from the Canada Revenue Agency (CRA) confirm that the CRA will administer 2024 employee and employer tax reporting based on the proposals.
The April 2024 budget introduced significant changes to the treatment of stock option benefits and capital gains received by individual taxpayers, together with changes to the tax treatment of capital gains received by corporations.
Before the changes in the budget, individual taxpayers could claim a 50% deduction on qualifying option benefits and most capital gains. The changes proposed in the budget would restrict this 50% deduction on combined capital gains and stock option income up to $250,000 per year, with such income over this threshold eligible for only a 33% deduction. For 2024, the $250,000 limit applies to income realized on or after June 25, 2024.
Draft legislation to effect the budget proposals was introduced in September 2024 and has not received royal assent. However, two recent updates from the CRA confirm that the Agency will be administering the changes based on the draft legislation.
The first update announced that the CRA will release updated 2024 tax forms for impacted individuals, trusts, and corporations to reflect the draft legislation. The new forms will be available by January 31, 2025.
The second update includes instructions for the preparation of 2024 T4 slips for employees who exercised stock options, as follows:
For options exercised before June 25, 2024, T4 reporting will remain the same as in prior years:
For options exercised on or after June 25, 2024, new T4 reporting will be:
The draft legislation and the administrative guidelines indicate that despite the requirement to report a 33% deduction on the T4, an employee would still be eligible for a 50% deduction on the Box 90 option benefit as long as the benefit is below $250,000 and the employee has no other income driving the capital gains inclusion rate into the 66.67% bracket. It is assumed that the remaining deduction will be claimed on the employee’s tax return.
Although this CRA guidance regarding T4 preparation is helpful, the release of tax forms at the end of January does not leave much time to review and determine the data that will be required to complete these forms. The changes to the T4 preparation are relatively straightforward, but may be difficult to integrate into existing payroll software systems, particularly given the short time frame to make any necessary system changes.
More fundamentally, there is no guidance on the withholding rate that employers should apply to option exercises on or after June 25, 2024. The CRA’s intent to administer the budget proposals may be another reason for employers to consider increasing their withholding rates, if they have not already done so, but this is still a nuanced decision that each impacted employer will need to consider.
It should be noted that there is still a chance that the budget proposals will not pass into law. However, the 2024 employee and employer tax reporting guidance indicates it will be proceeding on this basis.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Chelsea Coosemans
Partner, Toronto
Dan Trinh
Partner, Vancouver
Alex Legg
Director, Calgary
Gary Li
Director, Toronto
Further information on Vialto Partners can be found here: www.vialtopartners.com
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