TORONTO, Oct. 7, 2015 /CNW/ - The federal Liberals and the NDP are right about this much: There is a more sensible way to tax the stock options that are granted as compensation by corporations than the approach the federal government takes now. But both parties are wrong about how much revenue an appropriate tax reform will add to the treasury. Far from the half-billion dollars or more in additional tax revenue both parties calculate they will enjoy by changing the taxation of stock options, the appropriate reform will actually result in marginally lower tax revenue. This, according to a report released today at a press conference with authors Jack Mintz and V. Balaji Venkatachalam.
As it stands, stock options are treated differently than salary and other forms of cash compensation when it comes to taxing an employee or director, in that they are subject to only half taxation, similar to capital gains. They are also treated differently than cash compensation for the corporation granting the options, in that they cannot be deducted from corporate income tax. The federal NDP and Liberals have both accepted the growing criticism, which only intensified in the aftermath of the 2008 financial crisis, that the lower tax rate is an unfair tax break for those employees who receive stock options. Both parties have proposed to change that, leaving an exemption for startup companies only, with the NDP proposing full personal taxation for all stock options and the Liberals proposing it for options-based compensation exceeding $100,000.
The report argues that treating stock options like cash compensation would indeed be more tax efficient, reducing the distortionary effect that can influence company compensation packages in favour of stock options. But the only way to ensure that efficiency is by treating both the personal tax side of the benefit, and the corporate tax side of the benefit, in the same way as cash compensation. That is, applying full taxation to the recipient means also allowing the same deduction to an employer allowed for other forms of compensation. Changing only the personal side merely replaces one type of distortion with another, and will only result in discouraging employers from granting options, by making it a more expensive form of compensation than salary.
The NDP predicts its proposal to impose full personal taxation on stock options will raise $500 million. The Liberals predict that their similar proposal will actually raise more: Approximately $560 million. But neither proposal acknowledges the necessary symmetrical adjustment for corporations — the tax deductibility of stock-option benefits. In fact, the report calculates that the net affect for federal and provincial governments would be a slight net loss of $12 million.
The NDP and the Liberals are onto a good idea in proposing a more efficient way to tax stock options. Regardless of who wins the election, it is the right approach. But it cannot be done fairly, or successfully, without also including a deduction for the employer. And once that is accounted for, as sensible as their proposals may be, neither party should expect any extra spending money to come from implementing this change.
The paper can be downloaded at http://www.policyschool.ucalgary.ca/?q=research
SOURCE The School of Public Policy - University of Calgary
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