What is the Tax Policy?
Smaller, and particularly newer companies, very often find it difficult to attract and retain people with the necessary executive skills because they do not have enough financial resources to match the higher salaries offered by larger enterprises.
A change in the tax treatment of employee stock options will alleviate this problem. At present, when a taxpayer exercises a stock option granted by his employer, the difference between the fair market value of the shares acquired and the price payable under the option is taxed as ordinary income. A special tax treatment for stock option plans established for employees of Canadian-controlled private companies will be introduced effective April 1, 1977. Under this proposal, the difference between the option price paid for the shares and their sale proceeds will be taxed as a capital gain and then only when the shares are disposed of. This proposal will not apply to an employee who is a controlling shareholder of the company or is related to a controlling shareholder. The stock option will permit this type of company to reimburse its key employees in a way that does not impair its working capital.1
1 Canada, Department of Finance, Budget Document 1977, at 38.