The Broadbent Blog

OECD to Canada: tax stock options to combat inequality

The OECD Economic Survey of Canada released today calls for tax reforms which would increase government revenues while also reducing inequality, specifically calling for changes to preferential treatment of stock options.
Noting that income inequality in Canada is above the OECD average and has been rapidly rising in recent years, the organization states that "there is also scope for the federal government to increase efficiency and reduce income inequality by further reducing tax expenditures that benefit relatively higher income households, such as... preferential treatment of stock options” (p. 38).
As I have explained before, in Canada stock options are taxed as if they are capital gains income, meaning that only 50% of the gain from exercising an option to buy stock at below the market price at which it can be sold is taxable. This is the case even though there is no risk of a loss.
Special tax breaks for stock options primarily benefit senior corporate executives, especially CEOs of large public companies who are commonly given the right to buy shares in the future at heavily discounted prices. Options make up a big slice of  the total compensation of senior corporate executives.

90% of the benefits of the stock options tax break go to the top 1% of taxpayers. The stock options tax break costs the federal government $785 million per year, according to the Department of Finance.

Stock options are not only unfair, they are also economically destructive in that they encourage corporate executives to boost short-term profits just before options become due. This comes at the cost of long term corporate performance according to Roger Martin, former Dean of the Rotman School of Management at the University of Toronto.

Photo: LendingMemo. Used under a CC-BY-2.0 creative commons liscence