Close Stock Option Loophole - Why should we subsidize super rich CEOs?

Monpoly man

In Canada, there is one set of tax rules for corporate insiders, another for the rest of us. The stock option loophole is among the more blatant examples of this lopsided state of affairs.

It is a favourite of bank presidents and other wealthy CEOs. Under current tax laws, they can be paid in stock options and later cash them in, drawing millions in income. But, unlike a regular salary, the first 50 per cent of stock option income is tax free. What’s not for these guys to love?

In the privacy of boardrooms and country clubs, the wealthy admit it would be foolish not to take advantage of what the government has made legal. So they do. Bankers, big pharma CEOs and real estate magnates have used it for years.

The latest report, Out of the Shadows, by the Canadian Centre for Policy Alternatives calculates that federal and provincial governments lose at least three quarters of a billion dollars annually from this one section of the Tax Code.

The Canadian government has forfeited billions in tax revenue by keeping this loophole on the books for the past three decades. Year after year, both Liberal and Conservative governments shrug their shoulders and cite vague trickle-down theories to claim that it benefits our economy. They’re conveniently silent on how it benefits their friends — the donors, the former prime ministers and current senators who sit on corporation boards that engage in the stock option game.

Ottawa has come close to getting rid of this tax perk. During the last election, the Liberals promised to fully tax individual stock options gains exceeding $100,000. They branded it as their commitment to increase taxes on the wealthiest Canadians. Voters believed them. But then a flurry of lobbying just before the 2016 budget broke Finance Minister Bill Morneau’s resolve.

Those lobbyists claimed that stock options are a key tool for successful start-ups. A new enterprise is more likely to attract and retain high-powered talent, they said, if it can offer stock options in its early years, when it’s unable to pay high salaries. 

Fair argument. But hold on a moment … 

The top users of the stock option loophole are not Canada’s next big tech innovators or job creators. Instead, the list reads like the Who’s Who of the one per cent: three bank presidents, a CEO of a mega-pharmaceutical company, real estate developers, the head of the world’s largest potash production company, and an energy firm heavily involved in pipeline development. There’s nothing remotely ‘start-up’ about any of those operations. These are long-established millionaires who are not taking money out of their pockets to invest in a new idea. For them, and their accountants, this is simply a tool to avoid paying tax on what they earn.

A study by the Canadian Centre for Policy Alternatives found that in 2013, 75 of Canada’s 100 top-paid CEOs received part of their income in the form of stock options. The loophole enabled them to accrue combined savings of $495 million, or $6.6 million each. That’s half a billion dollars of foregone public money to subsidize 75 very rich people. More than 90 per cent of the benefit from this tax loophole goes to that top one per cent of earners.

It’s enough to make the average taxpayer shake with rage.

And public criticism is growing. Recently, a Toronto Star editorial took the finance minister to task over the costly flip-flop on his election promise. High profile fund manager Stephen Jarislowsky has called the whole set up “obscene”. The Quebec-based Institute for Governance of Private and Public Organizations has urged government to eliminate all personal and corporate tax benefits which favour stock options as a means of compensation. And Roger Martin, former dean of the Rotman School of Management at the University of Toronto, calls the current system for stock-option compensation “indefensible.”

So why is the finance minister listening only to the people who profit from this perk?

There are thoughtful solutions that can promote the innovation that Canada needs. Some of them — including enabling start-ups to use up to $100,000 in stock options — could achieve the original purpose of this measure. Solutions were proposed in the Liberal and NDP platforms during the last election campaign. It’s time to re-look at those options.

These companies and their senior executives profit from Canada’s infrastructure and our legal, health and education systems. Yet the Canadian tax system has careened towards “the more you have the less you should pay” for decades, leaving regular taxpayers to foot the bill for those things we value.

The federal government has promised to review all tax loopholes and close those that are unfair or ineffective. Stock options would be a very good place to start.

This piece originally appeared in IPolitics.