Some of Canada’s largest technology companies say upcoming changes to how stock options are taxed will make it harder to recruit and retain top talent, particularly the experienced executives who can help them grow into the global champions the Liberal government has said it wants to encourage.

Ottawa has said the changes are aimed at mature firms in established industries, not emerging businesses creating jobs. But despite assurances to the contrary, they are set to affect fast-growing tech companies like Shopify and Ceridian.

“Stock options are one of our sector’s most important incentives to attract and retain top talent,” said Brandon Nussey, CFO of point-of-sale technology firm Lightspeed. “The proposed tax changes within the federal fall economic statement, if implemented, will harm Canadian tech companies’ ability to be competitive in the global market for talent.”

Many startups and innovation-economy firms issue stock options to staff as a form of compensation, allowing them to hire at more affordable salaries. Employees get the right to buy the equities at a set price, and make money when their value rises above that. Using the federal stock-option deduction, they pay half the usual personal income tax rate on their gains.   

In the March 2019 federal budget, the government announced plans to limit use of the tax break. Following consultations, the November 2020 Fall Economic Statement (FES) spelled out the restriction: employees will only be able to use the deduction on options for $200,000 worth of underlying shares that vest every year. The new limit will take effect for grants from July 1. 

The rules won’t apply to all recipients. Options issued by Canadian-controlled private corporations—a structure commonly used by startups—will be exempt, as will those from any business with $500 million or less in annual gross revenue. The carve-out “will ensure that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand and attract key talent,” the FES states.

But several publicly traded technology firms that are growing rapidly and hiring significantly have crossed the half-billion threshold, or are fast approaching it. And some say the new rule will make it harder for them to keep expanding. 

Montreal-based Lightspeed, for example, brought in US$139.3 million in revenue in the first nine months of its 2021 fiscal year, and is projecting up to US$70 million for the fourth quarter—up from US$120.6 million for fiscal 2020, following organic growth and major acquisitions. Lightspeed has more than 900 employees, and currently has 102 open positions across its Montreal, Ottawa and Toronto offices. 

Ceridian, which had nearly US$843 million in revenue in 2020, will be affected by the new cap immediately. The HR tech firm is headquartered in Minneapolis but is run from Toronto, and in February 2020 announced it would fill 2,000 new jobs in Canada over the following five years. 

To grow beyond a few hundred million dollars in annual revenue, companies need to hire executives with experience at that larger scale, requiring them to recruit in the U.S., CEO David Ossip told The Logic in December. Canada’s higher personal tax rate makes it difficult to attract such candidates, according to Ossip, who also cited the upcoming change to the stock-options deduction. “We can’t attract people because we can’t pay them competitively,” he said, noting that one way companies will adapt is to “start spreading [their] operations more globally [and] following the strong talent.” 

Ceridian recently hired a new chief financial officer and chief product and technology officer in the U.S., making it one of many Canadian tech firms taking advantage of the pandemic-induced shift to distributed teams to recruit remote executives.  

Finance Canada spokesperson Anna Arneson said the new rule limits the benefit of the stock-options deduction “for high-income Canadians who work in mature companies,” but ensures job-creating startups and emerging firms can keep growing and attracting key talent.

“The $500-million threshold was chosen following extensive consultations with stakeholders over a period of 18 months, as to ensure a balance between tax fairness and growth,” she said. “Businesses that grow to that size are a success and should not be treated preferentially under the tax regime for employee stock options.” The department did not answer The Logic’s question about whether the threshold will increase in the future.

Finance Canada estimates the stock-options deduction will cost the government $935 million in foregone tax revenues in 2021. The incentive is top-heavy—in 2017, 2,330 filers, with incomes above $1 million each, paid over $1.3 billion less in tax by claiming it, almost two-thirds of the total.   

The new cap will also affect Ottawa-based Shopify—by far the country’s largest tech firm by market cap—which brought in US$2.93 billion in revenue in 2020. The e-commerce company’s CEO Tobi Lütke publicly opposed an earlier Liberal promise to impose a $100,000 limit. “It would have been harder to build Shopify with the taxation being the way that it’s proposed,” he told The Canadian Press in February 2016. Then-finance minister Bill Morneau ultimately dropped the proposal. 

Shopify lobbied top Finance Canada officials—including the senior assistant deputy minister for the tax branch—in July 2019 and December 2020, according to the federal lobbyist registry, shortly after the release of the budget and FES, respectively, which contained details of the stock-options cap. Company representatives also met with Ian Foucher, director of policy to Morneau, in July 2019, and with Tyler Meredith, who filled the same role for current Finance Minister Chrystia Freeland, this January. 

Shopify did not respond to multiple requests for comment. The company has a workforce of more than 7,000 and plans to hire over 2,000 more into technical positions this year. In May 2020, Lütke announced a shift to a “digital by default” working model, and most jobs now require candidates to be located in a continental region rather than in a specific city or in Canada.

Seven other technology companies listed on the Toronto Stock Exchange had gross revenues of more than $500 million in their last fiscal year, while another three brought in more than $250 million and grew. Descartes, OpenText and Real Matters declined to comment on Ottawa’s stock options changes. Altus Group, BlackBerry, CGI, Constellation Software, Enghouse Systems, Kinaxis and Nuvei did not respond. Not all of those firms are growing rapidly or hiring in significant numbers. 

Former innovation minister Navdeep Bains previously said Shopify—which he often cited as a model for the global innovation champions the Liberal government wanted to foster—and other scale-ups would be exempt from the cap. “From our perspective, the [limit] is clearly focused on large, established companies, for example in the banking [and] telecommunications sectors,” he told The Logic in April 2019. “Companies like Shopify, other emerging companies and companies that are scaling up in Canada would be exempted.” 

The offices of Freeland and current Innovation Minister François-Philippe Champagne both declined to explain why the government reversed its position on the cap exemption. Parliament has yet to pass legislation enacting the FES, including the stock-options provision.