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Oil startups urge Liberals to reconsider raising taxes on stock options

OilPump

It’s not just tech entrepreneurs who are concerned about the Liberal campaign promise to raise taxes on stock options.

Small oil and gas firms also say they want the government to reconsider its pledge to cap the amount that employees can claim through stock-option income deductions. They say the change, if implemented, will be another blow to an industry already downtrodden by depressed crude-oil and natural-gas prices.

“Options are a very, very key motivating factor to convince people to join startup firms,” said Chris Slubicki, chief executive of Modern Resources Inc., a private oil and gas company.

“In these difficult times, we would certainly hope the government would reconsider a punitive taxing policy.”

During last year’s federal election campaign, the Liberals focused their fiscal policy on tax breaks for the middle class and increased taxes for high-income earners. One of the planks of that platform was a promise to set a cap on how much can be claimed through stock-option tax deductions.

Currently, employees with stock options can claim deductions that effectively cut the tax rate on stock-option income in half. The Liberals acknowledged they are a useful compensation tool for startup companies, but said high-income Canadians often deduct hundreds of thousands of dollars from their individual taxable incomes via stock options. The party noted that any new cap would ensure employees with up to $100,000 in annual stock-option gains will be unaffected.

Last month, a group of Canadian tech entrepreneurs said fast-growing startups need help recruiting top foreign talent, and asked the federal government to back down from the cap.

But Mr. Slubicki said it’s not just tech startups that will be affected. He said every one of his energy firm’s 22 employees takes a lower salary than they could earn at a larger company and have some of their own money invested. They have taken this monetary gamble, he said, in hope that the company will some day be a success.

“These options are not a freebie. Every single one of our employees has capital at risk with no guarantee,” he said, adding that Canada’s stock-option tax deduction “model has worked very well in motivating people to take the risk of a startup in any industry.”

Startups also provide benefits to the broader Canadian economy, Mr. Slubicki said, including new jobs, tax revenues and royalties.

Glenn Gradeen, chief executive officer of Tangle Creek Energy Ltd. – a private company focused on light oil – said the vast majority of startups fail. “You’ve got to have the benefit for when you succeed to cover off the times when you don’t,” he said.

Mr. Gradeen said he’s also concerned the government will eventually pick winners and losers, and allow some sectors to continue to claim the same stock-option deductions while capping others. “I know oil and gas isn’t popular. It’s not popular in the press.”

On Friday, Federal Finance Minister Bill Morneau will be in Calgary, and will meet with energy and environmental sector leaders as part of a cross-country, prebudget consultation tour.

Daniel Lauzon, a spokesman for Mr. Morneau, said the department understands stock options are a legitimate and valued form of compensation.

“The measures outlined in the platform are not intended to harm startups and middle-class Canadians who are building their companies here in Canada,” Mr. Lauzon said in an e-mail. “We look forward to hearing from as many groups and individuals as possible – including the tech and energy sectors – about what their families and communities need to thrive.”

Scott Munn, a partner at Hugessen Consulting Inc. who specializes in executive compensation, said the issue of taxation on stock options is more pronounced for smaller energy companies, which now use stock options more than mid-sized or larger industry players.

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