1. There are no tax consequences when the option is granted.
However, the exercising of these employee security or stock
options gives rise to a taxable benefit. It is computed as the difference
between the market value of the shares purchased and the exercise price
(the market price at the time the options were acquired). When the benefit
is included in your income depends on what kind of corporation you work
2. What kind of corporation do I work for?
When do you need to include the benefit in income? That depends on the kind
of corporation you work for. When options are granted by an employer that
is a Canadian Controlled Private Corporation (CCPC), the taxable benefit
(and the requirement to include its value in reported employment income) is
deemed by the Income Tax Act) to have arisen only when the employee disposes of the shares.
Where the option is granted by a public corporation, or by a private
corporation that is not Canadian-controlled, the taxable benefit is deemed
to have arisen when the employee exercises the option.
In either case, the taxable benefit includes the discount in income,
bringing the employee on an equal footing with an investor who purchased
the shares on the market.
3. Am I eligible for the Security Options Deduction?
Here’s a third important point: When the taxable benefit is included in
income, the employee may also be eligible for the Security Options
Deduction, which is equal to one half of the taxable benefit. This benefit
is available in the year that the taxable benefit is included in the
This benefit is designed to put an employee who purchases shares through a
security options plan on the same income tax footing as an individual who
acquired the shares on the stock market. That is, only 50% of the
difference between what the employee pays for the shares and the proceeds
of disposition is included in income. Note that this deduction is used in
computing taxable, not net, income, which means this employment
benefit will still reduce refundable and non-refundable tax credits.
4. Do I meet all the criteria for the deductions?
There are some special rules to observe before you claim this deduction on
your tax return, depending on where you work. In the case of a CCPC, the
Security Options Deduction is available only if the
employee holds the shares for at least two years before disposing of
. Your employer will make this determination and include the taxable
benefit and the deduction on your T4 slip.
5. Am I keeping comprehensive records of claims?
The employment income benefit you report will be added to the actual cost
of the shares and so will affect the adjusted cost base (ACB) of the
shares. This will be relevant in the future when the securities are
disposed of, so it’s important to keep detailed records.
In summary, employee stock options are a great way to participate in the
growth of a new company. Knowing the tax rules will help to keep the most
of the opportunity in your jeans. Speak to a tax specialist about your
originally appeared in the
Knowledge Bureau Report, © 2018 by The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Evelyn Jacks’ latest book,
NEW ESSENTIAL TAX FACTS: How to Make the Right Tax Moves and Be
Audit-Proof, Too will be published in February and is now available for pre-order.
Notes and Disclaimer
©2018 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.