Five tax tips for using employee stock options
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By Knowledge Bureau  | Tuesday, February 06, 2018



By Evelyn Jacks

Within today’s rapidly emerging new economy, many employers are enticing talent with employee stock option plans. These give employees the opportunity to purchase shares in their corporations at some future date, at today’s lower price. But there are tax consequences. What do employees need to know?

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 for.

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 employee’s income.

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 them . 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 particular situation.

This article 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

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.

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