Employee Stock Options

An employer may provide its employees the opportunity to purchase shares in the employer’s corporation at some future date, but at a price that is the current market price when the option is granted (the exercise price).

There are no tax consequences when the option is granted.

However, when the employee exercises these security options (also referred to as stock options) it will give rise to a taxable benefit. The benefit is calculated as the difference between the market value of the shares purchased and the exercise price. This benefit is included in income then, but may qualify for a Stock Options Deduction on Line 249.

The amount of the security options deduction is one-half of the taxable benefit and will be detailed in Box 39 (for a CCPC) or Box 41 of the employee’s T4 slip. The tax treatment differs, however, depending on whether a Canadian Controlled Private Corporation (CCPC) or a public corporation grants the options.

• Options Granted by a CCPC. The taxable benefit included in employment income is deemed to have arisen only when the employee disposes of the shares. The security options deduction is available provided only that the employee held the shares for at least two years before disposing of them.
   
• Options Granted by a Public Corporation. 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.

For options exercised after February 27, 2000 and before March 5, 2010, employees who would otherwise be taxed on stock option benefits in the year the option is exercised could elect to defer a portion of the security options benefit (up to $100,000) until the shares were disposed of by filing Form T1212 Statement of Deferred Security Options Benefits with the tax return each year.

However for options exercised after March 5, 2010, this deferral opportunity is not available. The following rules now apply:

1. When an employee has deferred stock option taxable benefits and subsequently disposes of the securities, the taxable benefits must be reported on Line 101. If the employee is still employed by the same employer, the benefit may be included in Box 14 of the T4 slip. If the employee is no longer employed with the same employer, the amount is calculated on Form T1212.

2. In a year in which a taxpayer is required to include a deferred securities option benefit in income, it will be possible to elect to pay a tax equal to the taxpayer’s proceeds of disposition of the optioned shares. (In Quebec the tax is 2/3 of the proceeds.) This election is made on form RC310 Special Tax On Disposition Of Securities Acquired Under An Employee Securities Option Program and will make sense when the proceeds are less than the taxes payable on the deferred benefit—that is when the value of the stocks has decreased by more than 80% since the option was exercised.

Excerpted from Jacks on Tax. © Knowledge Bureau, Inc. All rights reserved.