The Taxable Benefit on Employee Stock Option Plans

Employees may be presented with an opportunity to purchase shares in the employer’s corporation at some future date, but at a price set at the time the option was granted. This is known as the exercise price.

There are no tax consequences when an employee stock option is granted. But when you exercise these stock or security options, a taxable benefit arises, equal to the difference between the market value of the shares purchased and the exercise price. When is this taxable? It depends on the type of corporation.

If the employer is a Canadian Controlled Private Corporation (CCPC), the taxable benefit is deemed to arise when you dispose of the shares. In the case of a public corporation, the taxable benefit arises when you exercise the option.

When the security options taxable benefit is included in income, you will also be eligible for the Security Options Deduction which is equal to one-half of the taxable benefit.

It is wise to get some professional help before stock options are exercised or the shares disposed of, as complicated new technical provisions must be observed. For example, if the shares acquired under such a stock option are donated to a registered charity or to a private foundation (after March 19, 2007), you may claim a deduction equal to the taxable benefit. In addition, be sure to get professional help if you previously deferred your stock option benefits; a provision no longer available for stock options exercised after March 4, 2010.

Excerpted from Essential Tax Facts. © Knowledge Bureau, Inc. All rights reserved.