Option benefit deductions

Security options deduction - Paragraph 110(1)(d)

The employee can claim a deduction under paragraph 110(1)(d) of the Income Tax Act if all of the following conditions are met:

  • a qualifying person agreed to sell or issue to the employee shares of its capital stock or the capital stock of another corporation that it does not deal with at arm's length, or agree to sell or issue units of a mutual fund trust
  • the employee dealt at arm's length with these qualifying persons right after the agreement was made
  • if the security is a share, it is a prescribed share (as defined in the Income Tax Regulations) and if it is a unit, it is a unit of a mutual fund trust
  • the price of the share or unit is not less than its fair market value when the agreement was made
  • there is an additional condition where an employee receives cash instead of acquiring securities, see cash out

The deduction the employee can claim is one-half of the amount of the resulting taxable benefit in the year. Identify the amount of the deduction by entering it in the "Other information" area under code 39 at the bottom of the employee's T4 slip.

Note

The effect of foreign exchange gains and losses is not relevant when determining if an individual is eligible for the security option deduction.

Security options deduction for the disposition of shares of a Canadian-controlled private corporation - Paragraph 110(1)(d.1)

The employee receives the benefit in the year they dispose of the shares, but not in the year of acquiring them if all of the following conditions are met:

  • when the agreement to sell or issue shares to the employee was concluded, the issuing or selling corporation was a Canadian-controlled private corporation (CCPC)
  • the employee acquired shares after May 22, 1985
  • the employee dealt at arm's length with the corporation and any other corporation involved right after the agreement was concluded

In this case, the employee can claim a deduction under paragraph 110(1)(d.1) of the Income Tax Act if all of the following conditions are met:

  • CCPC shares disposed of in the year where the employee dealt at arm’s length with the corporation
  • the employee has not disposed of the shares (otherwise than as a result of the employee's death) or exchanged the share within two years after the date the taxpayer acquired them
  • the employee did not deduct an amount under paragraph 110(1)(d) for the benefit

The deduction the employee can claim is one-half of the amount of the benefit for the shares disposed of in the year. Identify the amount of the deduction by entering it in the "Other information" area under code 41 at the bottom of the employee's T4 slip.

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