What is a security (stock) options taxable benefit?
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A security is a share of the capital stock of a corporation or a unit of a mutual fund trust that is a qualifying person.
Many employers grant options to their employees as a form of compensation. These options give the employee of the employer or of a qualifying person with which the employer does not deal at arm's length, the right to acquire a security of the employer or a security of another qualifying person with which the employer does not deal at arm's length.
Generally, options issued to employees will be provided under one of the following three types of plans:
Employee stock purchase plan (ESPP): This plan allows the employee to acquire shares at a discounted price, (i.e., for an amount that is less than the value of the stock at the time of the acquisition of the shares). Many ESPPs provide for a delay in the acquisition of the shares: an employee contributes a certain amount over a period of time and at pre-specified periods, the employee can purchase shares at a discount using the accumulated contributions. The benefit is equal to the value of the shares, minus the amount paid.
Stock bonus plan: Under this plan, an employer agrees to give the shares to the employee free of charge. In effect, the employer agrees to sell or issue shares to the employee for no cost.
Stock option plan: This plan allows the employee to purchase shares of the employer's company or of a non-arm's length company at a predetermined price.
When a corporation agrees to sell or issue its shares to an employee, or when a mutual fund trust grants options to an employee to acquire trust units, the employee may receive a taxable benefit. Generally, the employee receives the taxable benefit in the same year he or she acquires the shares or units, or otherwise disposes of their rights under the option agreement. However, when certain conditions are met, the taxable benefit is deferred until the year the employee disposes of the shares. For more information, refer to “Security options deduction for the disposition of shares of a Canadian‑controlled private corporation – Paragraph 110(1)(d.1)”.
The taxable benefit is the difference between the fair market value (FMV) of the shares or units when the employee acquired them and the amount paid, or to be paid, for them, including any amount paid for the rights to acquire the shares or units. Also, a benefit can accrue to the employee if his or her rights under the agreement become vested in another person, or if they transfer or sell the rights.
The shares or trust units are considered to be acquired when legal ownership of the shares or units has been transferred and the vendor has entitlement to receive payment. In general, this would occur where the shares or units have been transferred to the employee/broker and paid for.
Include this benefit in box 14, "Employment income," and in the "Other information" area under code 38 at the bottom of the employee's T4 slip. Also, show the deductions the employee is entitled to in the "Other information" area of the T4 slip, as explained in the rest of this section.
For more information, see Interpretation Bulletin IT113R4, Benefits to Employees - Stock Options.
An employer may allow an employee to receive cash instead of securities in exchange for his or her options. Generally, the cash paid is equal to the difference between the FMV of the securities at the time the options would have been exercised and the amount paid or to be paid for the securities. This difference is equal to the employment benefit the employee is deemed to have received.
If an employee relinquishes a stock option right to an employer in exchange for a cash payment or other in kind benefit, the employee can claim the security options deduction if eligible or the employer can claim the cash‑out as an expense, but not both. If the employer chooses not to claim the cash‑out as an expense, the employer must make an election to do so under subsection 110(1.1) by entering this amount under code 86, “Security options election,” in the “Other information” area of the T4 slip. This would allow the employee to claim the deduction under paragraph 110(1)(d). The amount you report under code 86 may be different from the taxable benefit you have to include in the employee’s income in box 14 and under code 38.
If code 86 of the T4 is not entered, this means that the employer decided to claim the expense and the employee would not be allowed to claim the deduction under paragraph 110(1)(d). For more information, go Payroll.
You cannot elect to defer the security option.
When will the exercise or disposal of an option not result in a taxable benefit from employment?
The exercise or disposal of an option will not result in a taxable benefit when:
- The benefit conferred by the option agreement was not received by reason of the employee's employment.
- If the employee is also a shareholder or unit-holder, it is a question of fact whether he or she received the shares or units as a shareholder, a unit-holder or an employee.
- There was no intention to issue securities under the terms of the agreement, but there was an intention to issue a cash payment to the employee as a means of compensation (that is, under a phantom stock plan).
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