Employee security (stock) options

You, as the employer (the corporation or the mutual fund trust), may grant options to your employees to acquire securities of your corporation.

Generally, there are no tax consequences for your employee at the time the option is granted.

• Steps
• References

1. Determine if a security option agreement was made

   Generally, when you agree to grant security options to your employee, a written security option agreement will be made between you, as a qualifying person and your employee.

   For section 7 to apply, the security option agreement must contain terms intending for securities to be sold or issued to your employee if the terms of the agreement are met.

   If the benefit from the transaction is one of the following situations, the benefit is taxable under subsection 5(1) or paragraph 6(1)(a):

   • There was no security option agreement.

   • There was no intention in the agreement for securities to be issued (for example, a phantom stock plan or stock appreciation plan)

   Because section 7 does not apply, your employee is not considered to have received a security options taxable benefit and is not eligible for any security options deductions.

   ---

   • If there was no security option agreement or there was no intention in the agreement for securities to be issued, the benefit is taxable under subsection 5(1) or paragraph 6(1)(a).

     You must include the payment in your employee’s income in the taxation year in which your employee received the payment.

     Continue to: Step 9 - Withhold payroll deductions and remit GST/HST.

   • If the security option agreement contains terms intending for securities to be sold or issued to your employee if the terms of the agreement are met, the benefit may be taxable under section 7.

     Continue to: Step 2 - Determine if the security option agreement was made because of an employment relationship.

2. Determine if the security option agreement was made because of an employment relationship

   For section 7 to apply, the security option agreement must have been made because of an employment relationship between you as a qualifying person and your employee.

   This includes the following situations:

   You are a non-resident corporation

   If the security option agreement was made between you as a qualifying person who is a non-resident corporation and your employee is working in Canada (or employed in Canada by a corporation with which the non-resident corporation does not deal at arm’s length), a taxable benefit received from exercising the option is considered received because of an employment relationship under section 7.

   Special situation: Foreign parent or subsidiary plan

   • Canadian subsidiary companies may offer plans where the employee can purchase securities of their non-resident parent company.
   • The non-resident company is responsible for withholding and reporting of the benefits to CRA unless the Canadian subsidiary reimburses the non-resident in respect of the benefit.
   • The plan may not meet the requirements for claiming the security options deduction in paragraph 110(1)(d), or the imposition of Canadian taxation may arise earlier than anticipated.
   • The CRA will allow the Canadian subsidiary to report the benefit on behalf of the non-resident parent. This does not relieve the non-resident company from withholding and remitting the appropriate deductions

   When calculating a security options benefit, you must convert all amounts to Canadian dollars, even if they were listed in another currency. Use the exchange rate in effect on the dates of the transactions for the calculations.

   Learn more about the average exchange rates: Exchange rates

   You (or a group of employees) are using a trustee as an intermediary

   If the security option agreement was made between you as a qualifying person and your employee, either of whom are using a trustee as an intermediary, a taxable benefit received from exercising the option is considered received because of an employment relationship under subsection 7(2).

   Your former employee

   If the security option agreement was made between you as a qualifying person and your former employee, the benefit is considered received because of an employment relationship under subsection 7(4).

   Explanation

   If a person was your employee at the time of receiving a right to acquire shares, but subsequently ceases to be your employee (for example, changes jobs or retires) before the exercise or transfer of that right, the person is treated as your employee until the transaction is completed. This time period will depend on the terms of the security option agreement and how long the employee retains an option to acquire securities after their employment ceases. The benefit is included in their employment income and the person is deemed to have received the benefit as if they were still employed.

   Example - Former employee

   Description

   • An employee was granted an option under a security option agreement to purchase 20,000 shares of ABC Inc during the course of their employment.
   • On November 30, 2020, the employee’s employment ceased when they resigned from their position as Manager.
   • A clause in the security option agreement allowed the person to purchase the shares within a period of 90 calendar days after the date of termination.
   • On January 20, 2021, the person chose to purchase 20,000 shares at the price of $0.50 cents per share.

   Result

   Although the person's employment ceased on November 30, 2020, the benefit from the purchase of shares in ABC Inc. on January 20, 2021 is considered to have been received because of an employment relationship and is taxable under subsection 7(4).

   Your employee is also a shareholder

   Not because of an employment relationship

   If the security option agreement is between you as a qualifying person and your employee who is also a shareholder, it is a question of fact as to whether the benefit is considered received in respect of, in the course of or because of an employment relationship or as a shareholder.

   Example - Not considered received because of an employment relationship

   Examples of where a security options taxable benefit is not considered received because of an employment relationship:

   • Benefit is a distribution of profits
   • Similar benefits are not available to employees who were not shareholders
   • Duties of other employees are not equally important

   Description

   • A person is president of ABC Inc.
   • They own 51% of that corporation's common voting shares.
   • The person's spouse owns 10%.
   • The person and their spouse are the only people who concluded a security option agreement with ABC Inc.
   • The security option agreements were not offered to any other employee.

   Result

   The person is in a position of control. The person and the spouse receive the benefit because of the person’s capacity as a shareholder.

   The benefit received from exercising the option is not taxable as an employee benefit because it is not considered to be received because of an employment relationship.

   However, the benefit is still taxable as a shareholder benefit.

   If your employee is also a shareholder, it is a question of fact whether the individual received the shares in their capacity as a shareholder or as your employee.

   Because of an employment relationship

   If the security option agreement was received by the shareholder in their capacity as an employee, the benefit is considered received because of an employment relationship.

   ---

   • If the security options are not considered received because of an employment relationship, these are not taxable as an employee benefit.

     Do not continue to the next step.

     If you are not sure if the worker is an employee or self-employed for CPP/EI purposes

     You need to consider multiple factors to determine if the worker is an employee or is self-employed.

     Learn more about the factors the CRA considers when determining a worker’s employment status: Employee or Self-employed

     Benefits received in their capacity strictly as a shareholder are not reported on a T4 slip, but on a T4A slip.

     However, the shareholder benefit must be included on the shareholder's personal income tax return and reported as business income.

     Learn more: Lines 13499 to 14300 – Self-employment income

   • If the security options are considered received because of an employment relationship, the resulting benefit is generally taxable under section 7.

     Continue to: Step 3 - Determine if your corporation is a CCPC or not.

3. Determine if your corporation is a CCPC or not

   Whether you, as a qualifying person, are a CCPC or not impacts:

   • The timing of when a security options taxable benefit must be included in your employee’s income
   • The type of security options deductions available to your employee

   ---

   Your corporation is a CCPC if it meets all of the following requirements at the end of the tax year:

   Select all of the requirements that apply to your situation:

   • It is a private corporation
   • It is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year
   • It is not controlled directly or indirectly by one or more non-resident persons
   • It is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700 of the ITR)
   • It is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada
   • It is not controlled directly or indirectly by any combination of persons described in the three previous conditions
   • If all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange were owned by one person, that person would not own sufficient shares to control the corporation
   • No class of its shares of capital stock is listed on a designated stock exchange

   Result
   Your corporation must meet all of the conditions above to be considered a CCPC

   ---

   If your corporation does not meet all conditions above, it is not a CCPC.

   Your result
   Your corporation must meet all of the conditions above to be considered a CCPC

   ---

   If your corporation does not meet all conditions above, it is not a CCPC.

   Your result
   Your corporation meets all of the conditions above to be considered a CCPC

   ---

   If your corporation meets all the conditions above, it is a CCPC.

4. Determine if the benefit is taxable and when the benefit must be included in your employee’s income

   A taxable benefit arises from the exercise of a security option when one of the following applies:

   • Your employee acquires, purchases or receives the securities at less than their FMV at the time they were acquired
   • Your employee sells, transfers, or disposes of options under the security option agreement for a financial gain

   Determine when the benefit is taxable and when you need to include in your employee’s income

   The following events may trigger a taxable benefit:

   Event 1: Your employee exercises their rights and acquires the securities

   Taxable situation

   The benefit is always taxable to your employee if your employee chooses to exercise their rights under a security option agreement and acquires the securities under paragraph 7(1)(a) or subsection 7(1.1).

   When to include the benefit in your employee’s income

   You must include the benefit in your employee’s income in the taxation year in which:

   • You are a CCPC

     Your employee disposed of the shares

   • You are non-CCPC

     Your employee acquired the shares

   ---

   Continue to situation 1 of Step 5 - Calculate the value of the benefit

   Event 2: Your employee exchanges shares acquired from a CCPC under the security option agreement for new shares

   Non-taxable situation

   There is no taxable benefit from the transaction under subsection 7(1.5) if your employee exchanges the shares of a CCPC for new shares and all of the following apply:

   • Your employee exchanges their shares acquired under a security option agreement of a CCPC for new shares of your corporation, a corporation with which your corporation does not deal at arm’s length immediately after the disposition or exchange of the old shares, the newly amalgamated or merged corporation, or a corporation with which the newly amalgamated or merged corporation does not deal at arm’s length immediately after the amalgamation
   • Your employee receives no consideration for the exchange other than the new shares
   • The fair market value of the new shares immediately after the disposition or exchange is not more than the FMV of the old shares immediately before the disposition or exchange

   If all conditions above are met, your employee is deemed to not have disposed of or exchanged the security originally acquired. The new securities acquired in the transaction are deemed to be the same securities as those which were exchanged and the qualifying person to be the same as the qualifying person who originally issued the securities under subsection 7(1.5).

   You do not need to do any calculations.

   Do not continue to the next step.

   Taxable situation

   The benefit may be taxable for your employee if the transaction does not meet all of the conditions above.

   When to include the benefit in your employee’s income

   If there is a taxable benefit, you must include the benefit in your employee’s income in the taxation year in which your employee disposes of the original CCPC share.

   ---

   Continue to situation 1 of Step 5 - Calculate the value of the benefit

   Event 3: Your employee exchanges their rights under the security option agreement for new security options rights

   Non-taxable situation

   There is no taxable benefit from the transaction under subsection 7(1.4) if your employee exchanges the security options for a new option and all of the following apply:

   • Your employee exchanges their security options for new security options as a result of any type of corporate reorganization or capital restructuring within a non-arm’s length corporate group
   • Your employee receives no consideration for the exchange other than the new option
   • Your employee does not derive an economic gain from the exchange

   If all conditions above are met, your employee is deemed to not have disposed of or exchanged the option. The new option received in the transaction is deemed to be the same option as the one which was exchanged and the qualifying person to be the same as the qualifying person who originally issued the securities under subsection 7(1.4).

   You do not need to do any calculations.

   Do not continue to the next step.

   Taxable situation

   The benefit may be taxable for your employee if the transaction does not meet all of the conditions above.

   When to include the benefit in your employee’s income

   If there is a taxable benefit, you must include the benefit in your employee’s income in the taxation year in which your employee exchanged their rights under the security option agreement for new security options rights.

   ---

   Continue to situation 2 of Step 5 - Calculate the value of the benefit

   Event 4: Your employee chooses to cash out their rights under the security option agreement

   Taxable situation

   The payment is taxable under paragraphs 7(1)(b) or 7(1)(b.1) if all of the following apply:

   • Your employee disposes of their rights under the security option agreement
   • Your employee has the option of receiving either shares or cash
   • Your employee elects to cash out the rights

   When to include the benefit in your employee’s income

   You must include the benefit in your employee’s income in the taxation year in which your employee cashes out the options.

   ---

   Continue to situation 2 of Step 5 - Calculate the value of the benefit

   Event 5: Your employee disposes of their rights under the security option agreement and your employee does not have the option to receive either shares or cash

   Taxable situation

   The benefit from the transaction is taxable under paragraphs 7(1)(b) or 7(1)(b.1) if all of the following apply:

   • Your employee disposes of their rights under the security option agreement
   • Your employee does not have the option to receive either shares or cash
   • Your employee has disposed of security options rights to a third party as part of a transaction that results in an ownership change in the corporation

   When to include the benefit in your employee’s income

   You must include the benefit in your employee’s income in the taxation year in which your employee disposed of their security options rights.

   ---

   Continue to situation 2 of Step 5 - Calculate the value of the benefit

   Event 6: Your employee transfers their rights to a non-arm’s length person, and that person exercises the option to acquire the shares

   Taxable situation

   The benefit from the transaction is taxable under paragraph 7(1)(c) if your employee transfers their rights under a security option agreement by one or more transactions to a non-arm’s length person and that person exercises the option.

   When to include the benefit in your employee’s income

   You must include the benefit in your employee’s income in the taxation year in which a person, to whom your employee transferred their rights to security options, exercised the option to acquire the shares.

   Special situation: Your employee dies before the transaction

   If your employee transfers their rights to a non-arm’s length person, and your employee dies before the person exercises the option to acquire the shares, the benefit from the option is deemed to have been received by the non-arm’s length person.

   The benefit must be included in the non-arm’s length person’s income in the taxation year in which the non-arm’s length person exercised the option to acquire the shares.

   ---

   Continue to situation 3 of Step 5 - Calculate the value of the benefit

   Event 7: Your employee transfers their rights to a non-arm’s length person, and that person disposes of the rights

   Taxable situation

   The benefit from the transaction is taxable if:

   • Your employee has transferred security options to a non-arm’s length person and that person (transferee) has disposed of the security options to an arm’s length person under paragraph 7(1)(d)
   • The rights of your employee under a security option agreement have, by one or more transactions between persons not dealing at arm’s length, become vested in a non-arm’s length person (transferee), and the transferee subsequently transfers or disposes of the rights to you (as the employer) with which the transferee does not deal at arm’s length (or to a corporation or mutual fund trust not dealing at arm’s length with such an employer) under paragraph 7(1)(d.1)

   When to include the benefit in your employee’s income

   The benefit must be included in your employee’s income in the taxation year in which a non-arm’s length person, to whom your employee transferred their rights to security options, disposed of the rights to the security options.

   ---

   Continue to situation 2 of Step 5 - Calculate the value of the benefit

   Event 8: Your employee dies holding unexercised options

   Non-taxable situation

   The value of options held by your employee after death is nil if the security option agreement provides that the options expire upon your employee’s death under paragraph 7(1)(e).

   You do not need to do any calculations.

   Do not continue to the next step.

   Taxable situation

   There is a deemed taxable benefit under paragraph 7(1)(e) if your employee owns unexercised options under a security option agreement immediately before death and the agreement does not stipulate that the options expire upon the death of your employee.

   When to include the benefit in your employee’s income

   If your employee died and had unexercised options which did not expire upon death, the taxable benefit must be included in your employee’s income in the taxation year in which your employee died.

   ---

   Continue to situation 4 of Step 5 - Calculate the value of the benefit

   Event 9: Your employee is no longer able to exercise their rights under the security option agreement

   Non-taxable situation

   There is no taxable benefit from the transaction under subsection 7(1.7) if all of the following apply:

   • Your employee had rights to acquire shares under a security option agreement
   • Your employee is no longer able to exercise their rights under the security option agreement
   • Your employee did not receive consideration for the loss of the ability to exercise the option
   • Your employee did not exchange their rights for rights under a new security option agreement under paragraphs 7(1)(b) or 7(1)(b.1)

   Example

   Examples of this situation include:

   • Corporate mergers where the previous corporation no longer exists for your employee to exercise the option (where no new options were provided to your employee by the new corporation).
   • Situations where the option is cancelled by you (as the employer).

   If all conditions above are met under subsection 7(1.7), you do not need to do any calculations.

   Do not continue to the next step.

   Taxable situation

   The benefit is taxable for your employee if your employee receives consideration for not being able to exercise their option rights or exchanges their rights for rights under a new security option agreement.

   When to include the benefit in your employee’s income

   If there is a taxable benefit, you must include the benefit in your employee’s income in the taxation year in which your employee receives consideration for no longer being able to exercise their right to security options.

   ---

   Continue to situation 2 of Step 5 - Calculate the value of the benefit

5. Calculate the value of the benefit

   If your employee received a security options taxable benefit, the calculation of the benefit will depend on the event that caused your employee benefit.

   Situation 1: Your employee exercises their rights and acquires the securities (events 1 and 2 of step 4)

   The calculation of the security options benefit to use will depend on when your employee exercised their security options.

   ---

   • Exercised before June 25, 2024

     For benefits received before June 25, 2024, use the following to calculate the value of the security options taxable benefit:

     • FMV of the shares or units at the time your employee acquired them
     • minus Amount paid or to be paid to the qualifying person by your employee for the securities
        
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip using code 38 and box 14
     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The option price per share was $40, which matched the FMV of the shares at the time. The employee exercised the options the next day. The FMV per share was then $42.

     • $336,000 (8,000 x $42) is the FMV of the shares at the time the employee acquired them
     • minus $320,000 (8,000 x $40) is the amount paid or to be paid to the qualifying person by the employee for the securities
        
     • minus $0 because the employee did not pay anything to acquire the security options rights
        
     • equals $16,000 is the value of the security options benefit to be included on the T4 slip using code 38 and box 14

   • Under proposed legislation Exercised on or after June 25, 2024

     For benefits received on or after June 25, 2024, use the following to calculate the value of the security options taxable benefit:

     • FMV of the shares or units at the time your employee acquired them on or after June 25, 2024
     • minus Amount paid or to be paid to the qualifying person by your employee for the securities
        
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip using code 90 and box 14
     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The option price per share was $40, which matched the FMV of the shares at the time. The employee exercised half of their options on July 15, 2024, when the FMV per share was $45.

     • $180,000 (4,000 x $45) is the FMV of the shares at the time the employee acquired them
     • minus $160,000 (4,000 x $40) is the amount paid to the qualifying person by the employee for the securities
        
     • minus $0 because the employee did not pay anything to acquire the security options rights
        
     • equals $20,000 is the value of the security options benefit to be included on the T4 slip using code 90 and box 14
   Situation 2: Your employee disposes of or transfers their rights to another person, cashes out their rights, or is no longer able to exercise their rights under the security option agreement (events 3, 4, 5, 7 and 9 of step 4)

   The calculation of the security options benefit to use will depend on when your employee disposed of, transferred, cashed out or received consideration for not being able to exercise their rights to security options.

   ---

   • Benefit received before June 25, 2024

     For benefits received before June 25, 2024, use the following to calculate the value of the security options taxable benefit:

     • Value of the consideration received for the security options rights
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip using code 38 and box 14

     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The employee paid $500 to acquire these rights. Before the employee exercised their options rights, the employer cancelled the security option agreement and paid the employee $10,000 following the terms of the agreement as consideration for the loss of the rights.

     • $10,000 is the value of the consideration received for the security options rights
     • minus $500 is the amount the employee paid to acquire the security options rights to acquire the securities
        
     • equals $9,500 is the value of the security options benefit to be included on the T4 slip using code 38 and box 14

   • Under proposed legislation Benefit received on or after June 25, 2024

     For benefits received on or after June 25, 2024, use the following to calculate the value of the security options taxable benefit from disposing of, transferring, cashing out or receiving consideration for not being able to exercise their options rights.

     • Value of the consideration received for the security options rights disposed of on or after June 25, 2024
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip using code 90 and box 14
     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The employee paid $500 to acquire these rights. Before the employee exercised their options rights, the employer cancelled the security option agreement on September 8, 2024 and paid the employee $12,000 following the terms of the agreement as consideration for the loss of the rights.

     • $12,000 is the value of the consideration received for the security options rights disposed of on or after June 25, 2024
     • minus $500 is the amount the employee paid to acquire the security options rights to acquire the securities
        
     • equals $11,500 is the value of the security options benefit to be included on the T4 slip using code 90 and box 14
   Situation 3: Your employee transfers their rights to a non-arm’s length person and that person exercises the option to acquire the shares (event 6 of step 4)

   The calculation of the security options benefit to use will depend on when the non-arm’s length person exercises their security options.

   ---

   • Exercised before June 25, 2024

     For benefits received before June 25, 2024, use the following to calculate the value of the security options taxable benefit:

     • FMV of the shares or units at the time the non-arm’s length person acquired them
     • minus Amount paid to the qualifying person by the non-arm’s length person for the securities
        
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip of your employee using code 38 and box 14
     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The option price per share was $40, which matched the FMV of the shares at the time. The employee transferred their rights to their spouse, who then exercised all the options the next day, when the FMV per share was $42.

     • $336,000 is the FMV of the shares at the time the non-arm's length person acquired them
     • minus $320,000 is the amount paid to the qualifying person by the non-arm's length person for the securities
        
     • minus $0 because the employee did not pay anything to acquire the securities
        
     • equals $16,000 is the value of the security options benefit to be included on the T4 slip of the employee using code 38 and box 14

   • Under proposed legislation Exercised on or after June 25, 2024

     For benefits received on or after June 25, 2024, use the following to calculate the value of the security options taxable benefit for when the non-arm’s length person exercised their security options:

     • FMV of the shares or units at the time the non-arm’s length person acquired them on or after June 25, 2024
     • minus Amount paid to the qualifying person by the non-arm’s length person for the securities
        
     • minus Amount your employee paid to acquire the security options rights to acquire the securities
        
     • equals Value of the security options benefit to be included on the T4 slip of your employee using code 90 and box 14
     Example - Calculations

     An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on April 15, 2024. The option price per share was $40, which matched the FMV of the shares at the time. The employee then transferred their rights to their spouse, who exercised half of their options on July 15, 2024, when the FMV per share was $45.

     • $180,000 (4,000 x $45) is the FMV of the shares at the time the non-arm’s length person acquired them
     • minus $160,000 (4,000 x $40) is the amount paid to the qualifying person by the non-arm’s length person for the securities
        
     • minus $0 because the employee did not pay anything to acquire the security options rights
        
     • equals $20,000 is the value of the security options benefit to be included on the T4 slip of your employee using code 90 and box 14
   Situation 4: Your employee dies holding unexercised options which do not expire upon the death of your employee (event 8 of step 4)

   Use the following to calculate the value of the security options taxable benefit if your employee dies holding unexercised options which do not expire upon the death of your employee:

   • FMV of the security options rights immediately after death
   • minus Amount your employee paid to acquire the security options rights
      
   • equals
     • Under proposed legislation Value of the security options benefit to be included on the T4 slip using code 38 and box 14 if the death occurred before June 25, 2024
     • Value of the security options benefit to be included on the T4 slip using code 90 and box 14 if the death occurred on or after June 25, 2024

   Example - Calculations

   An employee was granted the option to acquire 8,000 shares of their employer, Company Y, on August 15, 2024. The employee paid nothing to acquire the security option. The security option agreement contained no condition that the options rights would expire upon the death of the employee. The employee died three months later, when the FMV of the options rights immediately after death was appraised to be $40,000.

   • $40,000 is the FMV of the options rights immediately after death
   • minus $0 because the employee did not pay to acquire the security options rights
      
   • equals $40,000 is the value of the security options benefit to be included on the T4 slip using code 90 and box 14

6. Determine which security options deductions apply to the security options benefit

   If your employee received a security options taxable benefit under section 7, your employee may be eligible for security options benefit deductions.

   Deduction under paragraph 110(1)(d)

   Your employee is eligible to claim the security options benefit deduction under paragraph 110(1)(d) if all of the following apply:

   • A qualifying person agreed to sell or issue to your employee shares of its capital stock or the capital stock of another corporation that it does not deal with at arm’s length, or agreed to sell or issue units of a mutual fund trust
   • Your employee dealt at arm’s length with the qualifying person right after the agreement was made.
   • If the security is a share, it is a prescribed share under subsection 6204(1) of the ITR 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 FMV at the time when the agreement was made.

   • If the benefit is from the cash-out of a security option, for your employee to be eligible to claim the deduction, you (as the employer) must elect to not claim the cash-out as an expense.

     How to make the election

     You (as the employer) must decide if you will deduct the cash-out as an expense or if your employee will be allowed to claim the security option deduction.

     Either you or your employee can claim a deduction, not both.

     If you choose not to claim the cash-out as an expense, you must make an election to do so under subsection 110(1.1). This is done by entering the total amount of the security option cash-out that you elected not to claim as an expense using Code 86 - Security options election on the T4 slip. Your employee can then claim the deduction under paragraph 110(1)(d) on their income tax and benefit return.

     The amount you report using code 86 may be different from the taxable benefit you have to include in your employee’s income in box 14 and using code 38.

   • If you are a non-CCPC or mutual fund trust which has, or part of a consolidated group that has, revenues of more than $500 million, the share of security options eligible for the security options deduction are limited by a $200,000 annual vesting limit for options granted on or after July 1, 2021.

     In this situation, continue to: Step 7 - Determine if the $200,000 vesting limit impacts the security options deduction under paragraph 110(1)(d).

   ---

   • If all of the above conditions are not met, your employee is not eligible for the deduction under paragraph 110(1)(d).

     Continue to: Step 9 - Withhold payroll deductions and remit GST/HST.

   • If all of the above conditions are met, your employee is eligible for the deduction under paragraph 110(1)(d). However, they cannot claim the deduction under paragraph 110(1)(d.1) even if your employee is eligible.

     If eligible, your employee can claim the following deduction from the value of the security options taxable benefit (step 5):

     • Exercised before June 25, 2024

       1/2 of the value of the benefit

     • Under proposed legislation Exercised on or after June 25, 2024

       1/3 of the value of the benefit

   Deduction under paragraph 110(1)(d.1): Only applies if you are a CCPC

   Your employee is eligible to claim the security options benefit deduction under paragraph 110(1)(d.1) if all of the following apply:

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

   ---

   • If all of the above conditions are not met, your employee is not eligible for the deduction under paragraph 110(1)(d.1).

     Continue to: Step 9 - Withhold payroll deductions and remit GST/HST.

   • If all of the above conditions are met, your employee is eligible for the deduction under paragraph 110(1)(d.1).

     If eligible, your employee can claim the following deduction from the value of the security options taxable benefit (step 5):

     • Exercised before June 25, 2024

       1/2 of the value of the benefit

     • Under proposed legislation Exercised on or after June 25, 2024

       1/3 of the value of the benefit

     Continue to: Step 8 - Calculate the security options deduction.

   Deduction under paragraph 110(1)(d.01)

   If your employee acquires a security under an option and donates it to a qualified donee, your employee is eligible to claim the additional security options benefit deduction under paragraph 110(1)(d.01) if all of the following apply:

   • Donation must be made on or before the day that is 30 days after the day on which the option is exercised
   • Donation must be made within the year in which the option is exercised and both of the following apply:
     • Employee must be eligible for the deduction under paragraph 110(1)(d)
     • If the security is a share, it must be of a class listed on a prescribed Canadian or foreign stock exchange

   Under subsection 110(2.1), a deduction under paragraph 110(1)(d.01) is also available where an employee, in exercising an option, directs the appointed or approved broker or dealer to immediately sell the security and donate all or part of the proceeds of the disposition to a qualified charity. The amount of the deduction must be prorated to reflect the portion of the proceeds that are donated.

   ---

   • If all of the above conditions are not met, your employee is not eligible for the deduction under paragraph 110(1)(d.01).

     Continue to: Step 9 - Withhold payroll deductions and remit GST/HST.

   • If all of the above conditions are met, your employee is eligible to claim the deduction for the charitable donation of securities under paragraph 110(1)(d.01).

     If eligible, your employee can claim the following deduction from the value of the security options taxable benefit (step 5):

     • Exercised before June 25, 2024

       1/2 of the value of the benefit

     • Under proposed legislation Exercised on or after June 25, 2024

       1/3 of the value of the benefit

     Continue to: Step 8 - Calculate the security options deduction.

   Deduction under paragraph 110(1)(d.4): Security options exercised on or after June 25, 2024

   You are not responsible for calculating or reporting the deduction under paragraph 110(1)(d.4).

   If eligible, your employee can claim this deduction on their income tax and benefit return using line 24901.

   Learn more: More information to be published by end of December 2024

7. Determine if the $200,000 vesting limit impacts the security options deduction under paragraph 110(1)(d)

   For options granted on or after July 1, 2021, the portion of security options eligible for the security options deduction are limited by a $200,000 annual vesting limit under paragraph 110(1)(d) if both of the following apply:

   • Your employee meets all of the conditions to claim the security options deduction under paragraph 110(1)(d) (step 6)
   • You are a non-CCPC or mutual fund trust which has, or part of a consolidated group that has, revenues of more than $500 million

   Only taxable benefits arising from the security options within the $200,000 vesting limit (qualified securities) are eligible for the security options deduction under paragraph 110(1)(d).

   Use the following calculations to determine the portion of the securities that are non-qualified securities:

   1. Calculate using the prescribed formula A = C + D - $200,000 (under subsection 110(1.31)

      • FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year
      • plus The lesser of the total FMV (at the time the agreement was entered into) of the securities to be sold or issued under other agreements with that qualifying person (or a qualifying person that does not deal at arm’s length with that qualifying person) for the vesting year and $200,000
         
      • minus $200,000 vesting limit
         
      • equals Result A, if the amount is negative, the result is zero for the vesting year

   2. Calculate using the prescribed formula A/B (under subsection 110(1.31))

      • Result A for the vesting year
      • divide by FMV (at the time the agreement is entered into) of the securities to be sold or issued under the agreement for the vesting year
         
      • equals Portion of the securities deemed non-qualified for the vesting year (A/B)

   3. Calculate the number of non-qualified securities

      • Portion of the securities deemed non-qualified for the vesting year
      • multiply by Number of shares which could be exercised in the vesting year
         
      • equals Number of non-qualified securities, which is the number to be reported on Form T2SCH59 using line 500 for the year the agreement was made

   4. Calculate the security options taxable benefit eligible for the security deduction under paragraph 110(1)(d)

      • FMV of the qualified shares or units eligible for the security options deduction at the time your employee acquired them
      • minus Amount paid or to be paid to the qualifying person by your employee for the qualified securities
         
      • minus Amount your employee paid to acquire the security options rights to acquire the securities
         
      • equals Value of the security options benefit for qualified shares exercised in the year
   Example - Calculations with single option

   An employee receives the option to acquire 10,000 shares of their non-CCPC employer with gross revenues of more than $500 million on July 15, 2021 for their FMV of $40 per share.

   The employee exercises all 10,000 of their options on September 15, 2021 when the FMV of the shares was $50 per share.

   1. Calculate using the prescribed formula A = C + D - $200,000

      • $400,000 (10,000 X $40) is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2021
      • plus $0 is the lesser of the FMV (at the time the agreement was entered into) of the securities to be sold or issued under other agreements with that qualifying person for the vesting year and $200,000
         
      • minus $200,000 vesting limit
         
      • equals $200,000 is the result A

   2. Calculate using the prescribed formula A/B

      • $200,000 is the result A for year 2021
      • divide by $400,000 (10,000 X $40) is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2021
         
      • equals 0.50 (50%) is the portion of the securities deemed non-qualified for the vesting year 2021 (A/B)

   3. Calculate the number of non-qualified securities

      • 0.50 (50%) is the portion of the securities deemed non-qualified for vesting year 2021
      • multiply by 10,000 is the number of shares offered in the vesting year 2021
         
      • equals 5,000 is the number of non-qualified securities to be reported on Form T2SCH59 using line 500 in 2021

   4. Calculate the security options taxable benefit eligible for the security deduction under paragraph 110(1)(d)

      • $250,000 (10,000 shares - 5,000 of non-qualified securities = 5,000 of qualified securities X $50) is the FMV of the qualified shares or units eligible for the security options deduction at the time the employee acquired them
      • minus $200,000 (5,000 X $40) is the amount paid or to be paid to the qualifying person by the employee for the qualified securities
         
      • minus $0 because the employee did not pay anything to acquire the securities
         
      • equals $50,000 is the value of the security options benefit for qualified shares exercised in the year
   Example - Calculations with multiple options

   On August 1, 2022, an employee is first granted an option to acquire 70,000 shares of their non-CCPC employer with gross revenues of more than $500 million for their FMV of $2 per share. The first year they will be able to acquire those securities is in the 2024 calendar year.

   On April 15, 2023, the same employee is granted the option to acquire another 50,000 of the company's shares for their FMV of $2 per share. The first year they will be able to acquire those securities is in the 2024 calendar year.

   The employee exercised both sets of options on August 23, 2024 when they had a FMV of $3 per share.

   Options granted in calendar year 2022

   1. Calculate using the prescribed formula A = C + D - $200,000

      • $140,000 (70,000 X $2) is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2024
      • plus $0 is the lesser of the FMV (at the time the agreement was entered into) of the securities to be sold or issued under other agreements with the qualifying person for the vesting year and $200,000
         
      • minus $200,000 vesting limit
         
      • equals $0 is the result A for the vesting year 2024 (if the result is negative, the amount is $0)

   2. Calculate using the prescribed formula A/B

      • $0 is the result A for the vesting year 2024
      • divide by $140,000 (70,000 X $2) is the lesser of the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2024 and $200,000
         
      • equals 0 is the number of non-qualified securities, in this situation you do not need to report or file Form T2SCH59 for 2022

   Options granted in calendar year 2023

   1. Calculate using the prescribed formula A = C + D - $200,000

      • $100,000 (50,000 x $2) is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2024
      • plus $140,000 (70,000 x $2) is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2024
         
      • minus $200,000 vesting limit
         
      • equals $40,000 is the result A for the vesting year 2024

   2. Calculate using the prescribed formula A/B

      • $40,000 is the result A for the vesting year 2024
      • divide by $100,000 (50,000 X $2) is the is the FMV (at the time the agreement was entered into) of the securities to be sold or issued under the agreement for the vesting year 2024
         
      • equals 0.40 (40%) is the portion of the securities deemed non-qualified for the vesting year 2024 (A/B)

   3. Calculate the number of non-qualified securities

      • 0.40 (40%) is the portion of the securities deemed non-qualified for the vesting year 2024
      • multiply by 50,000 is the number of shares offered for the vesting year 2023
         
      • equals 20,000 is the number of non-qualified securities, which is the number to be reported on Form T2SCH59 using line 500 in 2023

   4. Calculate the security options taxable benefit eligible for the security deduction under paragraph 110(1)(d)

      • $300,000 ($210,000 ($3 x 70,000) + $90,000 ($3 x 30,000)) is the FMV of the qualified shares or units eligible for the security options deduction at the time the employee acquired them
      • minus $200,000 (($2 x 70,000) + ($2 x 30,000)) is the amount paid or to be paid to the qualifying person by the employee for the qualified securities
         
      • minus $0 because the employee did not pay anything to acquire the securities
         
      • equals $100,000 is the value of the security options benefit for qualified shares exercised in the year
   Prescribed formula to determine the non-qualified securities

   The following prescribed formula (under subsection 110(1.31) determines the portion of the securities that are non-qualified securities:

   A/B

   A = C + D - $200,000 (if the result is negative, the amount is $0)

   where

   C = total FMV (at the time the agreement is entered into) of the securities to be sold or issued under the agreement for a particular vesting year

   D = is the lesser of:

   (i) $200,000; and

   (ii) the total FMV (at the time the agreements were entered into with the qualifying person, or another qualifying person that does not deal at arm’s length with the particular qualifying person) of the securities to be sold or issued in respect of other agreements (whether entered into previously or contemporaneously) for that particular vesting year

   B = the amount determined for C

   ---

   Your obligations as a qualifying person

   You must:

   • Inform your employee in writing no later than 30 days after the security option agreement is entered into of any shares that are non-qualified securities, including designated shares and shares exceeding the $200,000 annual vesting limit
   • Report the issuance of security options for non-qualified securities using Form T2SCH59 and include on your T2 return

     Learn more: T2SCH59, Information Return for Non-Qualified Securities (2021 and later tax years)

8. Calculate the security options deduction

   The calculation of the security options deduction to use will depend on when (step 4) the security options benefit is received if your employee is eligible to claim any of the security options deduction (step 6).

   Deduction under paragraphs 110(1)(d) or 110(1)(d.1)

   • Exercised before June 25, 2024

     For the security options exercised before June 25, 2024, use the following to calculate the security options deduction if your employee is eligible to claim this deduction for each period in which your employee received a benefit:

     • Security options taxable benefit qualifying for the deduction under paragraphs 110(1)(d) or 110(1)(d.1) (result of step 5 if they meet the conditions under step 6 or result of step 7d)
     • multiply by 50%
        
     • equals Value of the security options deduction to be included on the T4 slip using codes 39 (under paragraph 110(1)(d)) or 41 (under paragraph 110(1)(d.1)) if the taxable security benefit occurred before June 25, 2024

     Example - Calculations

     An employee receives the option to acquire 10,000 shares of their non-CCPC employer with gross revenues of more than $500 million on July 15, 2021 for their FMV of $40 per share.

     The employee exercises all 10,000 of their options on September 15, 2021 when the FMV of the shares was $50 per share.

     Based on the calculations with single option from step 7, 5,000 is the number of non-qualified securities of a total of 10,000 security options which could be exercised. This number was also reported on T2 Schedule 59 using line 500 in calendar year 2021.

     • $50,000 is the security options taxable benefit qualifying for the deduction under paragraph 110(1)(d)
     • multiply by 50%
        
     • equals $25,000 is the value of the security options deduction to be included on the T4 slip using code 39 (under paragraph 110(1)(d))

   • Under proposed legislation Exercised on or after June 25, 2024

     For the security options exercised on or after June 25, 2024, use the following to calculate the security options deductions for each period in which your employee received a benefit:

     • Security options taxable benefit qualifying for the deduction under paragraphs 110(1)(d) or 110(1)(d.1) (result of step 5 if they meet the conditions under step 6 or result of step 7d)
     • multiply by 33.3333%
        
     • equals Value of the security options deduction to be included on the T4 slip using codes 91 (under paragraph 110(1)(d)) or 92 (under paragraph 110(1)(d.1)) if the taxable security benefit occurred on or after June 25, 2024

     Example - Calculations

     An employee receives the option to acquire 10,000 shares of their non-CCPC employer with gross revenues of more than $500 million on July 15, 2024 for their FMV of $40 per share.

     The employee exercises all 10,000 of their options on September 15, 2024 when the FMV of the shares was $50 per share.

     Based on the calculations with single option from step 7, 5,000 is the number of non-qualified securities of a total of 10,000 security options which could be exercised. This number was also reported on T2 Schedule 59 using line 500 in calendar year 2021.

     • $50,000 is the security options taxable benefit qualifying for the deduction under paragraph 110(1)(d)
     • multiply by 33.3333%
        
     • equals $16,666.67 is the value of the security options deduction to be included on the T4 slip using code 91 (under paragraph 110(1)(d))
   Deduction for the charitable donation of securities under paragraph 110(1)(d.01)

   • Exercised before June 25, 2024

     For the security options exercised before June 25, 2024, use the following to calculate the security options deduction for the charitable donation of securities if your employee is eligible to claim the charitable deduction of securities for each period in which your employee received a benefit and donated the securities:

     • Security options taxable benefit qualifying for the deduction under paragraph 110(1)(d.01) (result of step 7d)
     • multiply by 50%
        
     • equals Value of the deduction for the charitable donation of securities under paragraph 110(1)(d.01). Do not include this amount on the T4 slip.

     Example - Calculations

     An employee receives the option to acquire 10,000 shares of their non-CCPC employer with gross revenues of more than $500 million on July 15, 2021 for their FMV of $40 per share.

     The employee exercises all 10,000 of their options on September 15, 2021 when the FMV of the shares was $50 per share.

     Based on the calculations with single option from step 7, 5,000 is the number of non-qualified securities of a total of 10,000 security options which could be exercised. This number was also reported on T2 Schedule 59 using line 500 in calendar year 2021.

     • $50,000 is the security options taxable benefit qualifying for the deduction under paragraph 110(1)(d.01)
     • multiply by 50%
        
     • equals $25,000 is the deduction for the charitable donation of securities under paragraph 110(1)(d.01). The employer does not include this amount on the T4 slip.

   • Under proposed legislation Exercised on or after June 25, 2024

     For the security options exercised on or after June 25, 2024, use the following to calculate the security options deduction for the charitable donation of securities if your employee is eligible to claim the charitable deduction of securities:

     • Security options taxable benefit qualifying for the deduction under paragraph 110(1)(d.01) (result of step 7d)
     • multiply by 66.6667%
        
     • equals Value of the deduction for the charitable donation of securities under paragraph 110(1)(d.01). Do not include this amount on the T4 slip.
     Example - Calculations

     An employee receives the option to acquire 10,000 shares of their non-CCPC employer with gross revenues of more than $500 million on July 15, 2024 for their FMV of $40 per share.

     The employee exercises all 10,000 of their options on September 15, 2024 when the FMV of the shares was $50 per share.

     Based on the calculations with single option from step 7, 5,000 is the number of non-qualified securities of a total of 10,000 security options which could be exercised. This number was also reported on T2 Schedule 59 using line 500 in calendar year 2021.

     • $50,000 is the security options taxable benefit qualifying for the deduction under paragraph 110(1)(d.01)
     • multiply by 66.6667%
        
     • equals $33,333.33 is the value of the deduction for the charitable donation of securities under paragraph 110(1)(d.01). The employer does not include this amount on the T4 slip.

   ---

   Learn how to calculate deductions and the GST/HST to remit on benefits: How to calculate - Calculate payroll deductions and contributions

9. Withhold payroll deductions and remit GST/HST

   Generally, security options taxable benefits are considered non-cash, unless the security option was cashed out.

   If there is a security options taxable benefit, you must withhold the following deductions:

   • Non-cash and near-cash: Option 1

     • CCPC

       • Income tax (do not withhold)
       • CPP (do not withhold)
       • EI (do not withhold)
       • GST/HST (do not remit)

     • Non-CCPC or mutual fund trust

       • Income tax
       • CPP
       • EI (do not withhold)
       • GST/HST (do not remit)

       If your employee is eligible to claim the deduction under paragraph 110(1)(d) (step 6), you can reduce the security options taxable benefit by this deduction when you determine the amount to withhold.

   • Cash: Option 2

     • Income tax
     • CPP
     • EI
     • GST/HST (do not remit)

10. Report the benefit on a slip

    If there is a security options taxable benefit, you must report the following amounts on the T4 slip:

    • Non-cash and near-cash

      CCPC

      Box 14 - Employment Income (may include other income)
      • Security options benefits:
        • Code 38 - Before June 25, 2024
        • Under proposed legislation Code 90 - On or after June 25, 2024
      • If eligible to claim the deduction under paragraph 110(1)(d.1):
        • Code 41 - Before June 25, 2024
          1/2 of the value of the taxable benefit received from qualified securities in this period
        • Under proposed legislation Code 92 - On or after June 25, 2024
          1/3 of the value of the taxable benefit received from qualified securities in this period
      • If eligible to claim the deduction under paragraph 110(1)(d):
        • Code 39 - Before June 25, 2024
          1/2 of the value of the taxable benefit received from qualified securities in this period
        • Under proposed legislation Code 91 - On or after June 25, 2024
          1/3 of the value of the taxable benefit received from qualified securities in this period
      Non-CCPC or mutual fund trust

      • Box 14 - Employment Income (may include other income)
      • Box 26 - CPP/QPP pensionable earnings
      • Security options benefits:
        • Code 38 - Before June 25, 2024
        • Under proposed legislation Code 90 - On or after June 25, 2024
      • If eligible to claim the deduction under paragraph 110(1)(d):
        • Code 39 - Before June 25, 2024
          1/2 of the value of the taxable benefit received from qualified securities in this period
        • Under proposed legislation Code 91 - On or after June 25, 2024
          1/3 of the value of the taxable benefit received from qualified securities in this period

    • Cash

      No security options agreement or phantom stock plan

      • Box 14 - Employment income (may include other income)
      • Box 24 - EI insurable earnings
      • Box 26 - CPP/QPP pensionable earnings
      Employee elects to cash out

      • Box 14 - Employment Income (may include other income)
      • Box 24 - EI insurable earnings
      • Box 26 - CPP/QPP pensionable earnings
      • Security options benefits:
        • Code 38 - Before June 25, 2024
        • Under proposed legislation Code 90 - On or after June 25, 2024
      • If eligible to claim the deduction under paragraph 110(1)(d):
        • Code 39 - Before June 25, 2024
          1/2 of the value of the taxable benefit received from qualified securities in this period
        • Under proposed legislation Code 91 - On or after June 25, 2024
          1/3 of the value of the taxable benefit received from qualified securities in this period
      • Code 86 - Security options election

    ---

    Learn how to report the benefit on a slip: T4 slip - Information for employers.

References

Related

• IT113R4, Benefits to Employees - Stock Options
• IT170R, Sale of Property – When Included in Income Computation (Archived)
• IT387R2, Meaning of Identical Properties (Archived)
• IT391R, Status of Corporations (Archived)
• IT458R2, Canadian-Controlled Private Corporation (Archived)
• Income Tax Folio S1-F5-C1, Related Persons and Dealing at arm’s Length
• New York Stock Exchange
• Toronto Stock Exchange

Legislation