Employee security options

When you get an option to buy securities through your employer, it does not immediately affect your tax situation. An option is an opportunity to buy securities at a certain price. The securities under the option agreement may be shares of a corporation or units of a mutual fund trust.

If you decide to exercise your option and buy the securities at less than the fair market value (FMV), you will have a taxable benefit received through employment. The taxable benefit is generally the difference between what you paid for the securities and the FMV at the time you exercised your option. You can reduce the amount of the benefit by any amount you paid to acquire the option rights.

Note

The taxable benefit included in your income in connection with an employee option agreement is not eligible for the capital gains deduction.

Generally, you are an eligible employee if you meet all of the following conditions right after the option is granted:

  • you deal at arm's length with the employer, the entity granting the option, and the entity whose eligible securities could be acquired under the option agreement
  • you are not a specified shareholder of an entity above that is a corporation (a specified shareholder is generally one who owns 10% or more of any class of a corporation's shares)

Such an employee must also be a resident of Canada at the time the option is exercised to qualify for the deferral.

Generally, an eligible security is one of the following:

  • a common share of a class listed on a designated stock exchange in or outside Canada
  • a unit of a mutual fund trust

Generally, the amount paid to acquire the eligible security, including any amount paid to acquire the rights under the option agreement, cannot be less than the FMV of the security at the time the option is granted. In addition, the eligible security must be a security in respect of which a security option deduction may be claimed on line 24900 of your income tax and benefit return.

If you buy shares through an employee security option granted to you by a Canadian controlled private corporation (CCPC) with which you deal at arm's length, you do not include the taxable benefit in your income in the year you acquire the securities. You wait until the year you sell the securities.

For eligible securities under option agreements exercised up to and including 4:00 p.m. EST on March 4, 2010, that were not granted by a CCPC, an income deferral of the taxable benefit may have been allowable subject to an annual limit of $100,000 on the FMV of the eligible securities.

If this situation applies, the inclusion into income of the taxable benefit is deferred until the year in which the first of these events occurs:

  • The employee disposes of the eligible security
  • The employee (or former employee) dies
  • The employee (or former employee) becomes a non-resident

If you exercised an option for eligible securities after 4:00 p.m. EST on March 4, 2010, that was not granted by a CCPC, the election to defer the security option benefit is no longer available.

If you qualify for a security option deduction on line 24900 of your income tax and benefit return, you can claim one-half of the amount recognized (and reported as income) as an employment benefit from the sale of eligible securities in 2020.

Employee security option cash-out rights

Employee security option agreements can be structured in such a way that you can dispose of your security option rights to your employer for a cash payment or other in-kind benefit (cash out payment). For more information, see Employee security option cash-out rights.

Adjusted cost base (ACB) of eligible securities

Regardless of when the eligible security option was exercised, the ACB of the eligible security you purchased through an employee eligible security option agreement is not the actual price you paid for them. To calculate the ACB of your eligible securities, add the following two amounts:

  • the actual purchase price
  • any amount included in your income as a taxable employee option benefit for the securities (even if you claimed a security option deduction for them)
Remittance requirement

If you exercise your security options in 2020, your employer will be required to withhold and remit an amount in respect of the taxable security option benefit (less any security option deduction) in the same way as if the amount of the benefit had been paid to you as an employee bonus.

Donations under employee option agreements

If you donated shares or mutual fund units in 2020 under your employee option agreement to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate your capital gain.

For a donation made in 2020, you may qualify for an additional security option deduction equal to 1/2 of the taxable benefit. For more information on these donations, see Pamphlet P113, Gifts and Income Tax.

Completing your Schedule 3

Disposition of eligible securities

Report the capital gain (or loss) in the year you exchange or sell the eligible securities purchased through an employee eligible security option agreement.

If the eligible securities are qualified small business corporation shares, report the transaction in the Qualified small business corporation shares area on Schedule 3.

In all other cases, report the transaction on lines 13199 and 13200 of the Schedule 3.

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