Employee security options

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. Generally, when you get an option to buy securities through your employer, it does not immediately affect your tax situation.

If you decide to exercise your option and buy the securities at less than 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 that you exercised your option. You can reduce the amount of the taxable benefit by any amount that you paid to acquire the option rights.

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

Eligible employee

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)

Eligible security

Generally, an eligible security is one of the following:

a share of the capital stock of a corporation
a unit of a mutual fund trust

Generally, the total 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.

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

For eligible securities under option agreements exercised up to and including 4 pm Eastern time (ET) 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 that the first of the following 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 pm ET 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 reported as a taxable benefit from the sale of eligible securities in 2025.

Employee security option cash-out rights

If you acquire securities under a security option agreement and meet certain conditions, you may be entitled to a security option deduction. In this case, your employer cannot claim a deduction for the issuance of the share.

Employee security option agreements can also 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.

For such transactions occurring after 4 pm ET on March 4, 2010, the security option deduction can only be claimed in one of the following situations:

You exercise your options by acquiring shares of your employer
Your employer has elected (as indicated by completing box 86, Security option election, of your T4 slip) for all security options issued or to be issued after 4 pm ET on March 4, 2010, under the agreement and has filed such election with the Minister of National Revenue, that neither the employer nor any person not dealing at arm’s length with the employer will claim a deduction for the cash payment in respect of your disposition of rights under the agreement

Adjusted cost base (ACB) of eligible securities

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

the actual purchase price, plus
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 2025, 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 2025 under your employee option agreement to a qualified donee, complete Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate your capital gain.

For more information on these donations, see Guide P113, Gifts and Income Tax.

Completing your Schedule 3

Disposition of eligible securities

You have to complete Schedule 3 to determine your taxable capital gains or your net capital loss.

Report the capital gain or loss in the year that 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 on line 1 of Part 3. In all other cases, report the transaction on line 4 of Part 3.

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