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 taxable benefit by any amount you paid to acquire the option rights.

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 from the taxable benefit.

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 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) 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 p.m., Eastern time (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 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 a taxable benefit from the sale of eligible securities in 2023.

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 deduction equal to one-half of the security option benefit (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 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 2023, 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 2023 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 2023, you may qualify for an additional security option deduction equal to half of the taxable benefit. For more information on these donations, see Guide 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" section of Schedule 3.

In all other cases, report the transaction in the "Publicly traded shares, mutual fund units, deferral of small business corporation shares, and other shares" section of Schedule 3.

Forms and publications

• Guide T4037, Capital Gains
• Guide P113, Gifts and Income Tax
• Form T1212, Statement of Deferred Security Options Benefits
• Schedule 3, Capital gains (or losses)
• Archived Interpretation Bulletin IT96R6, Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units
• Archived Interpretation Bulletin IT113R4, Benefits to Employees - Stock Options

Related topics

• Line 10100 – Security option benefits
• Line 24900 – Security options deductions
• Line 34900 – Donations and gifts