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Employee Stock Options: Five Tax Tips You Need to Know

Posted: January 30, 2018 By: Evelyn Jacks
Posted in: Strategic Thinking, knowledge bureau, income tax act, Evelyn Jacks, Small Business, securities, employee stock options, tax courses, taxable benefits, tax education, income tax filing, online education, stocks and bonds, Canadian Controlled Private Corporation, security options deduction, taxable net income, employment income benefit

Within today’s rapidly emerging new economy, many employers are enticing new talent with employee stock option plans: the opportunity to purchase shares in their corporations at some future date, at today’s lower price. But there are tax consequences. What do employees need to know?

1.  There are no tax consequences when the option is granted.

However, the exercising of these employee security or stock options gives rise to a taxable benefit. It is computed as the difference between the market value of the shares purchased and the exercise price (the market price at the time the options were acquired).  When the benefit is included in your income depends on what kind of corporation you work for.

2. What kind of corporation do I work for?

When do you need to include the benefit in income? That depends on the kind of corporation you work for. When options are granted by an employer that is a Canadian Controlled Private Corporation (CCPC), the taxable benefit (and the requirement to include its value in reported employment income) is deemed by the Income Tax Act (S. 7(1.1)) to have arisen only when the employee disposes of the shares.

Where the option is granted by a public corporation, or by a private corporation that is not Canadian-controlled, the taxable benefit is deemed to have arisen when the employee exercises the option.

In either case the taxable benefit includes the discount in income bringing the employee on an equal footing with an investor who purchased the shares on the market.

3. Am I eligible for the Security Options Deduction?

Here’s a third important point: When the taxable benefit is included in income, the employee may also be eligible for the Security Options Deduction, which is equal to one-half of the taxable benefit.  This benefit is available in the year that that taxable benefit is included in the employee’s income.

   

This benefit is designed to put an employee who purchases shares through a security options plan on the same income tax footing as an individual who acquired the shares on the stock market. That is, only 50 percent of the difference between what the employee pays for the shares and the proceeds of disposition is included in income. Note this deduction is used in computing taxable, not net, income, which means this employment benefit will still reduce refundable and non-refundable tax credits.

4. Do I meet all the criteria for the deductions?

There are some special rules to observe before you claim this deduction on your tax return, depending on where you work. In the case of a CCPC, the security options deduction is available only if the employee holds the shares for at least two years before disposing of them.  Your employer will make this determination and include the taxable benefit and the deduction on your T4 slip.

5. Am I keeping comprehensive records of claims?

The employment income benefit you report will be added to the actual cost of the shares and so will affect the adjusted cost base (ACB) of the shares. This will be relevant in the future when the securities are disposed of, so it’s important to keep detailed records.

In summary, employee stock options are a great way to participate in the growth of a new company. Knowing the tax rules will help to keep the most of the opportunity in your jeans. Speak to a tax specialist about your particular situation.

ADDITIONAL EDUCATIONAL RESOURCES: Knowledge Bureau’s EverGreen Explanatory Notes, DFA-Tax Services Specialist Mastery Program.

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