Taxation of Stock Options for Employees in Canada Watch Video
Allan Madan, CPA, CA
Did you receive stock options from your Canadian employer? Read More…
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Thank you for the very detailed explanation.
Another question is will [50% of] the gain from public traded company stock option be able to offset the previous year’s capital loss?
Very insightful article,
I was wondering if there is any capital gains tax on appreciated stocks when giving it to someone else as a gift?
Hi Michelle,
Stocks when given as a gift are not subjected to any capital gains tax even if they have appreciated in value.
Best Regards,
Allan Madan and Team
Hi superAmin,
If there is a change in ownership, doesn’t that mean there is a deemed disposition?
This seems to say I can gift stocks to someone without having to pay tax on the gains and eventually they will receive the stock at my ACB when first purchased and pay all the gains from the beginning when I had purchased the stock. Is that correct?
Thanks
Hi Allan,
Do I have to pay taxes on capital losses when I exercise my shares?
Hi Milos,
No you don’t have to pay any taxes because there is no capital gains, but rather you get tax benefits for selling it at a loss.
Best Regards,
Allan Madan and Team
Hi Allan, just to clarify, if I have capital losses on my stocks, I can deduct that from my capital gains to minimize my taxes on the capital gains even if they were separate stocks?
Hi Huy,
Yes the source of either the capital gain or loss is irrelevant, since you are expected to report your total capital gains and capital loss on your income tax return. It is important to note that for tax purposes, capital losses are only reported on items that are intended to increase in value. They do not apply to items used for personal use such as automobiles (although the sale of a car at a profit is still considered taxable income).
Best Regards,
Allan Madan and Team
Hi Allan,
How would the CRA calculate the appreciated price of stocks to coincide with inflation?
Hi Charles,
The CRA has there own calculation methods especially for stocks that individuals may have held for long periods of time. It is best to directly contact the CRA for more specific information.
Best Regards,
Allan Madan and Team
Hi Allan, are there any taxes on stocks received from a deceased individual through their will in cases where the stocks have dramatically increased in value?
Hi Thompson,
The stocks will only be subjected to capital gains tax when and if you decide to exercise/sell the stocks. There are no taxes on the transfer of assets through wills.
Hi superAmin,
Shouldn’t the assets on death be deemed disposed of, hence there will be gains on the stock?
What would happen if the options were still not exercised by the time of death?
Thanks
Hi Wilton,
Thanks for your question. Upon death there is a deemed disposition of all of your assets at their fair market value at that time, except for assets willed to your spouse. If you did not exercise your stock options before your death, then they will likely expire and become worthless, unless the options agreement states that a surviving beneficiary can assume the options in your place.
Hi Allan, as part of my employment contract, I have an option to receive shares or $10000. If I chose to receive the shares but later changed my mind since the values of the stocks are projected to be decrease in value, would I be taxed on the $10,000?
Hi Chrissy,
If you choose to re-take the $10,000 then it would be included as part of your total taxable income as long as you received it within the taxation year. If it is a possible option, you can choose to defer the received income for next year as to avoid paying less taxes on it this year if you project your income to be lower.
Best Regards,
Allan Madan and Team
Hi Allan,
Are there capital gains loss for issued stocks in cases where the company has filed for bankruptcy?
Hi Cruz,
Capital loss is only applied to cases where you have actually sold the stock. Luckily, for you there is a provision under section 50(1) of the income tax act that does allow for some tax relief. When this is applied, the shares will be deemed to have been disposed of for proceeds of nil at the end of the year, and to have been recacquired for adjusted cost base (ACB) of nil immediately after the end of the year. As a result, you will be able to realize the capital loss on the stock. The superficial loss rule does not apply in situation.
Best Regards,
Allan Madan and Team
What if my company is being taken over by several investors and is going from a public to a private company, when they own 90% of the shares, I am force to sell mine at below market value, do I get any tax relief in terms of capital losses?
Hi J.J.,
IF you are force to sell your shares then it is illegal for them to pay at below market value for the remaining shares, you should be able to get at least market value you for them. IF not, you can deduct your capital loss against your capital gains for tax relief.
Best Regards,
Allan Madan and Team
Hi Allan,
I did some contracting work for a small startup tech company. Since they had no money they paid me in shares, if and when they take the company public, would I have to pay taxes then?
Hi Lyle,
You would only have to pay capital gains tax when and if you decide to exercise/sell your shares. If you continue to hold onto them, you will not be subjected to any taxes.
Best Regards,
Allan Madan and Team
Hi Allan,
Is it possible to hold my stocks within a TFSA account? how would the accrued interest on these stocks be taxed?
Hi Arielle,
Yes common shares generally qualify for TFSA investments, however those shares must be listed on a designated stock exchange. If they are not listed, then they will be categorized as a non-qualified investment inside your TFSA and you will be hit with some severe penalties.
The taxation of the accrued interest would be the same for any type of investment contributions made to your TFSA.
Best Regards,
Allan Madan and Team
What would be classified as a designated stock exchange? what about penny stocks?
Hi Mahmoud, the Canadian Department of Finance has a list of 41 designated stock exchange on it website here http://www.fin.gc.ca/act/fim-imf/dse-bvd-eng.asp.
Penny stocks traded on pink sheets are not on a designated stock exchange but any penny stocks (people disagree on its definition) that are listed on any of the designated stock exchange are eligible for TFSA investments.
Best Regards,
Allan Madan and Team
What if a stock is listed on multiple exchanges some of which are not listed, how would the department of Finance categorize this?
Hi Timothy,
As long as the stock is listed on at least one approved stock exchange that is recognized by the department of Finance, it will qualify for TFSA investment.
Best Regards,
Allan Madan and Team
Hi Allan.
I currently work for a CCPC, and they have offered me $5000 in stock as compensation. As I am new to world of stocks, I am wondering what to do with these. What happens when I exercise my stock options? Are there any tax implications?
Hello, and thanks for your question.
Stock options are one of the most popular form of non-monetary compensation that employers offer. They are a taxable benefit, and should be included on your total employment income on box 14 of your T4 slip. Here’s how they work. An employee is given the option to buy shares of a company at a future price. At this stage, there is nothing to report on income.
When you buy the stocks at that agree-upon price (called exercising your option), the taxable benefit comes into play. This benefit is calculated as the difference between the fair market value of the shares on the date you purchased the shared and the price you paid for them. As your employer is a CCPC, you can defer all your taxable benefit until you sell your shares.
I worked for a company back in 2003 that had an IPO. Employees were awarded stock options, and I was given 2,000 shares. I still have the letter from the man who was then president and CEO. The length of the contract was 25 years. However, I ended up leaving the company a few months later, so it appears as if I am only 25% vested. The company has now been split into two separate companies.
Do any of my stock options have value today? Can I cash out my vested portion?
In your case, you would have 25% of the original contract for 2000 shares. The main question you need to answer here is which company took over the stock. If the company split into two, who took over the shares? Also, did the company that took over shares covert the option contracts? Sometimes the employee stock option plan (ESOP) will not have the options converted if the company is broken up.
If the company did not give you options but just 2,000 shares, you would need to know what the shares converted into. Most companies only give option contracts to executives, because they are not actually holding onto the stock. Most option plans do not have a vesting, but the ESOP will.
I would call the company that holds the stock, and find out what your options are. If the company split in 2003, it will probably take a long time to figure out the information. Companies are only required to keep records in the front office for 3 to 5 years, depending on the type of record. Therefore, the sooner you do this the better.
Hi Allan. My company is offering me some stocks as compensation. What are some things I should know before I take them?
Hello.
A stock option plan allows your employer to sell you shares at a predetermined price (known as the exercise price). Normally, you’ll exercise your right to buy shares only when the fair market price is higher than your exercise price. After all, if your exercise is 15$ a share and the market value is only 12$, you are overpaying! When considering take an employee stock option, you want to be confident that the shares in the company are going to increase in value. Also, you want to be sure that you can sell the shares later. If your company is private, make sure you have someone to sell those shares to. It will do you no good to have a lot of shares worth millions if nobody is buying.
Regards,
Allan Madan and Team
Hi Allan. I’ve signed up for an employee stock sharing plan on TFSA with my employer. As per the agreement, he matches 5% of my contributions. I have received a T4PS with an amount on box 35 that I need to include on my tax return. I thought the money you earn from a TFSA is tax free, was I wrong?
Hello,
Only the interest, dividends, or capital gains within a TFSA are tax free. Amounts contributed to it are considered after tax, and thus are not deductible from income. On the other hand, withdrawals are not considered income.
Your employer makes their matching contributions before tax, which is why these contributions are reported as additional income. This is why they are reported as additional income, and have to be reported on your tax return. Because of your employer’s contributions, it is quite easy to over contribute to your TFSA’s. Doing so may trigger penalty taxes, so do be careful. If you have any questions regarding this or any other tax-related question, please do not hesitate to ask me.
Regards,
Allan Madan and Team
I’m not very familiar with stocks or how they work but they seem intriguing to me. How would it work if I owned stock with the company I worked for, got it at a discounted price as per the stock options, but then was terminated. Would I still be in possession of those stocks and would I still have to pay taxes on them? Or would I lose the stocks since I was no longer employed with the company?
Hi Donovan,
Usually employees can and do keep the employers stock options even after termination.
In the year you exercise your options you will have an income inclusion which will be the difference between the exercise price less the FMV of shares when the options were exercised.
When you eventually sell the shares there will be a capital gain or loss.
The adjusted cost base will be the FMV of the shares when you exercised the options.
If the proceeds of disposition are more than the ACB you will have a capital gain.
If the proceeds of disposition are less than the ACB you will have a capital loss.
Best Regards,
So if I’m married or living with a common-law partner, and she is making considerably less than I am. Would I be able to share some of my dividends with her so that she can benefit from the tax savings that come along with the stock options or would that only be applied to my own person return?
Hi Nexum,
Under the Canadian tax system, there is a provision that allows you to transfer all of your dividend income to your spouse so that your spouse can recognize 100% of your dividend income if certain conditions are met. This may or may not be advantageous depending on you and your spouse’s tax situation and we’ll need more information.
Best Regards,
Hi, I was wondering if it would be worthwhile to invest some of my employee shares into my RRSP rather than sell them. I ask this because a colleague of mine buys his employee shares at a reduced price and then sells them at around the beginning of the year. From there he sells the shares, puts the money in his RRSP and then buys the shares again within the RRSP. He says this doesn’t save him much on taxes but it does help the return as he’s able to store money in his RRSP and watch it go untaxed. Is this something that is plausible?
Hi Tom,
One thing to remember when dealing with RRSPs is that they are tax deferrals, not tax free. This means that you can save taxes on them in the meantime by keeping the money in the RRSP, but once you make a withdrawal you will have to pay taxes on those withdrawals.
There really isn’t any way to avoid paying taxes on public corporation employee shares, but there is a way to avoid taxes in the future on those amounts. If you contribute the shares directly to a Tax Free Savings Account, you can save on paying additional taxes in the long run. You would still have to pay taxes on the capital gains you incurred, and there would be no refund, but whenever you withdraw the money from the TFSA it would be free of tax. Hope this Helps.
Allan
Hello,
My wife is currently on maternity leave until March. Therefore, she is on EI. The management of her company decided to allow her to cash in her stock options by December. We are not sure what the tax implications of this will be. The finance department of the company said that the income would be reported in the T4 as employee benefit. Will she have to report this income to the CRA, and will it reduce her EI benefit? She is in the top income bracket.
Hello,
Options are not treated as capital gains, as you cannot deduct losses against them. They are, however, taxed as ordinary income. Also, they are subject to a “security option deduction” (line 249 on your tax return) if certain conditions are met. Half of your wife’s benefit she receives from cashing the option is included in her taxable income for the year. If she is in the top bracket, one-half of her option benefit could be taxed at 46%.
Regards,
Allan Madan and Team
Hello,
Last year, I have exercised some deferred stock options. How do I report these?
Hello,
If you received a T4 from the employer who also issued the stock options in your name, then the respective gain or loss would be reported as part of your T4 slip (as well as the stock option deduction in box 39 and 41). In addition, you will be able to claim 50% of the amount from line 4 of Form T1212, Statement of Deferred Security Options Benefits.
Regards,
Allan Madan and Team
Hi Allan,
I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I deffer the taxes so I can split the taxable profit to multiple years so I pay less taxes?
Any info of the “Exercise” and hold” option would be good.
thanks,
Hi Kunal,
I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I differ the taxes so I can split the taxable profit to multiple years so I pay less taxes?
Any info of the “Exercise” and hold” option would be good.
thanks,
What are the tax implications of trading stocks in a non-TFSA account with a brokerage, when it comes to end of year taxes on profits? Is there a particular rate for capital gains? Also, do I keep track of my gains and losses myself?
Hello,
50% of your gains are counted as taxable income. You can deduct past capital losses from current capital gains. After factoring in capital gains, if your personal income is below the exemption level you won’t pay any taxes on it. You also don’t have to pay taxes if you haven’t sold the stock this year. Earnings from dividends are taxed differently, and have different rates depending on whether they are considered eligible or inedible.
Finally, keep track of all your gains and losses. Your institution may provide you with a summary, but will not give you a formal t-slip.
Regards,
Allan Madan and Team
Hello.
I received a company stock option some time ago. It has a strike price of $3.10, and a vest of $30,000 after each of three years. The most recent yearly dividend was $0.69, and six months ago the company offered to buy it back. Though they offered $2.80, nobody sold their shares. What, if anything should I do with these? What are the tax rules surrounding my situation?
Hello.
Tax rules for stock options in Canada differ, depending on whether the company is a CCPC. If it is, there is no immediate taxable gain. The gain is taxed when shares are sold, not exercised. This significantly reduces the up-front difficulty of purchasing stock options. Also, if shares are held for at least two years after the exercise, half of the initial gains are tax-free.
If it is not a CCPC, the taxable gain may be due in the year of exercise. Many companies in this situation offer near-immediate partial buyback to help offset these costs. The difference between the market value at the time of exercise and the value at the time of sale is taxed as income for non CCPC’s.
My advice is to exercise and sell if the stock price is higher, and take your cash profit. Then, use that profit to buy shares and collect dividends. You will get taxed on the profit from selling your options, and later on the dividends.
Regards,
Allan Madan and Team
Hello,
I work in Canada for a company that trades in the US. One of the benefits I get from my job is that I get restricted stock units (RSUs) once a year. These are connected to an ETrade account that the company arranged for me. I have filled out the W-8BEN tax form. I believe this is the correct form.
I just found out that there was an automatic ‘sell to cover’ action that sold enough stock to account for 40% of the value that had vested. Does this amount satisfy Revenue Canada when it comes to tax time? Or do I need to put some of the remainder aside as well? I asked an accountant, and he said that since it is a capital gain that the CRA would tax me on 50% of the value…is this correct?
Also, the stock vested at 25.61 (which is the value at which the sell-to-cover happened), but by the time I could sell, the stock was at 25.44. Does that have any bearing on my situation?
Hello,
The fair market value of the RSU at vest time is treated as regular income paid to you by your employer and will be taxed at your marginal rate. 40% should be enough withholding to satisfy your personal income tax, depending on what your total income for the year is. Since it vested at $25.61 but you sold it at $25.44, you’ll be able to claim a capital loss (or carry it forward to a year where you have gains you can offset with it).
Regards,
Allan Madan and Team
Hello,
I work for a start-up company, and part of my compensation is stock options. Assuming that we get a chance to exit (big assumption, of course), I stand to make a large sum of money when I exercise them. What happens at this point with regards to tax? As I understand it, all growth from the exercise price will be taxed as capital gains. Is this correct? If so, I would end up losing a large percentage in taxes.
Is it possible to exercise the options sheltered inside a TFSA or RRSP to avoid capital gains? Is there anything I’d need to do beforehand (e.g. “transfer” the options un-exercised into a TFSA) to prepare for that?
Hello,
Your options are taxed at capital gains rates (i.e. 50%) since you get a 50% deduction on the income inclusion assuming you meet certain conditions. Regarding holding them in a TFSA or RRSP, make sure that you ensure they will not be considered a non-qualified and/or prohibited investment. In general, you need to ensure that you and non-arm’s length parties (such as relatives) will not own more than 10% of the company.
However, you may not be able to get them into a TFSA without paying some tax on them. This is the point of a TFSA; the contributions are after-tax. You could possibly exercise the option, pay the (income) tax, then transfer the shares to a TFSA. However, this is assuming the stock price goes up after you exercise.
Regards,
Allan Madan and Team
Hello, in 2012, I bought 1,000 shares at my company at $10 each. In 2013, the stocks shot up to $40 a share. Some of my co-workers and I decided to sell the shares, but then the stocks declined back down to $10 a share. How should we handle this situation?
Hi, In this case you should report a taxable employment benefit of $30,000 on your T1 return. This represents the profit earned on the shares up to the date of exercise. In addition, you should report a capital loss of $30,000 because the shares dropped in value when you sold them. The bad news is, the capital loss of $30,000 cannot be offset with the taxable employment benefit of $30,000.
If you want, you can contact your local CRA Tax Services office, explain the situation, and they will determine whether special payment arrangements can be made.
Regards,
Allan Madan and Team
Hi,
My wife will need to exercise some options from her former employer this week. It’s a publicly traded company. I understand she will have pay taxes on the difference of price between the exercise price and the current value. My question is who is required to send the tax amount to the CRA: The employer or her.
If it’s the employer, does that mean they can withhold some of the shares as payment to the CRA?
Thanks
Hi JCP,
Generally, the difference between the fair market value of the shares at the time the option is exercised and the option price will give rise to a taxable benefit. This taxable benefit is included in the employment income when the stock option is exercised (i.e. it is added onto the T4 just like a salary or a bonus).
Since this amount is like a salary, the employer has to make payroll remittances on it (CPP, EI and income tax).
Best Regards,
Hi, I was just wondering if there are any benefits of transferring the stocks from my employee stock savings account to a TFSA.
Hi Carla, if you have room to contribute to your TFSA and you decide to transfer your stock over to the TFSA, it will be deemed that the stocks have sold for a capital gain (or capital loss). This means there may be taxes you will need to pay on the transfer in the tax year. If you are able to pay a small amount of capital gain now, your future returns (ex. Capital gain, dividends) will be tax free.
Contact me or your bank directly before deciding to make the transfer. It’s always beneficial to get professional help so that you don’t run into any problems
Allan Madan and his team
In your public company example the Coca cola shares are on a US exchange, so presumably the transactions will occur in the USA through some sort of US trustee or brokerage. Does that mean a US tax return needs to be filed for the income earned in USA?
Hi Shawn,
Under the Canada – US tax treaty, Canadian residents that incur capital gain on US stock investments are not required to file US tax return. You will simply report the capital gain on your Canadian tax return and pay tax to Canada.
Hi, Could you please tell me what are the cost implications to both an employer and employee in a stock options plan
Hi Kirti,
Under a stock option plan, at the time the stock option right is transferred to the employee, there is no effect on the employee’s tax situation until the employee exercises or disposes of the option. If the employee exercises the option below the fair market value of the stock, the employee will receive a taxable benefit. This would be an employment benefit equal to the amount by which the value of the shares at the exercise date exceeds the total amount paid.
As an employer, stock option plans are non deductible unless they are paid in cash.
Hello Allan, I own a start-up company and will be hiring employees soon. I just want to plan ahead so I don’t run into problems down the road. What options should I have for employee stock?
Hi Veronica, there are three main plans that you can deploy for your employee stock options. They are as follows:
1) Employee stock purchase plan (ESPP): This plan will allow your employees buy shares at a discounted price. Many ESPPs provide a buffer in the purchase of the shares: an employee will pay a certain amount over a period of time and at pre-specified periods, the employees can purchase shares at a discount using the accumulated payments. The benefit is equal to the value of the shares, minus the amount paid.
2) Stock bonus plan: under this plan, you will have to agree to give the shares to your employee(s) free of charge. In turn, you agree to sell or issue shares to the employee for no cost.
3) Stock option plan: This plan allows your employee(s) to purchase shares of your company or of a non-arm’s length company at a predetermined price.
Hi, I am moving to the States soon, but I still have stock through my current employer. Do I need to sell my stocks now? Or can I keep the stocks and deal with them when I get to the States?
Hello Craig, if you hold stock options at the time you become a non-resident, there should be no tax consequences at the time you move, but you will be liable for an employment benefit on exercise of the option.
On the other hand, if you have previously applied to acquire CCPC shares to defer employment income again before you become a non-resident, you will face departure tax on the shares that you hold. The gain or loss on disposition of the shares will be reduced by the inherent adjustment for employment income.
Hi Allan, is there a tax advantage to selling shares of my corporation?
Hello Jaimer, yes, in some cases there would be a big tax advantage for selling the shares of your corporation. If you have a qualified small Canadian-owned business or qualified farm property, you will be able to claim the capital gains exemption that will come from the sale of your shares. The capital gains exemption is $800,000 in vale for dispositions occurring on or after January 1st, 2014. This one idea could save you around $200,000 in income taxes.
You should note that selling shares is a lot harder than selling assets for your company. You may have to lower the price of your shares, and in turn, depending on your personal tax situation, you may not be able to make use of the capital gains exemption. The government restricts the use of the exemption in some cases where the taxpayer have claimed investment losses.
Hi Allan, is there any way to defer the taxes I pay on my stock options until I sell them?
Hi Kasey, if you work for a Canadian-controlled private corporation, you will be able to defer the tax on the employment benefit until the shares are sold. The CRA realizes that most people cannot find a way to pay tax on $50,000 of noncash compensation, which is why they allow you to defer the tax. However, if you do not work for a Canadian-controlled private corporation or a publicly traded company, no deferral will be available.
Hello Allan, I made the election to defer income taxes on my shares in a public company. The stock value has since declined and I don’t have enough money to pay the income taxes that I have deferred. Is there any way to postpone the payments until I get enough money to pay them off?
Hi Sarah, yes there is temporary relief that the CRA provides for employees who have made an election to defer income tax on declining stock options. The relief is intended to ensure the income taxes payable on the benefit arising on the exercise of the stock option does not exceed the proceeds of disposition received when the optioned securities are sold while taking account of the tax benefit resulting from the deductible capital loss on those securities.
To take advantage of this relief, the election must be filed no later than your filing deadline for the taxation year during which the shares are sold, which is almost always April 30th.
Hello Allan, I was thinking of giving shares to my employees instead of stock options. I know some of the advantages to this method, but not a lot about the disadvantages. Can you tell me a few disadvantages of giving shares to employees?
Hi Dan, here is a list of potential disadvantages for issuing shares to your employees.
• Deferred tax liability if shares are bought below fair market value.
• May need to defend the fair market value. You may also need an independent valuation, although that is very rare.
• You need to make sure that shareholder agreement provisions are in place.
• Issuing shares at very low prices on a cap table may look bad to new investors.
• More Shareholders to manage.
Here are some advantages of giving out shares.
• You can get up to $800,000 in life-time tax-free capital gains.
• 50% deduction on gains if shares held for more than two years or if shares were issued at FMV.
• Losses in a CCPC can be used as allowable business losses if the business fails.
• Can participate in Ownership of company.
• Less dilution than if stock options are issued.
Hi Allan,
I work for a public company and received 1000 shares of stock options. Let’s say the exercise price was $10/share, and the market value of the share was $13/share (at the time the shares were exercised). I paid necessary tax at the time of exercise, but I did not immediately sell my shares. If the shares go up in value to $15/share and I sell all my shares at this time, do I have to pay any taxes further taxes?
Thanks,
Clay
Hi Clay,
In your example, if you decide to sell your shares at $15, you will be taxed on the capital gain as follows:
Adjusted Cost Base: $13 (FMV of when you exercised your shares)
Proceeds of Disposition: $15 (FMV of when you sold your shares)
Capital Gain: $2
Inclusion Rate: 1/2
Taxable Capital Gain: $1 / share you sell.
You record a gain of $2 for each share you sold and will have to pay $1 in taxable capital gains for each share you sold.
I have a question concerning taxation of stock options.
I work for a public company and was granted 1000 shares of stock options at the exercise price of $10/share (according to the agreement). The market value of the shares was $13/share (at the time the option was exercised). I paid the necessary taxes at the time of exercise and the employment benefit was included in my income on my T4 slip. If I hold on to the shares and the shares go up in value, and then I sell the shares at $15/share, do I need to pay taxes for the additional gain of $2/share?
Thanks,
Benjamin
Hi Benjamin,
Capital gains tax will apply to the additional $2 per share that you profited on sale.
Hello
I find your blog informative and valuable. I have a question regarding TFSA and employee stock option. Can I have employee stock option in TFSA account? The contribution I make towards the stock option is on a monthly basis (for 3 years) and of course the contributions are after tax. Can I then exercise the options in the TFSA?
Would there be any tax implications?
Also, after I exercise can I keep these shares in TFSA and later on sell the shares if the price go up without any tax implications?
Thanks
Hi Allan,
Can I transfer Stock Options given to me to my personal company 100% owned by myself and my wife? Or to a company 100% owned by myself?
Hi George,
You can transfer stock options given to you to your corporation. However, there will be a capital gain realized upon the transfer. The amount of the gain will be equal to the market value of the options less the amount you paid for them. If your employer issued the stock options to you, it’s imperative that you read the options agreement to ensure that there are not any restrictions on transferring them.
There’s no tax savings in making a transfer of stock options to a corporation.
Dear Allan,
Quick question about employee stock options. I was wondering what the requirements are to deduct the stock option employment benefit?
Thanks,
Sumeer
Dear Sumeer,
As an employee who exercises options and acquires shares, you are entitled to an offsetting deduction that equates to one half of the employment benefit amount. This is given to you as long as these conditions are met:
– the employer corporation is the issuer of shares
– the shares are not “preferred shares” but instead “prescribed shares”
– the option exercise price must not be less than the fair market value of the shares at the time the option is granted
– the employee deals closely with the employer corporation
I hope this helped,
Thanks Allan
Hello Allan,
I am ready to declare my security option benefit and I work for a private Canadian corporation – how do I go about this?
Thanks,
Ranjeet
Hello Ranjeet,
Declaring your security options benefits depends on the type of company issuing the benefits. If the company is a Canadian controlled private corporation, you have to report the benefits the year you plan on selling your securities.
Thanks,
Allan Madan
I exercised options using a net exercise (they used part of my available options to purchase shares and provided me with a certificate for those shares) last year but on review the company did not report the taxable benefit on my T4. The stock is for a publicly listed company on the TSX. How should this be cleared up with CRA? Isn’t it the companies responsibility to report this as income on my T4?
Hi Ralph,
It’s the company’s responsibility to report the taxable benefit realized upon exercising employee stock options. You should speak with your employer and ask them if they will be issuing amended T4 slips to their employees.
Hi Allan,
I was just wondering what kind of stock options can people generally choose from?
Thanks,
Laurentine
Hi Laurentine,
Employees are generally issued a variety of different options under one of three types of plan. There is the Employee Stock Purchase Plan (ESPP), Stock Bonus Plan, and the Stock Option Plan. For further details about each of these options, please visit the Canada Revenue Agency website.
Dear Allan,
I have read a lot about stock options for workers in Canada. I am just wondering why Canadian employers initially grant these options to their employees.
Thanks,
Pierre
Hi Pierre,
By granting stock options it ensures keeping good workers. Employers typically want their employees to feel like owners in the business. They also want skilled individuals, thus offering compensation beyond a salary is an incentive to stay loyal.
Quick question! What makes a stock option very “tax-efficient”?
– Leon
Hello Leon,
Let’s use an example to answer this question! Suppose you exercise your stock option for $30,000 while the market value is $40,000 – this ultimately means you’ve received a benefit from your employment! You will face tax on the $10,000 benefit, – this is where the idea of ‘stock options’ should be of interest to you. Considering certain conditions are met, you can claim a deduction equal to 50% of the stock benefit. By including this $10,000 on your tax return, you could deduct $5,000. Thus, making a stock option very “tax-efficient”!
Hello,
What conditions exist to ensure that I am entitled to the 50% deduction?
Thank you,
Judith
Hi Judith,
There are three conditions that must be met for you to be able to claim an offsetting deduction equal to 50% of the stock option that you report as income. The three conditions are as follows:
i. You cannot be in control of the corporation – you must deal with the company at arm’s length; on a third party basis.
ii. The shares must be common shares, not preferred shares.
iii. The stock options cannot be in the money on the the money on the day the option is granted.
Hello,
Got together with my network from a former employer last week and we got around to the subject of taxes paid on our stock options. It was clear we have been given clearly different tax advice by our accountants.
I used to work for a Canadian division of a NYSE traded US Corporation. One of the benefits was granted stock options (common share) annually. The options were connected to an ETrade USA account that the company arranged for me. We submitted the W-8BEN tax form annually at the request of our parent company. When I exercised the options, 40% was withheld by Etrade and paid to IRS.
Options were reported as a taxable benefit on my T4s to CCRA.
Question- how should we have handled this? It appears most of us have paid taxes to both countries on the benefits.
Hi – wondering if you have had a chance to look at my October 20th question.
Hi,
Wondering if you had a chance to look into my original inquiry?
Don’t know why you wouldn’t answer this, we got our answer from a company that got all the business from everyone involved.
I work for an NYSE listed company and received stock options as part of my compensation plan. I went on maternity leave last year and they had extended my vesting for the same amount of time (i.e. extended the year). Is this the same treatement in Canada or is this a US common occurance, perhaps company specific? Any help would be greatly appreciated. -C
As far as I am aware, this appears to be a company specific policy.
Hi Allan
What is your take on the Liberal government’s pre-election promise to change how stop options are taxed?
I have unexercised employee options granted to me before the company I work for went public (IPO). I am
concerned that the changes can have a significantly negative effect on the tax on the gains of those options
if/when exercised next year (stock price is currently too low to exercise now, or I would).
As such:
1) Do you think the federal government will go ahead with these changes? I have read articles that make it
sound like it may not be worthwhile to go ahead as companies would logically have to be given the ability to
deduct options as an expense, which is now not the case.
2) Do you think there will be any grandfathering that may benefit situations such as mine?
3) Do you think the changes will apply to pre-IPO companies as well as public companies?
4) If the federal government does go ahead with changes, do you think the changes will be exactly as
promised, or might there be some lessening of their impact (e.g. higher annual exclusion)?
TIA
Jim
Hi Jim,
These are excellent questions. While the liberal government has expressed its intention to make employer stock option benefits 100% taxable, they have said that this high inclusion rate will only apply on gains in excess of $100,000. Therefore, most Canadians will not be affected. I suspect that the liberal government will go head with these plans, but I’m not completely certain.
The finance minister announced that options granted prior to the date on which the new stock option rules come into effect will be grandfathered. He did not specify whether the rules will be different for pre-IPO companies or public companies.
Hi Allan
What is your take on the Liberal government’s pre-election promise to change how stop options are taxed? I have unexercised employee options granted to me before the company I work for went public (IPO). I am concerned that the changes can have a significantly negative effect on the tax on the gains of those options if/when exercised next year (stock price is currently too low to exercise now, or I would).
As such:
1) Do you think the federal government will go ahead with these changes? I have read articles that make it sound like it may not be worthwhile to go ahead as companies would logically have to be given the ability to deduct options as an expense, which is now not the case.
2) Do you think there will be any grandfathering that may benefit situations such as mine?
3) Do you think the changes will apply to pre-IPO companies as well as public companies?
4) If the federal government does go ahead with changes, do you think the changes will be exactly as promised, or might there be some lessening of their impact (e.g. higher annual exclusion)?
TIA
Jim
Hi,
I have Employee stock options that my employer gave me (a big Canadian public company) that have vested and they are underwater for now.
Is it a good strategie to transfer my options into a TFSA while they worth 0$ and hoping they will eventually inflate the value of my TFSA? I would like, if the stock price increase enough, to do a cashless exercice into my TFSA. It seems to be a zero risk strategie since I’m not gambling any of my TFSA Ccontribution room. Am I missing something?
i work for a company that allows me to purchase stock options. they will match up to 30%. i am about to be laid off. better to cash out now? not sure if ei benefits will be reduced if i was to cash out while claiming ei.
Hi Rob,
Thanks for your question. If your total income for the year including taxable stock option benefits and EI payments does not exceed $61,000, then your EI payments will not be clawed-back. I suggest that you first calculate the total taxable benefit from cashing our your stock options before you decide whether or not it makes sense to cash out.
Hello Allan, can either stock option proceeds (or the options themselves) or ESPP stocks or proceeds be transferred or gifted to as spouse for taxation purposes ? The stock are in an American company which has been purchased and these stocks will be paid out all at the same time.
Thank you, Jane
Hi Jane,
They can be gifted to a spouse at cost, so that a capital gain will not arise on the transfer. BUT, any income or gains earned by the recipient spouse on the transferred stocks / shares must be attributed back to the transferor spouse. So you can’t save taxes by way of a gift to a spouse.
So what if you have a taxable benefit on your t4 in 2015 and then in 2016 the company goes bankrupt. Can I claim a loss for those shares on my personal tax in 2016?
Hi Judy,
In that case, claim a capital loss. Capital losses are only deductible against capital gains.
Taxable Compensation on Statement on Publically traded – Employee Stock Option is it part of Purchase Price?
Hi Tushar,
The taxable portion of stock-based compensation included in your T4 becomes your cost basis for the shares you received, assuming you have not cashed out and are still holding these shares.
I realized a gain of the sale of a non-qualified stock option from a US public company. I am a Canadian citizen working for a subsidiary of the US public company, in Canada. ON the sale of the options, my broker withheld income taxes at 37%. How do I report these taxes paid on my canadian return?
Hi Mario,
Claim a foreign tax credit on form T2209.
If I transfer my shares to my wife as a gift will I be able to avoid taxes on them?
Hi Paul, you can automatically rollover your shares to your wife at cost. However, any gains realized upon their sale will be taxable to you.
I have just (Feb 2018)executed an exercise and sell of my option grant from my employer, a publicly traded U.S, listed company. These options were granted in 2010 when I worked for their Canadian subsidiary. I moved to the U.S in 2014 still employed with this company and pay taxes as a U.S. resident. ON the transaction above, they have withheld Canadian federal and provincial taxes as well as U.S. and state taxes. Why do they deduct CAN taxes? Do I have to file a Canadian tax return for 2018 to get a refund of this amount? Any help appreciated. Does the location where I received this grant have importance? I thought that the exercise and sell transaction and timing was the most important consideration for any taxes.
I am a Canadian citizen who works for a private US based company in Toronto and was given stock options as part of my compensation. The company recently became acquired and I was paid out my options. They included this payout as ’employment income’ or cash bonus within my T4 which has a material impact to my income tax.
I am not convinced that they have treated this payout correctly – shouldn’t this be a capital gains treatment rather than say a ‘bonus’ ?
Hi Gus, the pay-out should be added to your income – box 14 of your T4 slip. If certain conditions are met, you can take a deduction for 1/2 of the option benefit included in your income.
What is the tax rate you have to apply when exercising the stock options?
I sold shares in a company that I bought on payroll deduction. I sold them for about one tenth of what I paid . I held them for around twenty years. Would my company be able to find out what I initially paid for them this late in time. Thank you Walter. Also what department of the company would I phone to find out.
Hi Walter, contact the HR department to verify the amount included in your T4 for company shares purchased by you. Add the amount included in your T4 for the shares to any amounts that you paid to purchase the shares, in order to arrive at the cost basis of the shares for tax purposes.
Hi Allan, Thanks for such a clear article. I have a question with regard to the tax rate for the 50% of the gain that is taxable upon exercising of the employee stock options in a public listed company. If one has reached the maximum income tax rate of 49.8% in CA, what tax rate will apply on the taxable gain? is it 49.8% or half of that at 24.9% ? Would appreciate hearing from you soon. Would also appreciate a quote for tax filing services for 2018 income from your company. Thanks.
Hi, the rate would be 24.9%. Please email a copy of last year’s tax return to me so that I can better understand your situation, in order to provide a quote. My email address is amadan@madanca.com.
Hi Allan,
I came across this post and wondered if you could clarify something. If I have a grant of RSUs that vest, and some shares are sold by my company to cover taxes, does this sale need to be reported on my income tax return? If the answer is yes, how is ACB calculated if I owned other shares in the same company prior to these RSUs vesting? Are the shares sold to cover taxes considered identical properties to shares owned prior to this RSU grant vesting, or do they fall under the exception that CRA lists in their 2018 Capital Gains guidelines that states the following (page 22), which would mean they have their own ACB:
https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4037/t4037-18e.pdf
Quote Below:
“Note Generally, the following properties are not considered identical properties:
■ securities acquired under an employee option agreement that are subject to the benefit deferral or are designated and disposed of within 30 days
■ certain employer shares received by an employee as part of a lump-sum payment upon withdrawal from a deferred profit sharing plan
As a result, the ACB averaging rule described above does not apply to these types of securities. Each of these securities will have its own ACB determined in the usual way.”
Hi Chuck,
The ACB of your vested RSUs is equal to the amount included as income on your T4 slip in respect of the RSUs that have vested in the year. For example, assume that you received 100 RSUs that vested at the same time in the year, and the market value of each unit is $20. In this case, the ACB of each RSU is $20, or $2,000 for 100.
The ACB of the unsold RSUs will not change, even if some of the RSUs were sold to cover the taxes owing. If you receive RSUs in the future, follow the same method as above to determine their ACB. Then, take the average ACB (using the weighted average method) to calculate the ACB of all unsold and vested RSUs you have.
For example, assume that you receive 100 vested RSUs on March 1, with a market value of $20 per share. Further assume that you receive an additional 100 vested RSUs on July 1, with a market value of $30 per share. The average ACB of each RSU is, therefore, $25.
Hello Alan,
My partner and I have developed a software program. A technology company wants to license the rights to the software and grant us some shares as payment. Will we need to report this grant of shares as income?
Hi Joseph,
Yes, you will need to report this grant of shares as a business income. The amount of income is equal to the market price per share multiplied by the number of shares granted.
I’m non-resident Canadain Citizen (currently living/working in Middle East). My country of residence do not have any tax treaty with Canada and United States. I want to ask:
– If I invest in Stocks in Canada, would I incur Capital Gain Tax when I sell those stocks being NON-RESIDENT?
-If later (after few years) I become Canadain resident, and I sell these stocks at that time (which I purchased being non-resident), would I incur Capital Gain Tax being Resident?
– If I invest in US Stock exchange while being non-resident of Canada; would I incur any Capital Gain Tax (either in US or in Canada)?
Hi Mansoor,
Non-residents of Canada who sell Canadian marketable securities (excluding real estate) held in a non-registered account do not pay capital gains tax to the CRA on any profits. Upon returning to Canada, the cost basis of all your assets, including Canadian marketable securities, is adjusted to their fair market value on the date of tax immigration. If you sell those securities afterward, you will be subject to capital gains tax on the profit, which is calculated as the net sales proceeds minus the fair market value of the security at the time of tax immigration.