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Taxation of Stock Options for Employees in Canada

Did you receive stock options from your Canadian employer? If yes, this article is for you. In this short write-up, I explain how the “Taxation of Stock Options for Employees in Canada” directly affects you.

Employee stock options and taxation of stock options for CanadiansWhat is a stock option?

Stock options or employee stock options is an option in which the employer gives an employee the right to buy shares in the company in which they work usually at a discounted price specified by the employer.  There are different types of stock options that can be issued to employees, more information can be found at the Canada Revenue Agency website.

If you’re working here in Canada, and received stock options from your employer, it’s really important that you go through this write-up.  For employers who are looking to sell their company through their shares, please have a look at one of our articles regarding asset sale and stock sale.

Here, you will find out just about all you need to know in regards to taxation of stock options for Canadian employees. To make for easy understanding, I’ll break this article into two parts.

First, we’ll cover CCPCs (Canadian Controlled Private Corporations), and then public companies. This is because the tax rules are different. For those of you who don’t know, a CCPC, or Canadian Controlled Private Corporation, is a company that’s incorporated in Canada, whose shares are owned by Canadian residents, and it’s not listed on a stock exchange like the New York Stock Exchange or the Toronto Stock Exchange.

Taxation of Stock Options for Employees in Canada in CCPCs:

Let’s start off assuming that you work for a CCPC. The most common question that I get asked is, “Do I have to include anything in my income when I receive the stock options?” The answer is, no. You don’t have to include anything in your income when you:

• Enter into the stock option plan
• When the options are granted to you, or
• When you exercise the options

The next question that I often get asked by my clients is, “Do I have to pay tax at the time of exercise, or at the time of the sale of the shares?” The answer to this one is, at the time of the sale of the shares. Let’s take a numerical example to simplify things.

Let’s assume that the exercise price is $3 a share, and the market value of the share is $10. The benefit of when you exercise and immediately sell is, therefore, $7 ($10 minus $3). This is known as the employment benefit which would be included in your income at the time of the sale of the shares.

The third question that I often get asked is, “What is this 50% deduction about?” Well, you are entitled to a deduction equal to 50% of the employment benefit (that we calculated as being $7 in the previous example)if you meet one of two conditions:

  • You have held the shares for at least two years after you have exercised them
  • The exercise price is at least equal to the fair market value of the shares when they were granted to you

Taxation of Stock Options for Canadian Employees in Public Companies:

Now, we move to public companies. Let’s assume you work for a public company like Coca Cola and you are granted stock options. The most common question I get asked, is “Do I have to pay tax at the time of exercise, or at the time of the final sale of the shares?”

The answer is, at the time of exercise, which is different than the rules for CCPCs. Let’s take a numerical example.

Let’s assume you work for Coca Cola Canada and the fair market value of the shares today is at $30. According to the option agreement, you can exercise or buy the shares for $10. Therefore, the employment benefit that will be included in your income at the time of exercise is $20. Here’s a quick piece of advice – please don’t hold on to the shares for too long because if the price of the stock drops, let’s say, in a worst case scenario to $0, you’re still on the hook for the tax on the employment benefit.

So if you have a low risk tolerance, it makes sense to sell the shares immediately after you exercise, so you have enough cash available to pay for the tax.

50% Deduction – Stock Options in Public Companies

Are you entitled to the 50% deduction if you work for a public company and receive stock options? The answer is yes, if you meet three conditions. Unlike CCPCs, you have to meet all these three conditions in order to be entitled to the 50% deduction.

1. You receive normal common shares upon exercise
2. The exercise price is at least equal to the fair market value of the shares at the time the options were granted
3. You deal at arm’s length or on a third party basis with your employer (an example of when you would not deal on a third party basis with your employer would be, let’s say, if you were the spouse of the president of Coca Cola).

The Cash Out Option (for Public Companies):

The final point we look at here is the Cash Out option for public companies. Assume you’re working for Coke and under the option agreement you have the ability to cash out. So instead of having to buy the shares for $10, and then sell them for $30, your employer offers you ability under the option agreement to simply receive a cheque directly from your employer for $20. This is known as cashing out your stock options.

When you cash out, the amount of money you receive will be included in your income as an employment benefit. Once again, you may be entitled to a 50% deduction equaling to half of the employment benefit reported on your tax return. The rules for the 50% deduction for the cash out are fairly complex so I’m going to them out of this article.

I hope you found this article about taxation of stock options for employees in Canada useful and if you wish to know more, you now know where to turn to.

About the Author – Allan Madan

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.

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About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

37 Responses to Taxation of Stock Options for Employees in Canada

  1. William Zhang says:

    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?

  2. Michelle.Wang says:

    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?

    • superAmin says:

      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

  3. Milos says:

    Hi Allan,

    Do I have to pay taxes on capital losses when I exercise my shares?

    • superAmin says:

      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

  4. monkeyballzjr says:

    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?

    • superAmin says:

      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

  5. Charles says:

    Hi Allan,

    How would the CRA calculate the appreciated price of stocks to coincide with inflation?

    • superAmin says:

      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

  6. Thompson says:

    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?

    • superAmin says:

      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.

  7. Chrissy says:

    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?

    • superAmin says:

      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

  8. Cruz says:

    Hi Allan,

    Are there capital gains loss for issued stocks in cases where the company has filed for bankruptcy?

    • superAmin says:

      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

  9. J.J. says:

    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?

    • superAmin says:

      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

  10. Lyle says:

    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?

    • superAmin says:

      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

  11. Arielle says:

    Hi Allan,

    Is it possible to hold my stocks within a TFSA account? how would the accrued interest on these stocks be taxed?

    • superAmin says:

      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

      • Mahmoud says:

        What would be classified as a designated stock exchange? what about penny stocks?

        • superAmin says:

          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

          • Timothy says:

            What if a stock is listed on multiple exchanges some of which are not listed, how would the department of Finance categorize this?

          • superAmin says:

            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

  12. Jackie O. says:

    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?

    • amadan says:

      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.

  13. Markus Greenbriar says:

    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?

    • amadan says:

      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.

  14. Phillip says:

    Hi Allan. My company is offering me some stocks as compensation. What are some things I should know before I take them?

    • amadan says:

      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

  15. Whitney Sammie says:

    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?

    • superAmin says:

      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

  16. tompleet says:

    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?

    • amadan says:

      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

  17. Vitner Cacelmo says:

    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.

    • superAmin says:

      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

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