I have Stock options. What are the tax implications?

This topic can get complex. Therefore, it is highly advised to consult a tax professional.

There are three possible scenarios with respect to stock options for tax purposes:

1. On the grant date the exercise price is less than the market value of the shares (i.e. in the money).
• At exercise date, the difference between the market value of the shares (at exercise date, NOT at grant date) and the exercise price will be included as taxable income. Essentially, this amount will constitute an employment benefit and you will have to pay tax on 100% of the amount. The market value will constitute your cost basis of the shares for capital gain purposes below.
• At the sale date, you will report a capital gain/loss for the difference between the market value of the shares and the cost basis of your shares above. For tax purposes, only 50% of the gain will be included in your taxable income.
2. On the grant date, the exercise price is higher than the market value of the shares (i.e. out of the money)
• Treated similarly as above with the one major difference:
• At the exercise date, you will be able to claim a special deduction on your personal income tax return for 50% of the employment benefit. Effectively, you will pay tax on 50% of the employment benefit.
3. The stock option is in a Canadian-Controlled Private Corporation
• Treated similarly to #2 with one major difference.
• If you exercise the shares and hold them for at least 2 years before selling the shares, the employment benefit and special 50% deduction incurred on the exercise date can be deferred and recognized in the year of sale of your shares.

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

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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