Stock options give investors the option, but not the obligation, to buy and sell a stock at the price and date of their choosing. You might be wondering why you should choose to buy an option instead of a share? And, how are options taxed if you plan on buying them?Well, let us break it down for you.Firstly, let’s talk about some of the benefits of buying the option rather than the stock.
- It costs much less than the current share price. For instance, if you plan to buy 100 shares at $55 each, you’d need to invest $5500, and that’s a big amount. On the other hand, you’d only need to invest less than $200 if you choose to buy stock options. You’d get to participate in the movement of the stock at a fraction of the price.
- The risk is less if you know how to manage it properly.
- Higher potential returns.
These are some of the advantages of investing in options rather than investing in stocks. In this article, you’ll learn about the details of stock options and the taxes related to the stock options.And, if you require in-depth knowledge of stock options and their taxes in Canada, you may contact our Accounting Firm.
What are Stock Options?
Suppose one of your friends named Olivia has a car. Requests Olivia to give you the right to buy the car from her for $20,000 in cash anytime during the next month. But Olivia doesn’t want to keep waiting for a month without a transaction. That’s why Olivia would agree to this agreement if you pay 2% of the car’s value, which is $400. This way, Olivia can’t sell the car to anyone else during the waiting period. Meanwhile, you do not necessarily have to purchase the car during this period, but you have the right to do so. Now, let’s take a look at the definition of the Stock option, which will help you understand the entire example above. A Contract allowing the recipient the right but not the obligation to transact a known transaction (Buy or sell) of a known asset at a known price in a known pre-defined time frame.In the definition above, you are the recipient. Other names for recipients are “Option buyer” and the “Option Holder.” A known price is also referred to as Strike, which is $20,000 in the above example, and the option’s price is $400. Lastly, a known pre-defined time frame is one month in the example above. The option has no value after this time.
How Are Stock Options Taxed in Canada?
Various types of stock options are available for employees in Canada. Canadian-controlled Private Corporations (CCPCs) are the organizations that private organizations own. That’s why you won’t find them on the stock exchange list. Being an employee of a private company, you would purchase the share at a lower cost than the market value. Therefore, you shouldn’t worry about adding it when you will file your income taxes.
These are the basics of stock options and how they are taxed in Canada. If you want to know more, you can contact us, and we will be happy to help.