Taxation of Stock Options for Employees in Canada

February 26, 2018 | Written by: Sohail Afzal

Tax Accounting Services Toronto

Being employed sometimes comes with numerous advantages. One of them is when the owners of the company allow employees to buy shares in the corporation, usually at a lower rate that is specified by the employer. This is what is commonly referred to as a stock option. There are different types of stock options that can be issued to employees. It’s important to understand the taxation rules that apply to different stock options given to employees in Canada. We’ll highlight this in the paragraphs below.

Stock Options for Private Corporations

Canadian Controlled Private Corporations (CCPCs) are those corporations that are owned by private individuals in Canada and therefore not listed on the public stock exchange. If you are an employee of a private company, you may be given a chance to buy shares of your organization at a lower rate than the market value of the shares. In this case, you do not have to include anything when filing your personal income taxes at the time. This means that there’s really no taxes that you will be subject to at the grant date.

However, when you purchase the shares through your employer, the law requires that you include a taxable benefit when filing your income taxes. The amount to include will be the difference between the price you paid to buy the shares and the market value of those shares when you were purchasing them. You can postpone this taxable benefit until the date you decide to sell those shares. This is actually a very smart move because you will have the cash to pay the tax after selling the shares.

You can claim a tax deduction of up to 50% of the taxable benefit if:

  • You have had the shares for at least 2 years after purchasing them
  • The exercise price is at least equal to the fair market value at the time when the shares were granted to you

Employee Stock Options for Public Companies

You may also receive stock options from an employer who is listed as a public company. On the day when you receive the stock options from the corporation, you do not have any tax consequence. However, when you decide to purchase the shares, you get a taxable benefit that is equal to the difference between the exercise price and market value of the shares on that date. Unlike the stock options from private companies, you cannot postpone the timing of this taxable benefit. Therefore, the benefit will be included in your income at the time of exercising your shares.

Once you buy the shares from a public corporation where you are an employee, you can immediately sell them or hold on to them if you believe that they may increase in value in the future. Any profits that you make after selling the shares will be considered as a capital gain and hence subject to tax. You still have to pay taxes whether you sell the shares or not so long as you purchased the shares.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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