Stock Option Benefits

If you purchase shares under an employee stock option plan, the excess of the fair market value of the shares on the date of purchase, over the exercise price you pay, will be included in your employment income as a stock option benefit.

Where the corporation issuing the shares is a Canadian-controlled private corporation (CCPC) dealing at arm's length with you as an employee, the stock option benefit is taxed in the year you sell the shares. Where the corporation issuing the shares is not a CCPC, the stock option benefit is taxed in the year you purchase the shares.  However, you may defer taxation to the year you sell the shares where the option exercise price is at least equal to the fair market value of the shares at the time the options were granted, and you file an election with your employer before January 16 after the year of exercise. This election is available for most public company options exercised after February 27, 2000, subject to certain limits.  The amount of the benefit is added to the cost base of the shares purchased under the stock option plan. 

In the year you ultimately include a stock option benefit in your income, you may generally claim a deduction from taxable income equal to one-half of the stock option benefit, as long as the exercise price you paid for the shares was at least equal to the fair market value of the shares on the date you were granted the options.  For CCPC shares acquired under an employee stock option plan, if you hold the shares for at least two years, you may claim a similar deduction even if the exercise price was less than the fair market value of the shares on the date the options were granted.

Any increase in the value of the shares after you purchase them is generally treated as a capital gain in the year you sell the shares. Conversely, any decrease in the value of the shares is generally treated as a capital loss. Capital gains and losses on CCPC shares may be eligible for special treatment.

The stock option benefit rules are complex. If you have received or exercised employee stock options, seek the advice of a Chartered Accountant.