As an incentive strategy, you may provide your employees with the right to acquire shares in your company at a fixed price for a limited period. Normally, the shares will be worth more than the purchase price at the time the employee exercises the option.
This is the estimated fair market value FMV per share at the time the option is granted.
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In general, the difference between the FMV of the shares at the time the option was exercised and the option price i.
The employee can claim a deduction from taxable income equal to half this amount, if certain conditions are met.
Stock Options - Tax Planning Guide
Half of the difference between the ultimate sale price and the FMV of the shares at the date the option was exercised will be reported as a taxable capital gain or allowable capital loss.
Several of the employees decide to exercise their options.
The benefit is calculated as follows: In the above numerical example, the value of the stock increased between the time the stock was acquired and the time it was sold. As a result, the capital loss realized in cannot be used to offset the income inclusion resulting from the taxable benefit.
Anyone in difficult financial circumstances as a result of these rules should contact their local CRA Tax Services office to determine whether special payment arrangements can be made.
Taxation of Stock Options for Employees in Canada
The rules are different where the company granting the option is a public company. The general rule is that the employee has to report a taxable employment benefit in the year the option is exercised. This benefit is equal to the amount by which the FMV of the shares at the time the option is exercised exceeds the option price paid for the shares. When certain conditions are met, a deduction equal to half the taxable benefit is allowed.
For options exercised prior to 4: However, public company options exercised after 4: EST on March 4, are no longer eligible for the deferral. Some employees who took advantage of the tax deferral election experienced financial difficulties as a result of a decline in the value of the optioned securities to the point that the value of the securities was less than the deferred tax liability on the underlying stock option benefit.
A special election was available so that the tax liability on the deferred stock option benefit would not exceed the proceeds of disposition for the optioned securities two-thirds of such proceeds for residents of Quebec , provided that the securities were disposed after and before , and that the election was filed by the due date of your income tax return for the year of the disposition.
The taxation of stock options The tax planning guide Tax planning guide Section 1 — Businesses. Taxing partnership income Rules for joint ventures Which province gets your tax?
What if the stock declines in value? Home Tax planning guide Tax tables Find an office About Find an adviser www. A Canadian Member of Grant Thornton International Ltd. See the Tax Planning Guide in Quebec, Ottawa and Edmunston.