Determination of Adjusted Cost Base (ACB)
The Canada Revenue Agency (CRA) changed its position relating to the determination of the adjusted cost base (ACB) for Canadian income tax purposes for shares acquired under employee stock option agreements and then immediately sold. CRA will accept identification of specific securities acquired under the option agreement as being the securities disposed of by the employee, where it is obvious that the securities sold are the ones that were acquired under the agreement. As a result, only the ACB of the securities acquired under the agreement would be used in determining the gain or loss on that particular sale.
Receipt of a stock option in a Canadian corporation
As a general rule, the receipt of a stock option in a Canadian corporation will not have any Canadian income tax consequences while the exercise of the stock option will be a taxable event.
Transactions in stock options
Transactions in stock options are treated in the same way as stocks for Canadian income tax purposes. In most cases they will give rise to a capital gain or loss.
Employee Stock Options for a public company
Employee stock options for a public company are subject to Canadian income tax, and Canada Pension Plan levies, when they are exercised and acquired and it is the employer’s obligation to withhold CPP and income tax on the amount of the benefit at that time. However if the employee elects to defer the taxable benefit (under subsection 7(8) of the Canadian Income Tax Act) until the shares are disposed of, the employer is only required to withhold CPP.
Employee stock options for a public company
An employee who receives stock options for a public company and elects to defer the taxable benefit of up to $100,000 per annum (under subsection 7(8) of the Canadian Income Tax Act) until the shares are disposed of must report the taxable benefit (receipt of the stock option) at the time of disposition (on form T1212) and must pay Canadian income tax at that time.
Tax treatment of options issued to an independent contractor
The Canadian income tax treatment of options issued to an independent contractor differs from those issued to an employee. The contractor will have an income inclusion at the time of grant of the option equal to the value of the option and will have an income inclusion (or capital gain) at the time of exercise of the option equal to the difference between strike price and fair market value of the shares at time of exercise of the option.
"This article provides information of a general nature only. It may no longer be current. It does not provide legal advice nor should it be relied upon. If you have specific legal questions you should consult a lawyer."