Taxation of Employee Stock Options

When a company issues stock options to employees, there may be taxable benefits either when the stock option is exercised (in the case of a public company share), or when the resulting share is sold (in the case of a Canadian-Controlled Private Corporation “CCPC”).

If the exercise price of the option – at the time of issue – is equal to the fair market value of the share, there other potential benefits to the employee.

Public Company (and other non-CCPC) Shares

If the value increases, typically the employee would consider exercising the option if there is a ready market for the shares. The difference between the current fair market value and the exercise price is considered an employee benefit.

Since the option price equaled the fair market value at the time of issue, the employee is entitled to a deduction of 1/2 of the benefit.

CCPC Shares

For employees with options to acquire shares of a CCPC, the benefit is only taxable when the acquired shares are sold.

Similarly the employee would be entitled to a deduction of 1/2 of the benefit (if the exercise price of the option – at the time of issue – is equal to the fair market value of the share)

There are other considerations. For example the employee must be dealing at arm’s length with the corporation. Since these provisions are complex, make sure that you get advice specific to your situation before putting in place a stock option plan.