ARCHIVED – Employee Stock Options

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1. What are the current rules in respect of cash-out rights?
2. What are the budget proposals in respect of cash-out rights?
3. How can an employer elect in prescribed form?
4. What is the effect of the tax deferral election under the current rules?
5. How does the budget proposal affect the tax deferral election?
6. Is withholding required when employees exercise their stock options?
7. Will these proposals apply if there are restrictions on the disposition of the shares acquired under the stock option agreement?
8. Did the budget contain any relief for employees in situations where the value of the shares acquired by them under a stock option agreement decreased significantly between the time of exercising the stock option and the disposition of the shares?
9. What are the deadlines to file an election for special relief?
10. When and how will I be able to make the election?
11. Could you provide an example?
12. Where can I obtain more information on this budget measure?

1. What are the current rules in respect of cash-out rights?

Currently, when an employee acquires securities (referred to as "shares" for purposes of the Q&As) under a stock option agreement and certain conditions are met, the employee may be entitled to deduction equal to one-half of the stock option benefit (stock option deduction). In this case, the employer cannot claim a deduction for the issuance of a security.

Employee stock option agreements can be structured in such a manner that, if employees dispose of their stock option rights to the employer for a cash payment or other in-kind benefit (cash-out payment), the employer can deduct the cash-out payment, while the employee is still eligible for the stock option deduction.

2. What are the budget proposals in respect of cash-out rights?

For transactions occurring after 4:00 p.m. Eastern Standard Time on March 4, 2010, the budget proposes that the stock option deduction will only be available in situations where either:

• the employee exercises his or her options by acquiring shares of their employer; or
• the employer elects in prescribed form in respect of all stock options issued or to be issued after 4:00 p.m. Eastern Standard Time on March 4, 2010, under the agreement, that neither the employer nor any person not dealing at arm's length with the employer will claim a deduction for the cash-out payment in respect of the employee's disposition of rights under the agreement; and
  • the employer files such an election with the Minister of National Revenue;
  • the employer provides the employee with evidence in writing of such an election; and
  • the employee files such evidence with the Minister of National Revenue with his or her Individual Income Tax and Benefit Return for the year in which the stock option deduction is claimed.

In addition, for dispositions of rights occurring after 4:00 p.m. Eastern Standard Time on March 4, 2010, the budget proposes to clarify that the stock option rules apply to an employee (or a person who does not deal at arm's length with the employee) who disposes of rights under an agreement to sell or issue shares to a person with whom the employee does not deal at arm's length.

3. How can an employer elect in prescribed form?

The T4 slip will serve as the required "evidence" for both the employee and the employer. A new box will be added to the slip to indicate what portion of the reported stock option benefit relates to the employer's election. As the employer files the T4 with the Canada Revenue Agency and provides a copy to the employee, the requirements of the election will be considered to have been met. The employer should advise the employee of the election before or at the time of the cash-out. The decision to elect will affect the level of withholdings required.

Tax Deferral Election

4. What is the effect of the tax deferral election under the current rules?

Currently, where certain conditions are satisfied, employees of publicly-traded corporations who acquire securities pursuant to a stock option agreement may elect to defer the recognition of the stock option benefit until the year in which they dispose of the shares.

5. How does the budget proposal affect the tax deferral election?

In respect of rights under an agreement to sell or issue shares exercised after 4:00 p.m. Eastern Standard Time on March 4, 2010, the budget proposes to repeal the deferral provision.

Remittance Requirement

6. Is withholding required when employees exercise their stock options?

Yes, for employees that exercise their stock options after 2010, the budget proposes to clarify that the employer will be required to withhold and remit an amount in respect of the taxable stock option benefit (net of any stock option deduction) to the same extent as if the amount of the benefit had been paid as an employee bonus.

In addition, for employee stock option benefits arising on the acquisition of shares after 2010, the budget proposes that the fact that the benefit arose from these acquisitions not be considered a basis on which the Minister of National Revenue may reduce withholding requirements.

7. Will these proposals apply if there are restrictions on the disposition of the shares acquired under the stock option agreement?

The above proposals will not apply in respect of options granted before 2011, pursuant to an agreement in writing entered into before 4:00 p.m. Eastern Standard Time on March 4, 2010, where the agreement included, at that time, a written condition that restricts the employee from disposing of the shares acquired under the agreement for a period of time after exercise.

Special Relief for Tax Deferral Elections

8. Did the budget contain any relief for employees in situations where the value of the shares acquired by them under a stock option agreement decreased significantly between the time of exercising the stock option and the disposition of the shares?

Yes, where an employee disposes of shares before 2015, and the disposition of the shares results in a stock option benefit in respect of which an election was made to defer the income recognition, the budget proposes to permit the employee to elect in prescribed form to cause the following tax treatment for the year in which the shares are disposed;

• that the amount of the stock option deduction be equal to the stock option benefit (thereby eliminating the stock option benefit);
• that the employee be required to include in his or her income a taxable capital gain* equal to one-half the lesser of:
  • the stock option benefit; or
  • the capital loss realized on the disposition of the optioned shares;
• that the employee be required to pay a special tax equal to the proceeds of disposition from the disposition of the optioned shares (or 2/3 of the employee's proceeds of disposition, if the employee resides in Québec).

*The taxable capital gain will not be taken into account for purposes of the GST/HST Credit, the Canada Child Tax Benefit, the tax on Old Age Security benefits, the Refundable Medical Expense Supplement and the Working Income Tax Benefit.

Deadlines to file the election for special relief

9. What are the deadlines to file an election for special relief?

The deadlines to file the election are as follows:

• for shares disposed of by the employee before 2010*, the employee's filing due date for 2010; and
• for shares disposed of by the employee after 2009**, the employee's filing due date for the year of the disposition.

*The election will be considered an application for determination under the Fairness provisions. This will allow the Minister of National Revenue to reassess the Income Tax and Benefit Returns of eligible employees who disposed of shares acquired under a stock option agreement in 2001 and subsequent years.

** It is important to note that this special relief is only available if an employee disposes of the shares acquired under a stock option agreement by the end of 2014.

10. When and how will I be able to make the election?

The Canada Revenue Agency (CRA) will be making the necessary changes to forms, processes and systems to give effect to this proposed change. Please note that the CRA cannot reassess to give effect to this election until the necessary legislative amendments have received Royal Assent.

11. Could you provide an example?

As a result of rights provided under an employee stock option agreement, John acquired 1,000 shares of his employer, XYZ Public Co., in 2005, for $1 each at a time when the shares were trading for $15 each. John elected to defer the recognition of his $14,000 ($15,000 - $1,000) stock option benefit until he disposes of the shares. When John decided to sell his shares in 2008, the shares were trading for $0.75. In 2008, John's marginal tax rate is 40% and has no taxable capital gains that would enable him to benefit from any allowable capital losses.

12. Where can I obtain more information on this budget measure?

The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2010 documents for details.

Date modified:

2015-07-15