Principal Issues: When is an employee taxed on a benefit arising from an employee stock option?
Position: At the time that the employee exercises the employee stock option.
Reasons: Section 7(1) of the Act.
July 20, 2009
XXXXXXXXXX
Dear XXXXXXXXXX :
XXXXXXXXXX , forwarded to me a copy of your correspondence, which I received on May 29, 2009, concerning the taxation of employment benefits derived from participation in an employee stock option plan.
Under the Income Tax Act, a benefit received by an employee from his or her employer is generally subject to income tax. If an agreement between the employee and the employer allows the employee to acquire shares of the employer, the difference between the fair market value of the shares at the time they are acquired and the amount paid to purchase the shares constitutes a taxable benefit to the employee at the time the shares are acquired. However, if certain conditions are satisfied, the employee can elect to defer the inclusion of the benefit in income until the employee disposes of the shares, emigrates from Canada, or dies.
The employment benefit is always calculated at the time an employee exercises his or her stock option and acquires the shares. Therefore, the amount of the benefit is the same whether the employee includes the benefit in income when exercising the option or, if the benefit is deferred, when disposing of the shares. The employee must treat any gains or losses experienced after acquiring the shares in the same manner as any other investment in shares acquired in the stock market by that employee. In general, the employee cannot apply any capital losses that arise as a result of the disposition of the shares to offset the benefit from employment that arose from exercising the option. However, if the shares are disposed of as a consequence of the employee's death, any allowable capital loss may fully or partially offset the taxable employment benefit that must be reported at that time.
The Canada Revenue Agency is responsible for administering and enforcing the Act and must apply the legislation as written. The Department of Finance Canada is responsible for implementing and amending tax policy. I am therefore forwarding a copy of your correspondence to the Honourable James M. Flaherty, Minister of Finance, for his consideration.
I trust that the information provided is helpful.
Sincerely,
Jean-Pierre Blackburn, P.C., M.P.
c.c.: The Honourable James M. Flaherty‚ P.C.‚ M.P.
Minister of Finance
House of Commons
Ottawa ON K1A 0A6
Gary Allen
(613) 946-3558
2009-032528