Employees with Stock Options: No Tax Deferral But Special Relief Available

By: Nathalie Marchand

Amidst the deficit reduction announcements in Canada’s March 2010 Federal Budget were significant tax changes, including some affecting employee stock option holders.

First, the government has repealed the tax deferral election introduced in 2000 that allowed employees using stock options to opt to defer tax owed on stock option benefits arising from exercising an option, until the shares were sold or otherwise disposed of. When employees exercised an employer’s stock options, a taxable employment benefit is calculated as the difference between the share value at the time of exercise and the option or exercise price paid. So long as the option price was not less than the value of the shares when the options were granted, a deduction equal to 50% of the benefit (25% for Québec residents) is available. Previously, an employee could elect to defer such taxable benefits to a maximum amount of $100,000 per year of stock option vesting. The deferral of such stock option benefits has been eliminated for stock options exercised after March 4, 2010, 4:00 pm (EST).

Second, recognizing many employees were left holding shares with a significant decline in value, and who are left having to pay greater taxes than the value of the shares, the government is offering special relief for taxes deferred prior to March 4, 2010. As long as the purchased shares are disposed of before 2015, employees can elect to limit their tax liability arising from a stock option benefit to the proceeds from the disposition of these shares.

In other words, these taxpayers will pay a special tax equal to the proceeds from the disposition of the shares (two-thirds of proceeds for Québec residents) and claim a deduction equal to the full amount of the stock option benefit rather than 50%.

Moreover, an amount equal to one-half of the lesser of the amount otherwise included in employment income and the capital loss from the disposition of shares is required to be included in the taxpayer’s income as a taxable capital gain in the same taxation year.

If this matter reflects your situation, please contact your PWL advisor.