Security Options

Important

This page does not cover the new measures pertaining to source deductions of income tax announced on February 21, 2017, by the ministère des Finances in Information Bulletin 2017-3. For more information, read the tax news article entitled Increase of the Security Option Deduction.

Security option that is a share of its capital stock

If a corporation grants a security option that is a share of its capital stock (including a share of a corporation not dealing at arm's length with the corporation) to an employee or to the employee of a corporation not dealing at arm's length with the corporation, and the corporation grants this option under an agreement that allows the employee to acquire such a security, there is no taxable benefit for the employee at the time the option is granted.

Security option that is a mutual fund unit 

Similarly, if a mutual fund trust grants a security option that is a mutual fund unit (including a mutual fund unit of a mutual fund trust with which it is not dealing at arm's length) to an employee (or to the employee of a mutual fund trust with which it is not dealing at arm's length), and the trust grants this option under an agreement that allows the employee to acquire such a security, there is no taxable benefit for the employee at the time the option is granted.

As a rule, the employee receives a taxable benefit in the taxation year in which he or she acquires the security covered by the option, unless the security is a share of a Canadian-controlled private corporation (CCPC).

Source deductions and contributions

A benefit resulting from the exercise of a security option is subject to source deductions of income tax (see the notes below), employee and employer Québec Pension Plan (QPP) contributions, the employer contribution to the health services fund and the contribution related to labour standards

  • in the year the security was disposed, if the security is a share of a CCPC; 
  • in the year the security is acquired, in all other cases. 

You must include the value of the benefit in your total payroll used to determine your health services fund contribution rate, your participation in workforce skills development and, if applicable, your contribution to the Workforce Skills Development and Recognition Fund (WSDRF).

Such a benefit is a benefit in kind and is not subject to employee and employer Québec parental insurance plan (QPIP) premiums. 

Special rules concerning source deductions of income tax

A taxable benefit related to the acquisition of a security that is a share of a corporation, other than a share of a CCPC or a mutual fund unit, is subject to source deductions of income tax in the year the security is acquired as if it were remuneration paid as a gratuity. However, for the purpose of source deductions of income tax only, if the conditions giving entitlement to the security option deduction are met (see Deduction for Canadian Controlled Private Corporation Stock Options and Deduction for Stock Options of a Corporation Other than a Canadian Controlled Private Corporation or Options to Purchase Mutual Fund Units), the value of the benefit subject to a source deduction can be reduced by 25 % of the value of the benefit (or by 50 % of the value, if the benefit was deemed received for a stock option of a small or medium sized business (SMB) engaged in innovative activities). 

Notes
  • If you did not pay the employee any sum in cash or by cheque for the pay period in which the benefit is provided, you do not have to withhold income tax on the value of the benefit. 
  • If you paid the employee a sum for the pay period in which the benefit is provided that does not cover the total source deductions of income tax, you have to withhold income tax on the value of the benefit, up to the amount of the sum paid, even if the total sum must be withheld. In such circumstances, the employee cannot request a reduction in source deductions of income tax using the form Application for a reduction in source deductions of income tax (TP-1016-V). Accordingly, you cannot reduce the employee's source deductions of income tax.

Calculating a security option benefit 

The value of the benefit received by the employee is equal to

  • the FMV of the security at the time of acquisition or the value of the consideration received (in cash or in kind) at the time the employee transfers to you his or her rights, as applicable;

minus

  • the total of
    • the amount paid or payable by the employee to acquire the security, and
    • the amount paid by the employee for the option.

You must also calculate the amount of the security option deduction, unless the value of the benefit is included in the income used to calculate the deduction granted to the following persons:

  • a Québec sailor working for an eligible shipowner;
  • a foreign specialist working at an IFC;
  • a foreign researcher, foreign researcher on a post-doctoral internship or foreign expert working for a business carrying out research in Québec;
  • a foreign professor working for a university in Québec;
  • a foreign specialist working at a BDC;
  • a foreign specialist working for a stock exchange business or a securities clearing-house business;
  • a foreign specialist working for a financial services corporation;
  • a foreign farm worker; or
  • a worker holding a key position in a foreign production.

To calculate the security option deduction, see Deduction for Canadian-Controlled Private Corporation (CCPC) Stock Options and Deduction for Stock Options of a Corporation Other than a Canadian-Controlled Private Corporation or Options to Purchase Mutual Fund Units.

Information to enter on the RL-1 slip

You must include the value of the benefit in boxes A and L of the RL-1 slip of the employee in the year in which the employee sells or acquires the security, as applicable. The corporation that provides the benefit is responsible for including the value of the benefit in boxes A and L of the RL-1 slip of the employee that it files for the year the employee receives the benefit. 

Note

This section does not cover the tax treatment of

  • exchanges, sales and transfers of security options;
  • the sale or exchange of CCPC shares that an employee acquired before May 23, 1985, under an agreement reached after April 23, 1985;
  • the sale or exchange of shares (acquired further to the exercise of a stock option) in the course of a reorganization or recapitalization of the corporation; or
  • the replacement of a stock option plan.

For more information, contact us.

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