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.
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).
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 information regarding these special cases, contact us.
A taxable benefit resulting from the acquisition of a security that is a share of a corporation (other than 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, the value of the benefit subject to a source deduction can be reduced by the amount of the security option deduction that the employee can claim in his or her income tax return, provided the conditions are met.
- If you pay no other amount to the employee 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 pay an amount to the employee for the pay period in which the benefit is provided, but that amount does not cover the full amount of income tax you should withhold, you have to withhold income tax up to the amount you paid. In this situation, the employee cannot request a reduction in source deductions of income tax by filing form TP-1016-V, Application for a Reduction in Source Deductions of Income Tax, and you cannot reduce the amount of income tax you withhold.
If an employee transfers his or her security option to you as consideration for a cash payment or a benefit in kind without acquiring any securities, the employee can claim the security option deduction provided that you elected, under subsection 110(1.1) of the federal Income Tax Act, that neither you nor any person with whom you are not dealing at arm's length will deduct the payment made to or on behalf of the employee. To make the election, enter “L-8” in a blank box of the RL-1 slip, followed by the amount of the payment. The amount reported after code L-8 may be different from the value of the taxable benefit you must include in boxes A and L of the employee's RL-1 slip.