Calculating a Security Option Benefit
An employee is generally deemed to receive a taxable benefit in the year they acquire a security or transfer a right under an agreement, unless the security is a Canadian-controlled private corporation (CCPC) share. If the security is a CCPC share, the employee is deemed to receive a taxable benefit in the year they sell or exchange the share, provided the conditions are met.
The value of the taxable benefit for a security option is equal to the result of the following calculation:
- the fair market value (FMV) of the security at the time the employee acquires it or of the value of the consideration received (in cash or in kind) at the time the employee transfers you a right;
- the total of:
- the amount paid or payable by the employee to acquire the security, and
- the amount paid by the employee for the right to acquire the security.
You must include the value of the benefit in boxes A and L of the employee's RL-1 slip (see courtesy translation RL-1-T) in the year in which they are deemed to have received it, and may have to include it in box G or box I of the slip (see the Benefit Provided to an Employee page). You must also enter the amount of the security option deduction that the employee can claim in their income tax return with regard to this benefit if the conditions on either of the following pages are met:
Rights that can no longer be exercised
If an employee received one or more amounts for rights that can no longer be exercised under the agreement, and the fact that the rights can no longer be exercised does not constitute a transfer or a disposition of their rights, the employee is deemed to have disposed of their rights at the time the amount or amounts were received and to have received the amount or amounts as consideration for the disposition. The employee is deemed to have received a taxable benefit whose value is equal to the total amounts received, minus the amount they paid to acquire the rights.
Death of an employee before a security option is exercised
An employee who owned a security option immediately before their death is deemed to have received for the year of death a taxable benefit whose value is equal to the result of the following calculation:
- the value of the option, immediately after the time of death;
- the amount the employee paid for the right to acquire the option.
In this situation, you have to enter “L-7” in a blank box of the RL-1 slip, followed by the value of the option benefit the deceased employee is deemed to have received.
Election made under the Income Tax Act
If an employee transfers their right in a 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 if 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.
You can deduct the payment made to or for the employee as an expense if you do not enter the payment amount on the employee's RL-1 slip. If you deduct the payment, the employee cannot claim the security option deduction.
This election does not apply to security options covered by the new regulations applicable to security options granted after June 30, 2021, to an employee of a corporation, other than a CCPC, or a mutual fund trust whose gross annual income exceeds $500 million. See the Rules Applicable to Security Options Granted After June 30, 2021, to an Employee of a Corporation, Other Than a CCPC, or a Mutual Fund Trust Whose Gross Annual Income is More Than $500 Million page.
Source deductions and contributions
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 trust 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 purposes 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 the employee can claim in their income tax return with regard to the benefit, provided the conditions for this deduction 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.