An employee or former employee (the “employee”) is deemed to receive a taxable benefit in the year the employee sells or exchanges a share acquired under an option, provided the following conditions are met:

• The corporation that entered into an agreement with the employee was a Canadian-controlled private corporation (CCPC) at the time of the agreement.
• The share acquired by the employee is a CCPC share.
• The employee that entered into an agreement with the CCPC is a CCPC employee.
• Immediately after the agreement was reached, the employee was dealing at arm's length with any corporation involved (whether the employee's corporation, the corporation that made the agreement or the corporation that sold or issued the share to the employee).
• The employee acquired the share after May 22, 1985.

When these conditions are met, the employee can claim a security option deduction in their income tax return, provided:

• The employee sells or exchanges the share in the year.
• The employee held the share for at least two years (except where the employee died).
• The employee did not claim the deduction for stock options of a corporation other than a CCPC or options to purchase mutual fund trust units.

If the conditions are not met, the employee can claim the deduction for stock options of a corporation other than a Canadian-controlled private corporation or options to purchase mutual fund trust units, provided the conditions for that deduction are met.

The security option deduction is equal to 25% of the value of the benefit deemed received in the year, or to 50%, if the benefit is deemed received for a stock option granted after March 13, 2008, by a small or medium-sized business (SMB) that is an SMB engaged in innovative activities for the calendar year in which the option was granted.

You have to enter “L-10” in a blank box of the RL-1 slip (see courtesy translation RL-1-T) for the year in which the securities were sold, followed by the amount of the security option deduction, except if the value of the security option benefit is included in the employee's income and the employee is claiming a deduction elsewhere in calculating their taxable income.