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
New rules came into effect on July 1, 2021, for security options granted to an employee of a corporation (other than a Canadian-controlled private corporation [CCPC]) or a mutual fund trust whose gross annual income is more than $500 million according to its financial statements (or its consolidated financial statements).
The rules do not apply to security options granted after June 30, 2021, that replace options granted on or before that date.
Under the new rules, the $200,000 limit applies to the total value of the security options that an employee can acquire in a year and that will be eligible for the security option deduction. The limit is based on the fair market value of the securities at the time the agreement was entered into and is for the year in which the option can be exercised for the first time in regard to the securities. Securities whose value exceeds the annual acquisition limit of $200,000 are considered non-qualified securities.
For more information, see Schedule 59 of the Canada Revenue Agency's corporation income tax return (T2), in which you are required to report the non-qualified securities.
If the security options you provide as an employer are subject to the new rules, you can elect to designate securities to be issued or sold under the agreement (including securities whose value does not exceed the $200,000 limit) as non-qualified securities. If a security option concerns a non-qualified security, the employee cannot claim the security option deduction in their income tax return. In this case, you can deduct an amount equal to the value of the security option benefit that is included in the employee's income when calculating your taxable income, under certain conditions.
If you designate securities as non-qualified securities under federal legislation, the securities are also considered non-qualified securities under Québec legislation. If you do not make a designation under federal legislation, you cannot make one under Québec legislation.
If you designate securities as non-qualified securities, you cannot make the election under subsection 110(1.1) of the federal Income Tax Act that enables the employee to claim the security option deduction. Moreover, if an employee transfers their right in a security option (other than a non-qualified security) to you as consideration for a cash payment or a benefit in kind without acquiring any securities, and the right is provided for in an agreement covered by the rules that apply to security options granted after June 30, 2021, the employee can claim a security option deduction without you having made the election under subsection 110(1.1). In this case, you cannot deduct any amount when calculating your taxable income.
If the value of a security option granted to an employee exceeds the annual acquisition limit of $200,000, or if you elect to designate securities as non-qualified securities, you must notify the employee in writing that the securities are non-qualified securities no later than 30 days after the day the agreement is entered into.
In addition, you must send us a copy of the T2 Schedule 59 that you sent the Canada Revenue Agency to report the non-qualified securities. Send us the schedule no later than the filing deadline for the income tax return for the taxation year during which the agreement is entered into.
If an employee donates to a qualified donee a publicly listed share acquired under a security option that is a non-qualified security, the employee is not eligible for the security option deduction or the additional 50% deduction for the donation of securities. The employee may be eligible for the tax credit for charitable donations and other gifts.