Many employers offer their employees stocks or stock options as a benefit of employment. If you have received security option benefits from your employer, determine whether the Canada Revenue Agency taxes these benefits, which portion of them is taxable and when you should report these benefits on your income tax return.
Understanding Security Options Benefits
Typically, employees receive security options through one of three different types of arrangements: employee stock purchase plans, stock option plans and stock bonus plans.
Through employee stock purchase plans, employees have the chance to purchase company stocks for less than their fair market value. Employees have the option to purchase stocks at predetermined prices through stock option plans, regardless of their increase in value. A stock bonus plan lets employers give their employees stocks for no charge.
Determining the Taxable Portion of Security Option Benefits
The taxable portion of your security option benefits are calculated when you sell or exercise your options. If you sell your options, the taxable portion is the amount of money you earn on the sale. If you exercise your option, the taxable portion of the benefit is the amount you pay for the stocks minus their fair market value.
For example, if you are given an option to purchase 1,000 of your employer’s shares at a rate of $10 per share, you pay $10,000 for the shares when you exercise your option, regardless of their value. If, when you exercise the option, the fair market value of the stocks is $15 each, the value of all 1,000 stocks is $15,000. Because you have essentially earned an extra $5,000, that amount is taxable and must be claimed on your income tax return.
Reporting Taxable Benefits
After you exercise an option or receive free stocks, your employer should note the value of the benefits you received, and he should report that amount in box 14 of your T4 slip. When filing your taxes, add together all of the numbers from box 14 on all of your T4 slips and write that sum on line 101 of your income tax return.
Declaring Security Option Benefits
The year you declare your security option benefits varies based on the type of company issuing the benefits. If the company is a Canadian controlled private corporation, you have to report the benefits the year you sell your securities; if you receive the security options from another type of company, you report the benefits the year when you exercise your stock options.
If you receive options from a Canadian controlled private corporation, you do not have to declare them when you exercise the options. Instead, you wait until you sell the options, and you report them on the tax return you file for that year.
Exceptions to Taxable Benefits
If you receive options as a shareholder rather than an employee, they are not considered as taxable employment benefits. Because of that, they are not reported on box 14 of your T4, but you may have to declare any earnings from these options as capital gains.