2- Stock options

An employee who acquires shares in the employer’s corporation¹² under a stock option plan is deemed to have received a taxable benefit in the year equal to the amount by which the FMV of the shares when they are acquired exceeds the price paid for them.

However, the employee is generally entitled to a 50% deduction of the benefit (25% in Quebec¹³) if the amount paid to acquire a share is at least equal to its FMV at the time the option was granted. Any increase (decrease) in value subsequent to the date of acquisition will be taxed as a capital gain (loss) in the year of disposal.

Shares of Canadian-Controlled Private Corporations

If a stock option plan pertains to shares of a Canadian-controlled private corporation (CCPC), the amount of the benefit is normally taxable as employment income in the year of disposal of the shares. In such a situation, the employee is entitled to the above-mentioned deductions provided the shares are kept for at least two years, even if the price paid for the shares is less than their FMV at the date the stock option is granted.

Example: On December 20, 2020, ABC Ltd. (a CCPC) grants John, its employee, the right to purchase 1,000 shares for $10 per share, i.e. their FMV at that time. In June 2021, John exercises his option. The FMV of the shares at that time was $15 per share. On May 1, 2025, John sells all of his shares for $12,000.

Tax consequences: There are no tax consequences in 2020 when the option is granted. There is no taxable benefit for John in 2021 because ABC is a CCPC and the gain on the shares qualifies for the deferral. In 2025, when the shares are sold, John has to include a taxable employment benefit of $5,000 ($15,000 – $10,000) in his income. He can also claim a deduction of $2,500 ($5,000 × 50%) for federal purposes and $1,250 ($5,000 × 25%) for Quebec purposes, and a deductible capital loss of $1,500 (($12,000 – [$10,000 + $5,000]) × 50%). Unfortunately, the loss on the disposition of the shares cannot be applied to reduce the taxable benefit.

Maximum deduction for shares of a large corporation

The preferential tax treatment applicable to stock options granted after June 30, 2021, is subject to a limit. This limit does not apply to options granted by a CCPC or an employer whose gross annual income (on a consolidated basis) is $500M or less.

Under these rules, the stock option deduction can only be claimed with respect to an annual vested amount of $200,000 per employee, determined on the basis of the value of the underlying shares at the time the options are granted. Any stock option benefit from exercising an option in excess of this limit is fully taxable for the employee, with no possibility of claiming the deduction in this respect.

Example: On August 31, 2025, John’s employer, a large public corporation, grants him options to purchase 25,000 shares with an FMV of $10 per share on the grant date. Options on 20,000 shares are considered to be eligible for the preferential tax treatment, since they do not exceed the annual vesting limit of $100,000 (20,000 X $10 = $200,000). Accordingly, John can therefore claim the stock option deduction with respect to the benefit from these options, if all other conditions are otherwise satisfied. Options for the additional 5,000 shares will not give entitlement to the stock option deduction. These rules will apply regardless of when the options are exercised.

If, instead, John’s employer grants him 20,000 options in August 2025 and 5,000 options in January 2026, all of the options would be considered as qualified securities and give entitlement to the stock option deduction in accordance with the usual rules.

¹² Or a company not at arm’s length with the employer. The same tax treatment applies to options granted by mutual fund trusts.

¹³ 50% if the option is granted (1) after March 14, 2008 by an “innovative SME”, i.e., before 2025, in general a corporation whose total assets are less than $50M and that has been entitled to certain SR&ED tax credits over the past few years or (2) after February 21, 2027, a listed large corporation with a significant presence in Quebec, that is, a corporation with a base payroll attributable to its establishment in Quebec of at least $10M.