“the ability to make this election ends this year.”
Typically, when publicly listed shares are acquired under a stock option agreement at an exercise price which is less than the fair market value of the shares on the date when the stock options were exercised, the difference between the fair market value of the shares and the exercise price will be taxable as employment income (“stock option income”).
A deduction of 50% of the stock option income is allowed if the exercise price is equal to or more than the fair market value of the shares at the date of grant of the options. For stock options exercised prior to or at 4:00 pm on March 4, 2010 (the date and time of the 2010 Federal Budget), a deferral of up to $100,000 of the stock option income per year may be claimed.
When the shares acquired under the stock option are subsequently sold, there will be a capital gain or loss on the shares to the extent of the increase or decrease in value of the shares since the date of exercise. Where there is a loss, the loss will be a capital loss that will not be available to offset the stock option income.
The 2010 Federal Budget provided measures to alleviate the hardship from the fact that the capital losses cannot be used to offset the stock option income by allowing a taxpayer to make an election which will essentially allow the capital losses from sale of the stock option shares to be used to offset the stock option income. However, the ability to make this election ends this year.
For the election to be available, a number of conditions must be met:
- The taxpayer must have elected for deferral of the stock option income.
- The taxpayer must dispose of the particular securities before 2015.
An election must be filed before the filing due date for the return for the year of disposition of the securities for the following rules to apply:
- The taxpayer will have a deduction equal to the entire amount of stock option income provided that the exercise price was equal to or more than the fair market value of the shares on the day the option was granted. Therefore, there will not be any net income from exercising the stock options being subject to tax.
- The taxpayer will be deemed to realize a capital gain in the year of disposition of the securities, which will be equal to the lesser of the amount of the stock option income and the capital loss. This will allow the capital loss from the sale of the stock option shares to be applied against this capital gain.
- The taxpayer will be liable to pay a tax for the year of disposition equal to the proceeds of the disposition of the securities.
- The normal rules of statute of limitation will not apply and the election will be considered a request of the taxpayer for the Minister to reassess outside the normal reassessment period.
The ability to make this election will be gone after December 31, 2014. If you have acquired publicly listed shares by exercising stock options and they have accrued losses, we would be happy to discuss whether this election could be of benefit to you.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.