Stock Option Deferral – Cost Base Calculations

Volume No. 05-24

“Detailed records are necessary to calculate the cost base of stock option deferral shares.”

A few years ago, the Department of Finance issued new rules with regard to the deferral of stock option benefits on stock options of public company shares. Before these new rules, the only way that a stock option benefit could be deferred until the sale of the shares was if the stock option was in respect of private company shares. The Department of Finance issued new rules, allowing for a deferral of the stock option benefit where the value of the shares at the time that the stock option was granted did not exceed $100,000. If the taxpayer received stock options where the value of the shares exceeded $100,000, the taxpayer could still defer a portion of the stock option benefit until the shares were actually sold.

One of the complicated areas in these new rules is the calculation of the cost base of the shares that were received when the stock option was exercised. This becomes more complicated when there are shares purchased on the open market mixed with shares received through the exercise of a stock option.

Where there are two groups of shares, the stock option shares are kept in a separate “bundle” in calculating the adjusted cost base of the stock option shares. Moreover, there is a rule that states that the shares that have no stock option deferral on them are deemed to have been sold before the shares for which there is a stock option deferral. These rules are of benefit to taxpayers in that they do not have to bring the stock option benefit into income until the deferred shares are sold. Even within the stock option deferral shares, there can be a further separation of the shares. If options are exercised and sold within 30 days, a taxpayer can elect to have the cost base of those shares specifically isolated and not grouped with the other deferred shares.

Advisors must be careful to separate the various kinds of shares acquired, both through stock options and in the open market and keep track of the timing of when the options were exercised and when the shares are sold.


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