The March 4, 2010 Federal Budget changed the rules relating to stock option benefits lately, but the opportunity to participate in the shares of a publicly traded company is still a good one. And, it is important to inform yourself of this opportunity in a post-financial crisis world, for two reasons. The first is that negotiating for benefits at a time when stock prices are low can provide significant lifts in value later. The second is simple: your employer may not have the cash to provide for a raise or a signing bonus.
When stock options are granted to you, you buy shares at a pre-determined price, which will be less than fair market value. If you work for a Canadian controlled private corporation (a CCPC), at arm's length (you are unrelated) the difference between the price at which you acquire the shares (the exercise price) and the fair market value (FMV) is considered to be a taxable benefit, which in this case, is not accounted for until you sell them. At that time, the difference between the FMV on acquisition and the price at which you sell them is also calculated, and in general, a capital gain results; 50% is included in income, unless other capital losses of the year offset these gains.
However, if you work for a company whose shares are publicly traded, the taxable benefit is reported as employment income in the year you exercise your option. You'll find it on your T4 slip. Later, upon sale or disposition the capital gain or loss is calculated in the manner described above, and the employment benefit is added to the cost of the shares.
In the case of both the CCPC and the public corporation, the taxable benefit qualified for a Stock Options Deduction on the tax return when reported.
One more point: one could elect to defer reporting up to $100,000 of those exercised benefits stemming from the publicly traded company, to put the employees from both types of organizations on an equal footing.
Now to the recent tax changes. The deferral opportunity has been eliminated with the March 4 budget, and after 2010, employers will be required to make and remit source deductions for the value of the benefit. The availability of the Stock Options Deduction disappears, if your employer provided you with a cash out, unless the employer agrees not to take a deduction for the amounts paid to you. Finally, those who previously deferred benefits and then sell the shares at a loss, before 2015, will be able to adjust for those losses on the tax return.
It's important to check these new opportunities out with your employer, your payroll department and your tax advisor to ensure you get all of the tax benefits at the right time, as some of the calculations are complicated. Know too that errors or omission on prior filed returns can be corrected, simply by filing an adjustment. You can go back to the year 2000 to do so.
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