Study Notes: Stock Options

Question 1

What factors do you need to consider with questions about:

Stock options

Answer 1

1. Special rules for CCPC.

• The stock option benefit can be deferred until the taxation year in which the shares are disposed
• Provided that the shares are not disposed for two years after acquisition there will be an offsetting deduction in the year of disposal equal to 1/2 of the employment benefit. This is available even if the CCPC has become a corporation by then.
• Any proceeds on disposition in access of the FMV at the time of exercising the option would represent a captial gain and would possible be eligible for the capital gains deduction if the shares are QSBC share.

Question 2

What factors are to be considered when

Determining the inclusion of a stock option benefit?

Answer 2

1. the type of corporation issuing the option
2. whether the employee and the corporation are dealing at arm’s length
3. the relationship of option price to the fair market value of the shares when the option is granted; and
4. the relationship of the option price to the value of the shares at the time they are purchased unter the option

Question 3

What are the

Stock Option Rules for All Corporations

Answer 3

• Employment inclusion is deemed on the exercising of the stopck option equal to the difference between the FMV when the option is excercised and the option price
• There is a partial offsetting deduction in Division C equal to 1/2 the income inclusion if the option price is equal to or greater than the FMV at the time the option was granted.

Question 4

Stock option rules applicable to CCPC

Answer 4

1. The inclusion of the stock option benefit occurs at the time that the shares are disposed of, thereby deferring the inclusion of the benefit. (ITA: 110(1)(d)
2. There will be a Division C deduction equal to 1/2 of the inlcusion if the shares have not been sold or exchanged for two years after the date of acquisition (ITA: 110(1)(d.1).
3. Stock options issued by CCCP can qualify for a the Division C deduction if the option price is equal to or greater than the FMV at the time the option was granted.
4. Note: the stock option can qualify for the Division C deduction in #2 or #3 above but not both. Only one of the two possibilities need apply.

Question 5

Risk factors associated with stock options

Answer 5

• If the employee chooses to exercise the option but decides to dispose of them at a later date he/she risks having a in inclusion in income at the time of exercising the options and an economic loss at disposal if the price at disposal is less than the FMV at the exercise date.
• To deal with this risk, from 2010 to 2015:
  
  • any gain or loss from the exercise price is treated as a capital gain or loss.
  • tax deferral election for employees of corporations was repealed

Question 6

What is ACB

Answer 6

Adjusted Cost Base

(ACB equals FMV at exercise date)

Question 7

Special treatement for employees of corporation who elected to defer the income inclusion of options exercised prior to Mar 4, 2010 and sold their shares at a loss after Mar 4, 2010

Answer 7

They can elect to pay a special tax equal to the proceeds of the sale. When this election is made:

1. The taxpayer can claim a deduction equal to the stock option benefit that was deferred.
2. An amount equal to the lesser of:
   
   • the stock option beneft, and
   • the capital loss on the optioned securities

will be included int he taxpayer’s income as a capital gain. This may be offset by the allowable capital loss on the optioned securities.

Individuals who have not yet disposed of their shares have until 2015 to do so to qualify for this election