Option benefit deductions

• Security options deduction – Paragraph 110(1)(d)
• Security options deduction for the disposition of shares of a Canadian-controlled private corporation (CCPC) – Paragraph 110(1)(d.1)

Security options deduction – Paragraph 110(1)(d)

The employee can claim a deduction under paragraph 110(1)(d) of the Income Tax Act if all of the following conditions are met:

• A qualifying person agreed to sell or issue to the employee shares of its capital stock or the capital stock of another corporation that it does not deal with at arm's length, or agreed to sell or issue units of a mutual fund trust
• The employee dealt at arm's length with these qualifying persons right after the agreement was made
• if the security is a share, it is a prescribed share (as defined in the Income Tax Regulations) and if it is a unit, it is a unit of a mutual fund trust
• The price of the share or unit is not less than its fair market value (FMV) when the agreement was made
• There are additional conditions where an employee receives cash instead of acquiring securities (see Cash-outs), and where the security options are granted on or after July 1, 2021 (see Annual vesting limit)

The deduction the employee can claim is one-half of the amount of the resulting taxable benefit in the year. Identify the amount of the deduction by entering it in the "Other information" area under code 39 at the bottom of the employee's T4 slip.

Annual vesting limit

For security options granted on or after July 1, 2021 (other than options granted after June 2021 that replace options granted before July 2021), the employee is subject to a $200,000 annual vesting limit under paragraph 110(1)(d) if the qualifying person meets both of the following conditions:

• is not a Canadian-controlled private corporation (CCPC)
• has, or is part of a consolidated group that has, gross revenues of more than $500 million

How to determine the portion of the securities that are non-qualified securities

The portion of the securities that are non-qualified securities and not eligible for the deduction under 110(1)(d) is determined by the formula:

A/B

A = C + D - $200,000 (if the result is negative, the amount is zero)

where

C = total FMV (at the time the agreement is entered into) of the securities to be sold or issued under the agreement for a particular vesting year

D = is the lesser of:

(i) $200,000; and

(ii) the total FMV (at the time the agreements were entered into with the qualifying person, or another qualifying person that does not deal at arm's length with the particular qualifying person) of the securities to be sold or issued in respect of other agreements (whether entered into previously or contemporaneously) for that particular vesting year

B = the amount determined for C

The qualifying person is required to fill out T2 Schedule 59 to report non-qualifying security options beyond the $200,000 annual vesting limit.

Designation of non-qualified securities

Qualifying persons subject to the new rules will be able to designate securities to be issued or sold under a securities option agreement as non-qualified securities for purposes of the employee stock option rules. When this designation is made, employees will not be entitled to a stock option deduction, but the employer will be entitled to a deduction for the value of the benefit received by employees.

Notification requirements for non-qualified securities

Qualifying persons will be required to notify employees in writing no later than 30 days after the day the securities option agreement is entered into for non-qualified securities, and to report the issuance of securities options for non-qualified securities on Form T2 Schedule 59 with their tax return. 

Charitable donations

An employee will be ineligible for the additional 50% stock option deduction if the employee donates to a qualified donee a publicly listed security acquired under a securities option that is a non-qualified security under the new stock option rules. The employee may, however, be eligible for the charitable donation tax credit. 

Security options deduction for the disposition of shares of a Canadian-controlled private corporation (CCPC) – Paragraph 110(1)(d.1)

The employee receives the benefit in the year they dispose of the shares, but not in the year of acquiring them if all of the following conditions are met:

• When the agreement to sell or issue shares to the employee was concluded, the issuing or selling corporation was a CCPC
• The employee acquired shares after May 22, 1985
• The employee dealt at arm's length with the corporation or any other corporation involved right after the agreement was concluded

In this case, the employee can claim a deduction under paragraph 110(1)(d.1) of the Income Tax Act if all of the following conditions are met:

• CCPC shares disposed of in the year where the employee dealt at arm's length with the corporation
• The employee has not disposed of the share (otherwise than as a result of the employee's death) or exchanged the share within two years after the date the employee acquired it
• The employee did not deduct an amount under paragraph 110(1)(d) for the benefit

The deduction the employee can claim is one-half of the amount of the resulting taxable benefit in the year. Identify the amount of the deduction by entering it in the "Other information" area under code 41 at the bottom of the employee's T4 slip.