Everything you need to know about the budget’s new stock options rules

The government will cap the amount that can be claimed under the stock option deduction for some option holders.Darren Calabrese/The Canadian Press files

Changes are coming to the tax treatment of employee stock options courtesy of this week’s federal budget. Whether you’ll be affected or not, however, will depend on what type of company you work for and the amount of stock options you receive. Let’s begin with a review of how employee stock options are currently taxed and then take a look at what’s being proposed.

Current rules

Under current tax rules, when an employee stock option is exercised, the difference between the exercise price and the fair market value of the share is included in income as an employment benefit. For qualifying options, you can claim an offsetting deduction (the “stock option deduction”) equal to one-half the benefit, so that only 50 per cent of the stock option benefit is included in your income and taxed at your marginal rate.

The tax result is to effectively tax employee stock options like capital gains, although they are still considered to be employment income and thus qualify as “earned income” for RRSP contribution room purposes. And, because they are not actually capital gains, you can’t offset the income inclusion with capital losses you may have.

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