Can an Ontario private corporation grant stock options to employees?

Yes, Ontario private corporations can grant stock options to employees. A stock option gives the recipient the right to purchase shares in the corporation at a fixed price (the exercise price) within a set period. If the shares become more valuable over time, the employee can exercise the option and either hold the resulting shares or sell them at a gain.

For Canadian private corporations that qualify as Canadian-controlled private corporations (CCPCs), the Income Tax Act provides a potential tax benefit. If certain conditions are met — including that the exercise price is at least equal to the fair market value of the shares at the time of grant — the employment benefit arising on the exercise of the option can be deferred until the shares are sold, and a deduction equal to half the benefit may be available, resulting in capital-gains-like tax treatment. These rules are complex and subject to conditions.

An Ontario corporation wanting to grant stock options needs to ensure the options are authorized in the articles (or at least not prohibited), create a formal stock option plan or agreement, and keep proper records. The board typically approves option grants by resolution. For corporations that plan to grow and potentially be acquired or go public, a well-designed employee stock option plan can be an important recruitment and retention tool. A corporate lawyer and a tax advisor should review the plan before it is implemented.