Employee Stock Options and Capital Gains Tax in Canada

If your employer gives you stock options, you may face tax questions both when you exercise the options and when you later sell the shares. The first is an employment matter, and the second is a capital gains matter.

This article focuses on the capital gains side: how a later gain or loss on the shares is calculated, reported and taxed. The taxable benefit on exercise and the stock option deduction turn on your plan terms and the type of employer, so a lawyer or accountant can confirm them.

This article covers Canadian federal tax law, which applies in every province.

Two stages of tax

How the option itself is treated depends on your plan and your employer, and an accountant can confirm it. When you later sell those shares, the sale is a disposition and any gain or loss is a capital gain or loss.

How the employment benefit is measured, when it is taxed and whether a deduction is available depend on your option agreement and your employer. Ask your payroll department for the slips and values used so your records match what was reported.

Calculating the gain on the shares

You subtract the shares' ACB and the outlays and expenses of selling from the proceeds of disposition. Half of the gain is the taxable capital gain.

The CRA gives an example: 400 shares sold for $6,500, with a $60 commission and a $4,000 ACB, give a gain of $2,440. Half of that, $1,220, is the taxable capital gain reported on line 12700.

The ACB is generally the cost of the property adjusted under section 53 of the Income Tax Act, and it can never be negative. For employee shares, how the amount reported on exercise feeds into your cost is a point to confirm with an accountant.

If you hold several lots of the same company's shares, identical properties use an average ACB that is recalculated at each purchase. A sale of identical properties does not change the average ACB per unit.

How the gain is taxed and reported

If your taxable capital gains exceed your allowable capital losses, the difference is included on line 12700 and taxed at your marginal rates with your other income. Details of each sale go in Schedule 3, Part 3, in columns for proceeds, ACB, outlays and gain or loss.

A proposed increase in the inclusion rate was cancelled, so the one-half inclusion rate applies to gains realized in 2024, 2025 and 2026. It is still sensible to re-check the rate for the year of your sale.

• Report the sale in the calendar year it occurs, and file even if no tax is owing.
• If the shares are priced in another currency, convert proceeds at the rate when you sold and the ACB at the rate when you acquired them. Outlays use the rate when they were incurred.
• Net capital losses can be applied only against taxable capital gains. They can be carried back three years and forward indefinitely.

Selling at a loss, gifting and special situations

A loss may be denied as a superficial loss if you or an affiliated person, such as your spouse or a corporation you control, acquires identical property within 30 days before or after the sale and still owns it, or has a right to acquire it, at the end of that period. A superficial loss cannot be deducted, and it is usually added to the cost base of the substituted property.

Certain situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses. Gifting shares to someone other than a spouse or common-law partner is treated as a sale at fair market value. A gift of publicly traded shares to a qualified donee can have a zero inclusion rate on the gain, reported on Form T1170 and Schedule 3, but only a portion qualifies if you receive an advantage for the gift.

If part of the sale price is payable after the end of the year, you may be able to claim a capital gains reserve, generally for a maximum of four years after the year of sale, so the gain is included over five years. You need not claim the maximum, and you generally cannot claim a reserve if you were a non-resident, were exempt from tax, or sold the property to a corporation you control in the relevant tax year or the following year.

What to do next

• Collect your option agreement, grant and exercise records, and any slips from your employer.
• Record the number of shares, the dates and the prices at exercise and at sale.
• Keep brokerage confirmations showing commissions and the sale proceeds.
• Check whether you bought identical shares within 30 days of a sale at a loss.
• Ask an accountant or lawyer how the employment benefit and any deduction apply to your plan before you file.

Frequently asked questions