Employee Stock Options in Canada: Tax and Capital Gains on Sale

If you exercised employee stock options, you probably have two questions: what was taxed when you exercised, and what happens when you sell the shares. The first depends on your plan and your employer's slips. The second follows the general capital gains rules.

This article focuses on the sale. How the employment benefit and any related deduction apply to you depends on the terms of your plan and your slips, so confirm that part with an accountant.

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

Two events, two tax questions

Exercising an option is the point where you acquire shares. Selling those shares later is a separate disposition.

Once you own the shares, a later sale is generally treated like the sale of any other capital property.

The gain or loss when you sell the shares

You subtract the shares' ACB and the outlays and expenses of selling from the proceeds of disposition. The taxable capital gain is one-half of the capital gain, and the allowable capital loss is one-half of the capital loss. That one-half rate applies to gains realized in 2024, 2025 and 2026.

If taxable capital gains exceed allowable capital losses, the difference is included on line 12700 and taxed at your marginal rates with your other income.

Cost base and identical shares

ACB is usually the cost of a property plus the expenses to acquire it, such as commissions and legal fees. If you hold identical shares of the same class, an average ACB is used and recalculated at each purchase.

If you hold shares from several exercises or purchases, keep a running record, because the average changes each time you buy. If the shares are priced in another currency, convert proceeds at the exchange rate at the time of the sale, the ACB at the rate when the property was acquired, and outlays at the rate when they were incurred, and report in Canadian dollars.

Reporting, losses and buying back

• Report each disposition on Schedule 3, Part 3, showing proceeds, ACB, outlays and expenses, and the gain or loss. A positive result goes to line 12700, and a negative result does not.
• Report in the calendar year of the sale, and file a return even if no tax is owing.
• Net capital losses can be applied only against taxable capital gains. They can be carried back three years and carried forward indefinitely.
• A loss is superficial if you or an affiliated person, such as your spouse or common-law partner, acquires the same or identical property from 30 days before to 30 days 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.

What to do next

• Gather your option agreement, exercise confirmations and employer slips.
• Record the date, price and costs of each exercise or purchase of the shares.
• Collect the sale confirmation and any commission.
• Ask an accountant how your exercise was reported and what it means for your cost base.
• Check your sale dates for any repurchase within the superficial loss window.

Frequently asked questions