Volume 2, Number 1
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting on the information herein.
Ontario Research Employee Stock Option Credit
By Warren Smith, CA
Cadesky and Associates LLP (Toronto)
The Ontario Research Employee Stock Option Credit ("ORESO") is an Ontario tax incentive to reduce Ontario personal income tax. It applies to income and capital gains of employees arising from stock option benefits and capital gains on the sale of shares.
Eligible employees can receive a refund of their Ontario personal income tax on up to $100,000 of taxable income each year. There is no lifetime limit to the amount of taxable stock option benefits and taxable capital gains that qualify for this incentive. However, this incentive only applies to stock options that are granted after December 21, 2000.
For a taxpayer to be eligible for this incentive, he/she must be an eligible employee; the employer must qualify as an eligible employer; the stock option agreement must meet certain criteria; and certain forms must be filed by both the employee and employer within specific time frames.
The employee must first pay the Ontario tax on the filing of a personal income tax return, and subsequently file an application with the Ministry of Finance (Ontario) for a refund.
To be eligible for the ORESO tax incentive, an individual must meet the following criteria:
- Be an Ontario resident on December 31 of the year in which the eligible stock option was granted, and the year in which the income is taxable;
- Be eligible to claim the 50% stock option deduction;
- Not be a specified shareholder of the corporation (i.e., not own more than 10% of any class of shares of the corporation);
- Spend at least 30% of his/her time in eligible SR&ED work;
- Be employed by the employer for at least six months (including at least part of the year in which the stock option was granted); and
- Be a full-time or permanent part-time employee.
The employer must also meet certain criteria. An employer is an eligible employer for the ORESO tax incentive if the following criteria are met:
- the employer is a corporation;
- the employer carries on business and undertakes R&D through a permanent establishment in Ontario; and
- the employer incurs eligible R&D expenditures in Ontario of $25 million or 10% of its total revenue, whichever is less, in the taxation year prior to the year in which the stock option was granted.
The employer is required to complete certain paperwork, both in the year that the option is granted and when it is exercised. The employee must also submit a host of forms to the Ministry of Finance (Ontario). However, if everything checks out, the tax savings will make it more than worthwhile.