Typically, when publicly listed shares are acquired under a stock option agreement at an exercise price which is less than the fair market value of the shares on the date when the stock options were exercised, the difference between the fair market value of the shares and the exercise price will be taxable as employment income (“stock option income”).
A deduction of 50% of the stock option income is allowed if the exercise price is equal to or more than the fair market value of the shares at the date of grant of the options. For stock options exercised prior to or at 4:00 pm on March 4, 2010 (the date and time of the 2010 Federal Budget), a deferral of up to $100,000 of the stock option income per year may be claimed.
When the shares acquired under the stock option are subsequently sold, there will be a capital gain or loss on the shares to the extent of the increase or decrease in value of the shares since the date of exercise. Where there is a loss, the loss will be a capital loss that will not be available to offset the stock option income.
The 2010 Federal Budget provided measures to alleviate the hardship from the fact that the capital losses cannot be used to offset the stock option income by allowing a taxpayer to make an election which will essentially allow the capital losses from sale of the stock option shares to be used to offset the stock option income. However, the ability to make this election ends this year.
For the election to be available, a number of conditions must be met:
An election must be filed before the filing due date for the return for the year of disposition of the securities for the following rules to apply:
The ability to make this election will be gone after December 31, 2014. If you have acquired publicly listed shares by exercising stock options and they have accrued losses, we would be happy to discuss whether this election could be of benefit to you.
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