Question

In some cases, a deduction is allowed under Division C to compute the taxable income in respect of employee stock options. Discuss the conditions that are required for this deduction. Would the deduction be allowed if the employee paid nothing for the shares – that is, they were simply given to the employee?

Answer 1

*Any doubt please comment

The following conditions have to be met for claiming the division C deduction to compute taxable income in respect of employee stock options:

1. The stock option deduction can be claimed if the exercise price is not less than the value of the share when the option was granted.

2. There is a limitation of the type of shares issued i.e. the common shares.

3. An arms length relationship must exist between the parties before and after exercising the option.

If the employee pays nothing for the stock options then the benefit received is fully taxable. Ideally the taxable benefit is equal to the exercise price minus the market value of the shares at the time of purchase. In this since the exercise price i.e. the price the employee pays to buy the shares is $0, the entire market value of the shares is taxable.