How are capital gains taxed on an option to purchase?

An option to purchase lets a buyer lock in a price for a period, usually for a payment, and the seller must sell if the buyer exercises it. For the seller, the tax question is what the option payment is and when it counts. The Income Tax Act answers through a specific rule for options, and the result turns on whether the option is exercised or lapses.

Granting the option

Under subsection 49(1), granting an option is treated, for capital gains purposes, as a disposition of property whose adjusted cost base to the grantor is nil. There are listed exceptions, including options on a principal residence and options a corporation grants over its own shares. A nil cost means the whole amount received is the starting point of a gain.

If the buyer exercises it

Under subsection 49(3), when an option to acquire property is exercised, the granting and the exercise are deemed not to be dispositions. The consideration the seller received for the option is included in the seller’s proceeds of disposition of the property. The Act then treats the whole thing as one sale, and the gain is worked out on the combined proceeds.

If the option lapses

If the option expires unused, nothing is added to a later sale, and the grant stands as a disposition with a nil cost. That is why the payment is the gain. Which tax year reports it, and whether the property is capital property at all, are points for your accountant. Depreciable assets, for example, can bring recapture of capital cost allowance, which the CRA discusses in its guidance on selling a business.

Reserves and the capital gains deduction

If part of the price is paid over several years, the CRA says you may be able to claim a reserve, which spreads the gain over time, though generally not if you sold to a corporation you control. It also describes a capital gains deduction for qualifying property such as qualified small business corporation shares. See the lifetime capital gains exemption entry.