Stock option deduction (s. 110(1)(d))

An employee holding options when a business is sold meets this deduction when the options are exercised or cashed out. Subsection 7(1) deems the employee to have received a benefit, and paragraph 110(1)(d) then allows a deduction of a fixed fraction of that benefit, which the paragraph sets.

The conditions the CRA lists

The CRA’s employers’ guide says the employee can claim the deduction if a qualifying person agreed to sell or issue shares, or units of a mutual fund trust; the employee dealt at arm’s length with the qualifying persons right after the agreement was made; a share is a prescribed share; and the price is not less than fair market value when the agreement was made. It adds further conditions for cash-outs and for annual vesting limits on certain options.

What to ask

• Whether the options will be exercised or cashed out at closing
• Whether the exercise price met the fair market value test when the agreement was made
• Whether the employer is a Canadian-controlled private corporation, since the CRA’s guide describes, when conditions are met, a deferral of the benefit to the year the shares are disposed of and a separate deduction under paragraph 110(1)(d.1); see stock option benefit deferral

For how options are taxed in a buyout, see stock options in a buyout.