How are employee stock options taxed in Canada?
Background. Under the employee stock option rules in the Income Tax Act, employees who exercise stock options must pay tax on the difference between the value of the stock and the exercise price paid. This effectively reduces by half the tax payable by the employee, which is a significant tax savings.
How do stock options work for employees Canada?
Employee stock options give employees the right to purchase shares of their corporate employer for a fixed price during a set time period. If the value of the shares exceeds the fixed option price then the employee can exercise the option and purchase the corporate employer’s shares at the fixed option price.
How are stock options taxed for employees?
Workers can buy shares at a pre-determined price at a future date, regardless of the price of the stock when the options are exercised. With NSOs, you pay ordinary income taxes when you exercise the options, and capital gains taxes when you sell the shares.
Are stock options taxable income?
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don’t meet special holding period requirements, you’ll have to treat income from the sale as ordinary income.
Are employee options taxable?
First, you’ll typically have to pay ordinary income taxes when you exercise the options. You must pay the difference between what you paid for the stock (the exercise price) and the fair value of the shares when you exercised them. Then, you’ll pay capital gains tax if you sell the shares at a profit.
How do I report employee stock options on tax return?
However, when you sell an option—or the stock you acquired by exercising the option—you must report the profit or loss on Schedule D of your Form 1040. If you’ve held the stock or option for less than one year, your sale will result in a short-term gain or loss, which will either add to or reduce your ordinary income.