The acquisition of stock options through employment can be an excellent way to benefit from the ongoing efforts an employee contributes to the growth of a company. However, the tax consequences can be a bit complicated, so it might pay to do a little reading and get a little professional help, if you re considering such an investment.

What is an employee stock option? An employer may provide its employees the opportunity to purchase shares in the employer corporation at some future date, at a price that is the current market price at the time the option is granted (the exercise price). There are no tax consequences when the option is granted.

However, when the option is exercised, these employee stock options produce a taxable benefit equal to the difference between the market value of the shares purchased and the exercise price; that is, unless the company is a Canadian Controlled Private Corporation (CCPC). In that case, the benefit is recognized when the shares are disposed of.

When the options are from a non-CCPC or publicly traded company, a special tax deferral is available on the first $100,000 of benefit. Employees may defer such taxable benefit until the shares are disposed of by filing Form T1212 each year. But you must tell your employer about this by January 15 so that your T4 slip can be properly prepared.

When the taxable benefit is included in income, the employee becomes eligible for the Securities Options Deduction (formerly the Stock Option and Shares Deduction), which is equal to one-half of the taxable benefit. This benefit is designed to put an employee who purchases shares through a securities option plan on the same income tax footing as an individual who acquired the shares on the stock market. That is, only 50% of the difference between what the employee pays for the shares and the proceeds of disposition is included in income.

Finally, it must be determined whether there is a capital gain or loss on the actual disposition when the shares are actually sold or otherwise disposed of. For tax purposes, these shares are considered to be identical property, and the normal rules around the computation of capital gains and losses will apply. That is, you will need to know the average cost of your shares owned at the time of the disposition. However, there are special "order of disposition" rules that must be observed, depending on how the shares were acquired.

This computation can be somewhat complicated and it is often wise in these cases to get some professional help.

For more information and to obtain a copy of Essential Tax Facts by Evelyn Jacks, call toll free 1-866-953-4769 or visit Evelyn’s website: www.knowledgebureau.com.