This form will report important dates and values needed to determine the correct amount of capital and ordinary income if applicable to be reported on your return.
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Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form , Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section c. This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return. If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined.
Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value. Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value.
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For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. For specific information and reporting requirements, refer to Publication More In Help.
There are two types of stock options: Options granted under an employee stock purchase plan or an incentive stock option ISO plan are statutory stock options. Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options. Statutory Stock Options If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option.
Ads keep this website free for you. Before making a major financial decision you should consult a qualified professional. If you use an ad blocker, please consider a small contribution to help keep TaxTips. For most people, the gains and losses from call and put options are taxed as capital gains on capital account. However, if you are in the business of buying and selling stock, then your gains and losses from options will be treated as income on income account - see capital or income.
Topic No. 427 Stock Options
When your options are treated as capital gains, their disposition is reported on Schedule 3 Part 3, where publicly traded shares are reported. Gains or losses realized by a writer seller of naked uncovered options are normally treated as income. However, according to ITR Transactions in Securities Archived , paragraph 25 c , CRA will allow these to be treated as capital gains, provided this practice is followed consistently from year to year.
For taxpayers who record gains and losses from options as income , the income from options sold written is reported in the tax year in which the options expire, or are exercised or bought back. When call options are purchased and subsequently exercised, the cost of the options is added to the cost base of the purchased shares.
If the call options are not exercised, the cost is deducted in the tax year in which the options expire.
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If the call options are closed out by selling them, the proceeds are included in income, and the original cost is written off, in the tax year in which the options are closed out. When put options are purchased, the cost is written off in the year in which the options expire, are exercised, or are closed out by selling them.
For taxpayers who record gains and losses from options as capital gains or losses , the timing is a little trickier for options which have been sold. The following table shows the timing of the recording of gains and losses on options that have been sold or purchased.
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As you can see in the table, when call and put options sold are being recorded as capital gains, the gain is recorded in the taxation year in which the options are sold. However, if the options are then exercised in the next taxation year , the capital gain from the previous year must be reversed, and either added to the proceeds from the sale of shares call option , or deducted from the cost basis of shares purchased put option. To revise the capital gains from the previous year, a T1Adj would have to be filed.
See our article on changing your tax return after it has been filed. Of course, if the prior year tax return has not been filed when the options are exercised, the prior year return can be done omitting the gain, eliminating the need for a later revision. Usually, the taxpayer would benefit from filing the T1Adj. However, if the amount is not significant, and if a tax preparer is being paid to do the taxes, there may be little benefit to filing the T1Adj.
The only problem is that the Income Tax Act requires the options proceeds to either be added to the proceeds from the sale of shares call option , or deducted from the cost basis of shares purchased put option when the option is exercised.