How employee stock options are taxed

When you exercise an employee stock option, the difference between the market value of the shares and your strike price is a taxable employment benefit. For options on a public company, that benefit generally arises in the year you exercise, regardless of whether you sell.

Many employee options qualify for a stock option deduction that effectively taxes the benefit at a rate similar to a capital gain, provided conditions are met. Recent rules also introduced an annual limit above which the preferential treatment is reduced. Confirm eligibility and current limits for your year — this is an area that has changed.

Once you own the shares, your ACB is the full market value at exercise — strike price plus the benefit you were taxed on. Any change in value after that is a normal capital gain or loss when you sell.

Options on a Canadian-controlled private corporation (CCPC) follow special timing: the employment benefit can generally be deferred until you sell the shares rather than taxed at exercise. If your options are in a private Canadian company, the rules diverge meaningfully from the public-company case above — get specific advice.