Employee Stock Options

Bulletin
Published: January 2008
Content last reviewed: October 2009
ISBN: 978-1-4249-4458-3 (Print), 978-1-4249-4459-0 (PDF), 978-1-4249-4460-6 (HTML)

This page is provided as a guide only. It is not intended as a substitute for the Employer Health Tax Act and Regulations.

1. Employer's Tax Liability on Stock Options

This page will assist employers in determining what amounts are subject to Employer Health Tax (EHT).

EHT is payable by employers who pay remuneration:

  • to employees who report for work at a permanent establishment (PE) of the employer in Ontario, and/or
  • to employees who do not report for work at a PE of the employer but who are paid from or through a PE of the employer in Ontario.

An employee is considered to report for work at a permanent establishment of an employer if the employee comes to the permanent establishment in person to work. If the employee does not come to a permanent establishment in person to work, the employee is considered to report for work at a permanent establishment if he or she may reasonably be regarded as attached to the permanent establishment. For more information on this topic, please read permanent establishment.

Stock options

Employee stock options are granted under an agreement to issue securities, whereby a corporation provides its employees (or employees of a non-arm's length corporation) with a right to acquire securities of either of those corporations.

The term securities refers to shares of the capital stock of a corporation or units of a mutual fund trust.

Definition of remuneration

Remuneration as defined in subsection 1(1) of the Employer Health Tax Act includes all payments, benefits and allowances received, or deemed to be received by an individual that, by reason of sections 5, 6 or 7 of the federal Income Tax Act (ITA), are required to be included in the income of an individual, or would be required if the individual were resident in Canada.

Stock option benefits are included in income by reason of section 7 of the federal ITA. Employers are therefore required to pay EHT on stock option benefits.

Non-arm's length corporations

If a stock option is issued to an employee by a corporation not dealing at arm's length (within the meaning of section 251 of the federal ITA) with the employer, the value of any benefit received as a result of the stock option is included in remuneration paid by the employer for EHT purposes.

Employee moved to Ontario PE from non-Ontario PE

An employer is required to pay EHT on the value of all stock option benefits arising when an employee exercises stock option(s) during a period when his or her remuneration is subject to EHT. This includes stock options that may have been granted while the employee was reporting for work at a non-Ontario PE of the employer.

Employee moved to non-Ontario PE

An employer is not required to pay EHT on the value of stock option benefits arising when an employee exercises stock option(s) while reporting for work at a PE of the employer outside Ontario.

Employee not reporting for work at a PE of the employer

An employer is required to pay EHT on the value of stock option benefits arising when an employee who exercises stock option(s) does not report for work at a PE of the employer but is paid from or through a PE of the employer in Ontario.

Former employees

An employer is required to pay EHT on the value of stock option benefits of a former employee if the former employee's remuneration was subject to EHT on the date the individual ceased to be an employee.

2. When Stock Option Benefits Become Taxable

General rule

An employee who exercises a stock option to acquire securities is required to include in employment income a benefit determined under section 7 of the federal ITA.

Canadian-controlled private corporations (CCPCs)

If the employer is a CCPC within the meaning of subsection 248(1) of the federal ITA, the employee is considered to have received a taxable benefit under section 7 of the federal ITA at the time the employee disposes of the shares.

Employers are required to pay EHT at the time the employee (or former employee) disposes of the shares.

Where employee stock options are issued by a CCPC, but are exercised by the employee after the company has ceased to be a CCPC, the value of the benefit will be included in remuneration for EHT purposes at the time the employee disposes of the securities.

Non-Canadian controlled private corporations (Non-CCPCs)

Any taxable benefit resulting from an employee exercising stock options on securities that are not of a CCPC, including publicly-listed securities or securities from a foreign-controlled corporation, must be included in employment income at the time the options are exercised. EHT is payable in the year that the employee exercises the stock options.

Federal deferral of taxation does not apply to EHT

For federal income tax purposes only, an employee can defer taxation of some or all of the benefit arising from exercising stock options to acquire publicly-listed securities until the time the employee disposes of the securities.

The federal deferral of taxation on stock option benefits is not applicable for EHT purposes. Employers are required to pay EHT on stock option benefits in the year that the employee exercises the stock options.

3. Employers Undertaking Scientific Research and Experimental Development

Exemption

For a limited time, employers who directly undertake scientific research and experimental development and meet the eligibility criteria are exempt from paying EHT on stock option benefits received by their employees.

For CCPCs, the exemption is available on employee stock options granted before May 18, 2004, provided that the subject shares are disposed of or exchanged by the employee after May 2, 2000, and on or before December 31, 2009.

For non-CCPCs, the exemption is available on employee stock options granted before May 18, 2004, provided that the options are exercised after May 2, 2000, and on or before December 31, 2009.

All stock option benefits arising from employee stock options granted after May 17, 2004, are subject to EHT.

Eligibility criteria

To be eligible for this exemption for a year, the employer must meet all of the following eligibility criteria in the taxation year of the employer preceding the taxation year that ends in the year:

  • the employer must carry on business through a PE in Ontario in the preceding taxation year (see under Start-ups for the exception)
  • the employer must directly undertake scientific research and experimental development (within the meaning of subsection 248(1) of the federal ITA) at a PE in Ontario in the preceding taxation year
  • the employer's eligible expenditures for the preceding taxation year must not be less than $25 million or 10 per cent of the employer's total expenses (as defined below) for that taxation year, whichever is less
  • the employer's specified eligible expenditures for the preceding taxation year must not be less than $25 million or 10 per cent of the employer's adjusted total revenue (as defined below) for that taxation year, whichever is less.

For example, if the employer meets all of the above eligibility criteria in its taxation year ending June 30, 2001, it is eligible to claim the EHT exemption for the 2002 year.

Start-ups

Start-up companies that do not have a preceding taxation year can apply qualifying tests to their first taxation year. The scientific research and experimental development performed in their first taxation year will determine their eligibility for the first and second years on which EHT is payable.

Amalgamations

In the first taxation year ending after an amalgamation, the employer can apply the qualifying tests to the taxation year of each of the predecessor corporations that ended immediately before the amalgamation.

Eligible expenditures

Eligible expenditures are those incurred by the employer in directly undertaking scientific research and experimental development that qualify for the research & development (R&D) super allowance under the Corporations Tax Act (Ontario).

Contract payments received by the employer for performing R&D for another entity are included as eligible expenditures. Contract payments made by the employer to another entity for R&D performed by the other entity are not included as eligible expenditures of the employer.

Specifically, eligible expenditures of the employer for a taxation year are calculated as (A+B−C), where:

  1. is the total of the expenditures incurred in the taxation year at a PE in Ontario, each of which would be a qualified expenditure under subsection 12(1) of the Corporations Tax Act (Ontario) and is either an amount described in subparagraph 37(1)(a)(i) or 37(1)(b)(i) of the federal ITA or a prescribed proxy amount (as referred to in paragraph (b) of the definition of 'qualified expenditure' in subsection 127(9) of the federal ITA) for the taxation year
  2. is the reduction in 'A' as required under subsections 127(18) to (20) of the federal ITA in respect of a contract payment, and
  3. is the amount paid or payable by the employer in the taxation year that is included in 'A' and that would be a contract payment as defined in subsection 127(9) of the federal ITA made to the recipient of the amount.

Specified eligible expenditures

Specified eligible expenditures of the employer for a taxation year include:

  • the employer's eligible expenditures for the taxation year
  • the employer's share of eligible expenditures of a partnership in which it is a member during a fiscal period of the partnership that ends in the taxation year, and
  • eligible expenditures of each associated corporation that has a PE in Canada for any taxation year that ends in the employer's taxation year, including the associated corporation's share of eligible expenditures of a partnership in which it is a member.

Total expenses

The employer's total expenses are determined in accordance with generally accepted accounting principles (GAAP), excluding extraordinary items. Consolidation and equity methods of accounting are not to be used.

Total revenue

An employer's total revenue is the gross revenue determined in accordance with GAAP (not using the consolidation and equity methods of accounting), less any gross revenue from transactions with associated corporations having a PE in Canada or partnerships in which the employer or the associated corporation is a member.

Adjusted total revenue

The employer's adjusted total revenue for a taxation year is the total of the following amounts:

  • total revenue of the employer for the taxation year
  • the employer's share of total revenue of a partnership in which it is a member during a fiscal period of the partnership that ends in the taxation year
  • total revenue of each associated corporation that has a PE in Canada for any taxation year that ends in the employer's taxation year, including the associated corporation's.

Short or multiple taxation years

Eligible expenditures, total expenses, and total revenue are extrapolated to full-year amounts where there are short or multiple taxation years in a calendar year.

Partnerships

If a partner is a specified member of a partnership (within the meaning of subsection 248(1) of the federal ITA), the share of eligible expenditures, total expenses and total revenue of the partnership attributable to the partner is deemed to be nil.

4. Summary of EHT on Stock Options

  R&D intensive Non-R&D intensive
  Stock options granted before May 18, 2004

Stock options granted
after May 17, 2004

CCPC
Exempt from EHT if the securities are disposed of after May 2, 2000, and on or before December 31, 2009. Otherwise, EHT is payable when securities are disposed of by the employee. No exemption. Same as non-R&D intensive. EHT is payable when securities are disposed of by the employee. EHT is payable when securities are disposed of by the employee.
Non-CCPC public and private corporations
Exempt from EHT if the options are exercised after May 2, 2000 and on or before December 31, 2009. Otherwise, EHT is payable when stock options are exercised. No exemption. Same as non-R&D intensive. EHT is payable when stock options are exercised (federal income tax deferral rule does not apply for EHT purposes). EHT is payable when stock options are exercised (federal income tax deferral rule does not apply for EHT purposes).

5. More Information

Contact the Ontario Ministry of Finance at:

  • 1-866-ONT-TAXS (1-866-668-8297)
  • 1-800-263-7776 for teletypewriter (TTY)

Written interpretations

To obtain a written interpretation on a specific situation not addressed, please send your request in writing to:

Ministry of Finance
Advisory Services
33 King Street West, 3rd Floor
Oshawa ON  L1H 8H5

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