Ontario Research Employee Stock Option Credit

Bulletin
Published: September 2007
Content last reviewed: December 2010
ISBN: 978-1-4249-3691-5 (Print), 978-1-4249-3693-9 (PDF), 978-1-4249-3692-2 (HTML)

Publication Archived

Notice to the reader: The Ontario Research Employee Stock Option Credit was available for taxation years up to and including 2009. The tax credit is not available after December 31, 2009.

This publication is provided as a guide only. It is not intended as a substitute for the Income Tax Act (Ontario) and Regulations.

Purpose

The Ontario Research Employee Stock Option (ORESO) credit is intended to help Ontario high-technology companies attract and retain highly skilled research employees.

The ORESO credit reduces or eliminates Ontario personal income tax arising from the exercise or disposition of stock options granted to employees of research and development (R&D) intensive companies, and capital gains arising from the sale of shares acquired through exercising eligible stock options.

Description of the ORESO credit

Eligible research employees of eligible R&D-intensive companies can receive a refund of their Ontario personal income tax on up to $100,000 of taxable income each year up to and including the 2009 taxation year from taxable stock option benefits and taxable capital gains arising from the sale of shares acquired through exercising eligible stock options.

The stock options must have been granted after December 21, 2000 and before May 18, 2004.

There is no lifetime limit to the amount of taxable stock option benefits and taxable capital gains that would qualify for a refund.

Eligibility for the ORESO credit

Eligibility criteria

To be eligible to claim the ORESO credit, you must fulfill all of the following criteria:

  • be a resident of Ontario on December 31 of the taxation year in which you entered into an eligible stock option agreement
  • be a resident of Ontario on December 31 of the year you reported a stock option benefit, or realized a capital gain on the sale of shares acquired under the eligible stock option agreement
  • be an eligible employee of an eligible employer at the time you entered into the eligible stock option agreement
  • have filed a return of income (T1) for the tax year to which the credit relates
  • have reported on your income tax return an employee stock option benefit under section 7 of the federal Income Tax Act (ITA) in respect of an eligible stock option agreement, or a capital gain on the sale of shares acquired on the exercise of rights under an eligible stock option agreement
  • have deducted on your income tax return an amount under paragraph 110(1)(d), (d.01) or (d.1) of the federal ITA relating to an eligible stock option agreement for the taxation year to which the credit relates or a prior year
  • not be a specified shareholder of the eligible employer, or the corporation that entered into the eligible stock option agreement, or a corporation that is associated with the eligible employer at any time in the taxation year of the eligible employer in which the agreement is entered into, or at any time in its five previous taxation years.  Specified shareholder is defined under subsection 248(1) of the federal ITA, generally, as a shareholder who owns, directly or indirectly, 10 per cent or more of any class of shares of the corporation.

Determination of eligibility

Determination of whether the criteria are met, other than the determination of eligible employee (see below), is made by the individual.

Ceasing to be a resident of Ontario

Residents of Ontario who cease to be residents of the province during the year are not eligible for the credit for that year.

Trusts

A trust is not eligible to claim an ORESO credit.

Death in the year

An individual who dies in the year is eligible for the credit in the year of death, if he or she was a resident of Ontario on the day of death.

Eligible employee

Eligibility criteria

You are an eligible employee at the time a stock option agreement is entered into if you:

  • spend at least 30 per cent of your time, or earn at least 30 per cent of your total salary or wages, in directly undertaking or supervising in Ontario the prosecution of scientific research and experimental development for your employer, for a corporation associated with your employer, or for a partnership of which your employer (or a corporation associated with your employer) is a partner, in the eligible employer's taxation year in which the agreement was entered into.  The salary or wages paid must be expenditures directly attributable to the prosecution of scientific research and experimental development under paragraph 2900(2)(b) of Regulations made under the federal ITA
  • are employed by the eligible employer for at least six consecutive months, and the period of employment includes a part of the employer's taxation year in which the agreement was entered into
  • are a full-time or permanent part-time employee as defined in the Employment Equity Act (Canada) (a permanent part-time employee is one who is employed to regularly work fewer than the standard number of hours fixed by the employer for employees in the occupational group in which the person is employed), and
  • are not an incorporated employee providing services on behalf of a personal services business (within the meaning of subsection 125(7) of the federal ITA) at any time in the tax year or in any of the eligible employer's five previous tax years.

Determination of eligibility

The determination of whether an employee is eligible is made by the employer.

Definition of scientific and experimental development

Subsection 248(1) of the federal ITA generally defines scientific research and experimental development to mean systematic investigation or search carried out in a field of science or technology by means of experiment or analysis.  Further details of the definition are set out in the federal ITA.

Eligible employer

Eligibility criteria

An employer is an eligible employer at the time a stock option agreement is entered into if the employer:

  • is a corporation
  • carries on business through a permanent establishment in Ontario, either by itself or as a member of a partnership, in a taxation year in which it enters into the stock option agreement
  • directly undertakes scientific research and experimental development at a permanent establishment in Ontario, either by itself or as a member of a partnership, in the taxation year immediately preceding the year in which it enters into the stock option agreement, and
  • incurs an amount of eligible expenditures of at least $25 million or 10 per cent of total revenue at a permanent establishment in Ontario, by itself, as a member of a partnership or in combination with one or more corporations associated with it throughout the year, and that has a permanent establishment in Canada, in the taxation year immediately preceding the year in which it enters into the stock option agreement.

Start-up corporations

For start-up corporations, the requirement to undertake R&D in Ontario and the expenditure test apply to the first taxation year of existence. For short taxation years, the expenditure amounts are calculated by multiplying the expenditures by the ratio of the number of days in a full year to the number of days in the short year.

Amalgamated corporations

For corporations that have amalgamated, if the taxation year in which the stock option agreement is entered into is the first taxation year after amalgamation, the requirement to undertake R&D in Ontario and the expenditure test apply to the taxation years of each of the predecessor corporations that ended immediately before the amalgamation.

Definition of associated

Associated, in respect of a corporation and another corporation, has the meaning given to that expression by subsection 256(1) of the federal ITA.

Definition of permanent establishment

Permanent establishment has the meaning given to that expression by

  • subsection 400(2) of the Federal Regulations in references to a permanent establishment in Canada, and
  • section 4 of the Corporations Tax Act in references to a permanent establishment in Ontario.

Total revenue

Total revenue of a corporation is essentially the gross revenue of the corporation. To avoid double counting when total revenue of a group of entities is considered, inter-company transactions affecting gross revenue are excluded.

The total revenue of an eligible employer for a tax year includes:

  • the employer's proportionate share of the total revenue of a partnership of which it is a member during a fiscal period of the partnership that ends in the tax year, and
  • the total revenue of each corporation that is associated with the employer throughout the tax year and that has a permanent establishment in Canada for any tax year of the associated corporation that ends in the tax year, including the associated corporation's share of the total revenue of any partnership of which it is a member for a fiscal period ending in the associated corporation's tax year.

Eligible expenditures

Eligible expenditures are those that are incurred by an employer in directly undertaking scientific research and experimental development that qualify for the Ontario research and development super allowance under subsection 12(1) of the Corporations Tax Act.

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

An employer's eligible expenditures for a tax year include:

  • the employer's proportionate share of expenditures incurred by a partnership of which it is a member during a fiscal period of the partnership that ends in the tax year, and
  • eligible expenditures incurred by each corporation that is associated with the employer throughout the tax year, and that has a permanent establishment in Canada for any tax year of the associated corporation that ends in the tax year.  Eligible expenditures include the associated corporation's proportionate share of any expenditures incurred by a partnership of which it is a member for a fiscal period ending in the associated corporation's tax year.

Partnership

A partner's proportionate share of total revenue and eligible expenditures is nil if the partner is a specified member of the partnership (as defined under subsection 248(1) of the federal ITA).

Eligible stock option agreement

Definition

A stock option agreement is an agreement whereby a corporation agrees to sell or issue shares of the corporation, or of a corporation with which it does not deal at arm's length, to an employee of the corporation or of a corporation with which it does not deal at arm's length.

An eligible stock option agreement is a stock option agreement that:

  • is entered into by an eligible employer or by a corporation that does not deal at arm's length with the eligible employer after December 21, 2000, and before May 18, 2004
  • provides for the sale or issue of shares to an individual who is an eligible employee of the eligible employer when they entered into the stock option agreement
  • is granted to an employee by virtue of his or her employment with the eligible employer, and
  • is not to replace a stock option agreement that was entered into on or before December 21, 2000.

Eligible stock options defined

The term eligible stock options, as used in this bulletin, refers to rights to acquire shares under an eligible stock option agreement.

Information to be provided by employers

When an eligible stock option is granted

The eligible employer must:

The information to be provided on the certificates is based on the eligible employer's taxation year.

In the Certificate of Eligible Stock Option Agreements - Employee Summary [PDF - 338 KB], the employer must:

  • certify that it is an eligible employer for the taxation year in which it entered into an eligible stock option agreement
  • certify the date that it or a corporation not dealing at arm's length with it entered into the agreement
  • provide the names and social insurance numbers of all eligible employees with whom the employer entered into eligible stock option agreements.

In the Certificate of Eligible Stock Option Agreements - Individual [PDF - 277 KB], the employer must certify that:

  • it is an eligible employer for the taxation year in which it entered into an eligible stock option agreement
  • the stock option agreement entered into with the employee is an eligible stock option agreement
  • the employee is an eligible employee in relation to the agreement.

When an eligible stock option is exercised

The corporation must:

Both notices are filed on a calendar year basis.  The eligible employer is not required to report to the ministry deferred stock option benefits that are brought into income of the employees when the employees sell the shares that were acquired through exercising eligible stock options.

In the Notice of Benefit - Employee Summary [PDF - 327 KB], the employer must provide:

  • the name and social insurance number of each eligible employee who is deemed under section 7 of the federal ITA to receive an employee stock option benefit or who has elected to defer a benefit under that section
  • the amount of the section 7 benefit deemed to be received in the year and the amount of the benefit that the employee has elected in the year to defer under that section.

In the Notice of Benefit - Individual [PDF - 287 KB], the employer must notify the employee that the benefit deemed to be received or deferred by the employee under section 7 relates to an eligible stock option agreement.

Revocation of election to defer stock option benefit

If the employee elects to defer a stock option benefit under the federal ITA and subsequently revokes the election, the employer must provide an amended Notice of Benefit - Employee Summary [PDF - 327 KB] to the ministry, and an amended Notice of Benefit - Individual [PDF - 287 KB] to the employee.

Changes to be reported

An eligible employer must notify the ministry, in writing, if there are any changes to the information provided on the Certificate of Eligible Stock Option Agreements or Notice of Benefit forms on or before the last day of the second month following the month in which the employer becomes aware that the information has changed.

For example, if an employer becomes aware on January 15, 2007 that information has changed, then the employer must notify the ministry of those changes by March 31, 2007.

How to apply

Instructions

To receive a refund of Ontario personal income tax under the ORESO credit, you must complete and return an Application for Refund [PDF - 303 KB] to the Ontario Ministry of Finance (the ministry) and attach copies of all of the following documents:

The ministry will issue the refund cheques.  Refund cheques are usually mailed within 8 weeks of receipt of the Application for Refund [PDF - 303 KB].

You must certify your eligibility for the refund in the Application for Refund [PDF - 303 KB], and provide specific income and tax information required to calculate the amount of the refund.

Application due date

You must file your application no later than September 30 of the second calendar year beginning after the tax year to which the refund relates.

For example, you must file your application for a refund of 2006 taxes by September 30, 2008.

Notice of entitlement

Once the application is processed, you will be sent a Notice of Entitlement showing the refund amount (if any) and how the refund is calculated.

Notice of objection

If you do not agree with the Notice of Entitlement you have the right to file a Notice of Objection with the ministry within 90 days from the date of the notice.  Instructions for filing a Notice of Objection are included on the Notice of Entitlement.

Calculating the ORESO credit

Explanation of calculation

The ORESO credit is calculated using information from:

  • the application that you submitted to the ministry
  • your employer
  • your personal income tax return (including Form ON428, Ontario Tax which is filed as part of the federal T1 Income Tax and Benefit Return)
  • your federal Notice of Assessment or Notice of Reassessment.

The amount of the tax refund is the difference between the Ontario tax you paid and your adjusted tax amount after applying the credit, plus any applicable interest. The adjusted tax amount is the amount of Ontario personal income tax that you would have had to pay if you could have made the following deduction on your income tax return.

The deduction is calculated as the sum of:

  1. the amount of employee stock option benefits reported under section 7 of the federal ITA less any deduction allowed under paragraphs 110(1)(d), (d.01) or (d.1) of the federal ITA where the benefits relate to an eligible stock option agreement, and
  2. the lesser of:
    • the taxable capital gains from the disposition of shares acquired by exercising rights under an eligible stock option agreement, or
    • your taxable capital gains included in income less the sum of any allowable business investment loss, net capital losses and capital gains deductions for shares of a small business corporation.

To determine the amount of the ORESO credit, the amount calculated above is deducted from taxable income to arrive at your adjusted taxable income.  Your adjusted tax amount is determined using the Ontario tax calculations on Form ON428, Ontario Tax and your adjusted taxable income.

The calculation of the Adjusted Tax Amount is only for purposes of calculating a tax refund under the ORESO credit and will not increase or decrease your other Ontario tax credits and deductions as calculated on your income tax and benefit return.

Maximum deduction

The maximum amount that you can deduct in any taxation year is $100,000.

Capital gains and losses

Where you have an employee stock option benefit as well as a capital loss from the disposition of shares acquired by exercising rights under an eligible stock option agreement, the deduction that can be claimed in respect of the stock option benefit is not reduced by the capital loss.

If you have capital gains from the disposition of shares acquired by exercising rights under an eligible stock option agreement and other capital gains as well as an allowable capital loss, the allowable capital loss is deemed to first reduce the other capital gains.  As a result, you may still claim an ORESO credit.

Interest, penalties and tax credit repayment

Interest

For the 2005 and subsequent taxation years, compound daily interest on a tax refund will be paid starting on the day that is the later of:

  • 30 days after your income tax balance due day for the taxation year (usually April 30), and
  • the date of your income tax Notice of Assessment for the taxation year.

Penalty

Individuals who obtain a refund by knowingly making a false or misleading statement are liable to a penalty equal to the greater of $100 and 50 per cent of the refund amount.

Application of refunds to other Provinces of Ontario liabilities

If an individual owes any amounts to the Province of Ontario, all or part of the Ontario tax refund and interest may be applied to that liability instead of being paid to the individual.

Repayment

Individuals who receive a tax refund and interest that they are not entitled to, must repay the amount. Interest will be payable on any overpayment starting from the date the refund was issued.

Legislation

Definition

The rules discussed in this bulletin are contained in sections 8.7 and 8.8 of the Income Tax Act (Ontario).

 
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