Publicly traded shares, mutual fund units and other shares (T4037)

The Canada Revenue Agency says...

Capital Gains Guide (T4037)
Use this section to report a capital gain or loss when you sell shares or securities that are not described in any other section of Schedule 3. These include:
  • units in a mutual fund trust;
  • publicly traded shares;
  • shares that qualify as Canadian securities or prescribed securities, if they are not qualified small business corporation shares or qualified family farm corporation shares; and
  • shares issued by foreign corporations.

Report dispositions of units or shares on lines 131 and 132 of Schedule 3.

You should also use this section if you donate any of the following properties:
  • shares listed on a designated stock exchange;
  • shares of the capital stock of a mutual fund corporation;
  • units in a mutual fund trust; or
  • interest in a related segregated fund trust.

If you donated any of these properties to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate the capital gain to report on Schedule 3. For more information, see Pamphlet P113, Gifts and Income Tax.

If you sold any of the shares or units listed above in 2010, you will receive a T5008 slip, Statement of Securities Transactions, or an account statement.

You may buy and sell the same type of property (for example, units of a mutual fund trust or publicly traded shares) over a period of time. If so, you have to calculate the average cost of each property in the group at the time of each purchase to determine the adjusted cost base (ACB). For more information, see Adjusted cost base.

If you report a capital gain from the disposition of shares or other securities for which you filed Form T664, Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, see Chapter 4 of the CRA guide T4037, Capital Gains.

Note:
If you own shares or units of a mutual fund, you may have to report the following capital gains (or losses):
  • capital gains (or losses) you realize when you sell your shares or units of the mutual fund (report these amounts in the "Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares" section of Schedule 3); and
  • capital gains realized by the fund from its investment portfolio which are then flowed out to you.

For more information on mutual funds, see Information Sheet RC4169, Tax Treatment of Mutual Funds for Individuals.

For information on the deferral of capital gains incurred on the disposition of small business investments, see Capital gains deferral for investment in small business.

Employee security options (stock options)

Employee security options (stock options)

When you get an option to buy securities through your employer, it does not immediately affect your tax situation. An option is an opportunity to buy securities at a certain price. The securities under the option agreement may be shares of a corporation or units of a mutual fund trust.

If you decide to exercise your option and buy the securities at less than the fair market value (FMV), you will have a taxable benefit received through employment. The taxable benefit is generally the difference between what you paid for the securities and the FMV at the time you exercised your option. You can reduce the amount of the benefit by any amount you paid to acquire the option rights.

Note: The taxable benefit included in your income in connection with an employee option agreement is not eligible for the capital gains deduction.
Generally, an eligible employee is one who, right after the option is granted:
  • deals at arm's length with the employer, the entity granting the option, and the entity whose eligible securities could be acquired under the option agreement; and
  • is not a specified shareholder of an entity above that is a corporation. A specified shareholder is generally one who owns 10% or more of any class of a corporation's shares.

Such an employee must also be a resident of Canada at the time the option is exercised to qualify for the deferral.

Generally, an eligible security is:
  • a common share of a class listed on a designated stock exchange in or outside Canada; or
  • a unit of a mutual fund trust.

Generally, the amount paid to acquire the eligible security, including any amount paid to acquire the rights under the option agreement, cannot be less than the FMV of the security at the time the option is granted. In addition, the eligible security must be a security in respect of which a security option deduction may be claimed on line 249 of your return.

If you buy shares through an employee security option granted to you by a Canadian-controlled private corporation (CCPC) with which you deal at arm's length, you do not include the taxable benefit in your income in the year you acquire the securities. You wait until the year you sell the securities.

For eligible securities under option agreements you exercised before 4:00 p.m. EST on March 4, 2010 that are not granted by a CCPC, an income deferral of the taxable benefit may be allowable so that you do not have to include the benefit in your income until the year you sell the securities. This deferral is subject to an annual $100,000 limit, which we explain in more detail later on this page. To qualify for this deferral, you must be an eligible employee and receive options to acquire eligible securities.

Under proposed changes, if you exercised an option for eligible securities after 4:00 p.m. EST on March 4, 2010, the election to defer the security option benefit will no longer be available.

If you qualify for a security option deduction on line 249 of your return, you can claim 1/2 of the amount recognized as an employment benefit from the sale of eligible securities in 2010.

Employee security option cash-out rights

Employee security option cash-out rights

Currently, when you acquire securities under a security option agreement and you meet certain conditions, you may be entitled to a deduction equal to one-half of the security option benefit (security option deduction). In this case, your employer cannot claim a deduction for the issuance of the share.

Employee security option agreements can be structured in such a way that, if you dispose of your security option rights to your employer for a cash payment or other in-kind benefit (cash-out payment), your employer can deduct the cash-out payment, while you are still eligible for the security option deduction.

Under proposed changes, for transactions occurring after 4:00 p.m. EST on March 4, 2010, the security option deduction will only be available in situations where either:
  • you exercise your options by acquiring shares of your employer; or
  • your employer has elected (as indicated by completing box 86, Security option election, of your T4 slip) for all security options issued or to be issued after 4:00 p.m. EST on March 4, 2010, under the agreement and files such election with the Minister of Revenue, that neither the employer nor any person not dealing at arm's length with the employer will claim a deduction for the cash-out payment in respect of your disposition of rights under the agreement.

Adjusted cost base (ACB) of eligible securities

Adjusted cost base (ACB) of eligible securities
Regardless of when the eligible security option was exercised, the ACB of the eligible security you purchased through an employee eligible security option agreement is not the actual price you paid for them. To calculate the ACB of your eligible securities, add the following two amounts:
  • the actual purchase price; and
  • any amount included in your income as a taxable employee option benefit for the securities (even if you claimed a security option deduction for them).

Disposition of eligible securities

Disposition of eligible securities

Report the capital gain (or loss) in the year you exchange or sell the eligible securities purchased through an employee eligible security option agreement. If the eligible securities are qualified small business corporation shares, report the transaction in the "Qualified small business corporation shares" section of Schedule 3. In all other cases, report the transaction in the "Publicly traded shares, mutual fund units, deferral of small business corporation shares, and other shares" section of Schedule 3.

Annual limit on deferred option benefits

Annual limit on deferred option benefits

Currently, where certain conditions are satisfied, if you are an employee of publicly-traded corporations and you acquire securities under security option agreements, you may elect to defer the inclusion into your income of the security option benefit until the year in which you dispose of the shares.

If you are an eligible employee who has exercised an option for eligible securities after December 31, 2009, and before 4:00 p.m. EST on March 4, 2010, you can defer the taxable benefit resulting from the acquisition of eligible securities with an FMV of up to $100,000. You can do this by filing an election in the form of a letter, before January 16, 2011, with your employer or the person who would be required to file an information return in respect of the acquisition. The letter must contain:
  • confirmation that you were a resident of Canada at the time of the acquisition;
  • confirmation that you have not exceeded the $100,000 annual limit; and
  • the amount of the benefit related to eligible securities purchased under the option agreement that you wish to defer.

You must also complete Form T1212, Statement of Deferred Security Options Benefits, and file it with your paper return each year.

The $100,000 limit applies to the value of the eligible security options that first become exercisable by you each year and across all eligible security option plans of your employer. The value of an eligible security option is the FMV of the eligible security at the time the option is granted.

The inclusion into income of the taxable benefit will be deferred until the year in which the first of these events occurs:
  • the employee disposes of the eligible security;
  • the employee (or former employee) dies, or;
  • the employee (or former employee) becomes a non-resident.
Note: The deferral of the taxable benefit applies to any eligible security option exercised after December 31, 2009, and before 4:00 p.m. EST on March 4, 2010, regardless of when the option was granted or became exercisable.

Example

Example

In 2004, an eligible employee of Widget Corporation, received an option to buy 5,000 eligible shares at $9 each (the actual FMV of each share at the time the option was granted).

Widget Corporation is not a Canadian-controlled private corporation. On February 1, 2010, Emily exercised her option to buy the shares. The FMV of the shares at that time was $15 each. In 2011, she sells her shares for $20 each.

Emily's tax implications are as follows:

In 2005, when she was granted the option, there were no tax implications.

In 2004, when she bought the shares, the taxable benefit on the entire 5,000 shares she purchased is calculated as follows:

FMV (5,000 × $15) $ 75,000
Minus: Amount paid (5,000 × $9) 45,000
Taxable benefit (shown in box 53 on T4 slip) $ 30,000

There are no tax implications because she elected to defer the taxable benefit arising from the purchase of shares by filing Form T1212, Statement of Deferred Security Options Benefits, with $30,000 entered on line 2.

In 2011, when she sells the shares:
Proceeds of disposition (5,000 × $20)     $100,000
Minus:      
  Amount paid (5,000 × $9) $ 45,000  
  Taxable benefit + 30,000  
Total   = $ 75,000 – 75,000
Capital gain     = $ 25,000
The $30,000 taxable benefit that was deferred in 2010 will be included in income in 2011 on line 101 of her return. It will also be reported on line 4 of Form T1212. She will be able to claim a security option deduction of $15,000 ($30,000 × 1/2) on line 249 of her 2011 return. The capital gain of $25,000 will be reported on Schedule 3.

Donations under employee option agreements

Donations under employee option agreements

If you donate shares or mutual fund units in 2010 under your employee option agreement to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate your capital gain.

For a donation made in 2010, you may qualify for an additional security option deduction equal to 1/2 of the taxable benefit.

For more information on these donations, see Pamphlet P113, Gifts and Income Tax.

Remittance Requirement

Remittance Requirement

Under proposed changes, if you exercise your security options after 2010, your employer will be required to withhold and remit an amount in respect of the taxable security option benefit (less any security option deduction) in the same way as if the amount of the benefit had been paid to you as an employee bonus.

The above withholding requirement will not apply to options granted to you before 2011, pursuant to an agreement in writing entered into before 4:00 p.m. EST on March 4, 2010, where the agreement included, at that time, a written condition that restricts you from disposing of the shares acquired under the agreement for a period of time after you exercise them.

Special Relief for Tax Deferral Elections

Special Relief for Tax Deferral Elections
If you are an eligible employee and you dispose of shares before 2015, and the disposition of the shares results in a security option benefit for which you made an election to defer the income inclusion (after February, 27, 2000, and before 4:00 p.m. EST on March 4, 2010), you will be allowed to elect, by completing and submitting Form RC310, Election for Special Relief for Tax Deferral Election on Employee Security Options, to have the following tax treatment apply for the year of the disposition of the shares:
  • The amount of the security option deduction will be equal to the security option benefit (thereby eliminating the security option benefit).
  • You will be required to include in your income a taxable capital gain equal to one-half of the lesser of:
    • the security option benefit; and
    • the capital loss realized on the disposition of the optioned shares.
  • You will be required to pay a special tax equal to the proceeds of disposition of the optioned shares (or two-thirds of the proceeds of disposition, if you reside in Québec).

Deadlines to file the election for special relief

Deadlines to file the election for special relief
The deadlines to file the election (Form RC310) are as follows:
  • For shares you disposed of before 2010, the deadline is the filing due-date for your 2010 General Income Tax and Benefit return. Send a completed copy of Form RC310 along with documentation supporting the disposition to your Taxation Centre separately from your return.
  • For shares you disposed of after 2009, the deadline is your filing due-date for the taxation year of the disposition. Attach a completed copy of Form RC310 to your paper return. If you are filing electronically, keep it in case we ask to see it.
Example
For a detailed example, see Guide T4037, Capital Gains. To get this publication, download it from the CRA at http://www.cra.gc.ca/forms.

Donations under employee option agreements

Donations under employee option agreements

If you donate shares or mutual fund units in 2010 under your employee option agreement to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate your capital gain.

For a donation made in 2010, you may qualify for an additional security option deduction equal to 1/2 of the taxable benefit.

For more information on these donations, see Pamphlet P113, Gifts and Income Tax.

Stock splits and consolidations

Stock splits and consolidations

Generally, a stock split takes place if a company's outstanding shares are divided into a larger number of shares, without changing the total market value of the company's holdings. The total market value of each investor's holdings, and their proportionate equity in the company, are also not affected.

For example, in the case of a 2-for-1 stock split, the number of shares is doubled and the price per share is decreased by 50%. If before the split, you owned 100 shares valued at $60 each, you would now own 200 shares each worth $30. If the stock split was 5-for-1, your previous 100 shares valued at $60 would become 500 shares, each worth $12. In each of these cases, the total market value is the same ($6,000). This also applies when a consolidation (reverse split) takes place, and the number of shares decreases and the price increases proportionally. For example, 600 shares worth $10 each that are consolidated 1-for-3 become 200 shares worth $30 each.

In each of the above cases, no stock dividend is considered to have been issued, no disposition or acquisition is considered to have occurred, and the event is not taxable. However, the adjusted cost base (ACB) of the shares must be recalculated to reflect each split or consolidation, and when there is a disposition of the shares, the new ACB will be used to calculate the capital gain or loss.

This ACB is calculated by dividing the total cost of the shares purchased (usually including any expenses involved in acquiring them) by the total number of shares owned. For example, if you owned 100 shares of XYZ Ltd. that cost $1,000 to purchase, the ACB of each share would be $10 ($1,000 ÷ 100). If the stocks subsequently split 2 for 1, you would now own 200 shares of XYZ Ltd. The ACB of each share must be recalculated and would now be $5 ($1,000 ÷ 200).

Related information
Schedule 3 - Capital gains (or losses)
Capital Gains