# Employee stock options: how they're taxed

> When an employee stock option benefit is taxed, the 50% stock option deduction, the vesting limit at large employers, and your cost when you later sell.

- Web page: https://taxnotes.ca/guides/employee-stock-options/
- For: Individuals & families · Topic: Work and pay
- Last reviewed: 2026-10-11

An employee stock option lets you buy shares of your employer (or a related company) at a set price. Getting the option generally has no tax effect. The tax comes when you use it: if you buy the shares for less than they're worth, the difference is a taxable employment benefit. If you meet the conditions, you can deduct half of it.

## How the benefit is worked out

When you exercise an option, the benefit is:

- the fair market value of the shares when you acquire them
- minus the price you pay for them (the exercise, or strike, price)
- minus anything you paid to get the option itself

Say you were granted an option to buy 1,000 shares at $10 each, which was their market value on the day you got it. You exercise it when the shares trade at $25. Your benefit is $25,000 minus $10,000, or $15,000.

The benefit is employment income, not a capital gain, and it isn't eligible for the capital gains deduction (the lifetime exemption).

## When it's taxed

- **A public company, or another employer that isn't a CCPC.** The benefit is income in the year you exercise the option and acquire the shares, even if you keep them.
- **A Canadian-controlled private corporation (CCPC) you deal with at arm's length.** A CCPC is, roughly, a private Canadian corporation not controlled by non-residents or public companies, with no shares listed on a stock exchange. You report the benefit only in the year you sell the shares, though it's still measured at their value when you acquired them.

Selling or cashing out the option itself, rather than exercising it, can also create a taxable benefit, generally what you receive for it minus what you paid for it.

## The stock option deduction

If you qualify, you can deduct one-half of the taxable benefit. There are two ways to qualify, and you can claim only one for the same benefit.

**The general deduction.** All of these must be true:

- right after the option agreement was made, you dealt at arm's length with the company
- the shares are prescribed shares under the tax regulations, or the securities are units of a mutual fund trust
- the price you pay for the shares is no less than their fair market value when the option was granted

**The CCPC deduction.** If your employer is a CCPC you dealt with at arm's length and you don't claim the general deduction, you can still deduct half if you don't sell or exchange the shares within two years of acquiring them (a disposition because of death doesn't count).

If you cash out your options instead of buying shares, you can claim the deduction only if your employer elects not to deduct the cash payment itself.

A 2024 proposal would have reduced the deduction to one-third. On March 21, 2025, the Government of Canada announced that it won't go ahead with that change, so the deduction remains one-half.

## The annual limit at large employers

For options granted on or after July 1, 2021, by an employer that isn't a CCPC (or is a mutual fund trust) and has revenues of more than $500,000,000, alone or as part of a consolidated group, there's a $200,000 annual vesting limit. Only up to $200,000 of shares vesting in any one year can qualify for the general deduction, valuing the shares at their fair market value when the option was granted. An option vests in the first year it can be exercised. Shares over the limit, and shares your employer designates as non-qualified, are non-qualified securities: they don't qualify for the deduction, so the whole benefit on them is taxed. Your employer has to tell you in writing, within 30 days of the option agreement, which of your shares are non-qualified.

## Withholding and your T4 slip

Your employer reports the benefit as employment income on your T4 slip, with:

- code 38 for the security options benefit
- code 39 for the general deduction, or code 41 for the CCPC deduction, each half of the qualifying benefit
- code 86 if your employer made the cash-out election

Some slips for 2024 and 2025 use codes 90, 91 and 92 instead. If yours shows a deduction under code 91 or 92, you can claim an additional deduction on your return so that half the benefit is deducted in total. From 2026, only codes 38, 39 and 41 are used.

A non-CCPC employer withholds income tax and CPP contributions on the benefit, much as it would on a bonus, and can take the general deduction into account if you qualify for it. A CCPC employer doesn't withhold income tax or CPP contributions on it. There are no EI premiums on it unless you cash out. Either way, you claim the deduction yourself on your return.

## When you sell the shares

Your cost for capital gains purposes, the adjusted cost base, is what you paid plus the taxable benefit, even if you claimed the deduction. In the example above, it's $10,000 plus $15,000, or $25 a share.

If you later sell the shares for more than that, the difference is a capital gain, and only part of it is taxed (50% for 2025). If you sell for less, you have a capital loss. A capital loss can reduce only capital gains, not the employment benefit you were already taxed on; see [capital losses](https://taxnotes.ca/guides/capital-losses/).

The cost of identical shares bought at different times is normally averaged. Option shares whose benefit is deferred (as with a CCPC), and option shares you designate and sell within 30 days of acquiring them, generally aren't treated as identical to your other shares, so they keep their own cost.

## Donating option shares

If you qualify for the general deduction and donate the shares (listed on a designated stock exchange) or mutual fund units to a qualified donee, such as a registered charity, in the year you acquire them and within 30 days, you can claim an additional deduction of 50% of the benefit. The same applies if you have your broker sell them right away and donate the proceeds (if you donate only part of the proceeds, the deduction is reduced in proportion). Together, the two deductions can mean none of the benefit is taxed. For this purpose, the benefit is based on the lower of the shares' value when you acquired them and when you donated them.

The gift can also count toward the donation tax credit, and a capital gain on listed shares given directly to a qualified donee can be taxed at an inclusion rate of zero (you report it on Form T1170). See [charitable donations](https://taxnotes.ca/guides/charitable-donations/).

## What to do

- Before you exercise, find out whether your employer is a CCPC, whether your option price was at least the market value when the option was granted, and whether the vesting limit applies to you.
- If your employer is a CCPC, plan for the tax in the year you sell: no income tax is withheld on the benefit.
- Check your T4 for codes 38, 39 and 41 (or 90 to 92), and claim the deduction on your return.
- Keep the exercise date, price paid, market value and benefit for each lot of shares, to work out your cost when you sell.
- Estimate the tax on the benefit with the [income tax calculator](https://taxnotes.ca/calculators/income-tax/), and see [how capital gains are taxed](https://taxnotes.ca/guides/dividends-and-capital-gains/).

## Sources

1. [Line 10100 – Employment income](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-10100-employment-income.html) (canada.ca)
2. [Line 24900 – Security options deductions](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-24900-security-options-deductions.html) (canada.ca)
3. [Line 24901 – Additional security options deduction](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-24901-additional-security-options-deduction.html) (canada.ca)
4. [Employee security (stock) options](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/security-options.html) (canada.ca)
5. [Capital Gains – 2025 (Guide T4037)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html) (canada.ca)
6. [Gifts and Income Tax 2025 (Guide P113)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p113/p113-gifts-income-tax.html) (canada.ca)

Tax figures in this guide come from the TaxNotes.ca rates tables (https://taxnotes.ca/rates/), which cite the Canada Revenue Agency and, for Quebec, Revenu Québec.

Last reviewed: October 11, 2026

How to cite: "Employee stock options: how they're taxed", TaxNotes.ca, last reviewed 2026-10-11, https://taxnotes.ca/guides/employee-stock-options/. For a figure or rule, also cite the official source listed above.

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