What's New - Stock Options Benefits

Following the decision rendered on February 24, 2005, by the Tax Court of Canada in Alcatel Canada Inc. vs. Her Majesty the Queen, the CRA accepts that where stock options are exercised by an employee, the benefit will be allowed as salary or wages, and the corporation will be entitled to an investment tax credit (ITC) in respect of the value of the resulting benefit. However, the following conditions would have to be met:

• the stock options have been issued to the employee in a fiscal year during which the employee, as an employee of the claimant, was involved in the SR&ED activities of the claimant;
• the claimant files, within the 18-month reporting deadline, prescribed forms containing prescribed information for the year during which the stock option benefits were earned;
• the stock options were received by reason of the employee's employment (if the employee is also a shareholder, it is a question of fact whether he or she received the shares as a shareholder or as an employee);
• all or portion of the employee's salary was an allowable SR&ED expenditure of the claimant in the year the options were issued; and
• the employee has exercised the option or disposed of it.

Stock option benefits that are claimed for SR&ED purposes will be included in the salary or wages of an SR&ED employee in the same proportion (%) the employee's salary was claimed as SR&ED by the employer in the year in which the options were issued. However, the value of stock option benefits will not be an allowable SR&ED expenditure for purpose of subsection 37(1). The benefits will only be considered a qualified SR&ED expenditure in calculating the SR&ED ITC.

Until the next revision of Form T661, the value of stock option benefits will be added to the qualified expenditures in line 500 in step 3 of Form T661.

If you need additional information contact your tax services office.