You are using an outdated browser. Please upgrade your browser or activate Google Chrome Frame to improve your experience. In contrast to most other forms of compensation, stock options are generally more tax effective in Canada for employees than they are in the U. However, the more generous Canadian tax treatment may not be applicable to U. Stock options are also less tax effective for Canadian employers because the value received by the employee is not deductible by the organization for Canadian income tax purposes. Meanwhile, the Income Tax Act ITA effectively taxes option gains at the lower capital gains rate, as a result of the 50 percent stock option deduction. Since the Internal Revenue Service IRS will not allow a foreign tax credit for Canadian income taxes paid on U. Tax Treatment of Stock Options Canada Subsection 7 1 of the ITA taxes the value of shares issued by a company to an employee as employment income. Subsection 7 3 denies a tax deduction to the employer for the taxable amount incurred by the employee. Meanwhile, paragraph 1 d allows the employee to take a stock option deduction equal options 50 percent of the stock 7 1 benefit where: The objective of this deduction is to mirror the treatment of capital gains, without treating option benefits as actual capital gains. Thus, stock gains on exercising options cannot be offset by any capital losses that the individual may have. In addition, newly added subsection 7 10 allows an employee to elect to defer the taxes payable taxation stock options that qualify for the 50 percent stock option deduction until the earlier of the year in which the shares taxation sold by the stock, the employee dies or becomes a non-resident of Canada, provided: The above rules apply to all fair market value stock options issued by public companies. Unlike in the U. ISOs are less common than NQSOs, except in high-technology companies or other companies that do not currently pay income taxes. The reason for this is that the benefit received by the employee under a NQSO is tax deductible by the company, but the benefit received under an ISO is not. The difference between the fair market value of NQSO shares on the date of exercise and the amount paid by the employee to acquire the shares is taxable as ordinary income under the Code. There is no counterpart to the Canadian stock option deduction. As a result, the employee pays income tax on the stock option benefit at his or her options tax rate. Depending on the state and municipality in which the U. In addition, a 1. In contrast, the Canadian employee would pay from 18 percent to 23 percent, depending on the province, after claiming the stock-option deduction. However, ISOs are taxed differently under the Code, and the tax treatment is potentially more advantageous than either NQSOs in the U. The employee is not taxed on the gain when an ISO is exercised. If the employee does not dispose of the stock within two years after the ISO is granted, and holds the stock for over 12 months after exercise, gain will be taxed as long-term capital gains when the shares are ultimately sold. Otherwise, upon sale the gain is taxed as ordinary income. The maximum federal long-term capital gains rate is 20 percent, or 18 percent if the shares are held for more than five years. In addition, the terms of the ISOs have to be approved by the shareholders and they must be granted separately from NQSOs. Example Assume two executives, one in Canada and one in the U. Cross-Border Issues The taxation of stock options is not as straightforward when cross-border issues are factored in. Thus, stock option gains may be taxable in both countries. While foreign tax credits taxation allowed by the Options for foreign source income e. Thus, the potential for double taxation arises e. Consider the following scenarios: CCRA will tax these stock option gains. While the preferred tax treatment of stock options for Canadian employees presents planning opportunities for employers, the tax treatment of stock options for U. Watson Wyatt consultants can help organizations develop tax efficient multi-jurisdictional stock option plans that comply with legislation both north and south of the border. Special rules apply to shares issued to employees by Canadian controlled private corporations.