Agreement to issue securities to employees

Legislative history

Section 7 began in 1953 as a short rule taxing the bargain element of an employee share option as employment income when the shares were acquired, and grew into a code on who may grant options, over what securities, when the benefit is taxed, and how the section 110 deduction applies. The entries are drawn from the statute books and bills read on 11 October 2026 (scanned Acts from 1917 to 1991, the 1952 and 1970 revisions, the 1994 and 1999 bills on parl.ca, the annual statutes from 2001 on Justice Laws, and the seven point-in-time versions of the section from 31 August 2004). What could not be examined is noted at the end.

• The Income War Tax Act, 1917, S.C. 1917, c. 28, s. 3(1) (assented 20 September 1917). The 1917 Act had no option rule; its definition of income reached “the annual net profit or gain or gratuity … directly or indirectly received by a person from any office or employment”. Its later amendments and administration were not examined, and no conclusion is drawn about how option benefits were treated before 1953.
• The Income Tax Act, S.C. 1948, c. 52, s. 5 (assented 30 June 1948). The 1948 Act included in employment income “the value of board, lodging and other benefits … received or enjoyed by him in the year in respect of, in the course of or by virtue of the office or the employment” (paragraph 5(a)), the words that subsection 7(5) still echoes. The enactment contains no stock option provision.
• S.C. 1952-53, c. 40, s. 73 (An Act to amend The Income Tax Act; assented 14 May 1953). Section 73(1) added, under the new heading “Benefits to Employees”, section 85A, the first express stock option rule. Where a corporation “has agreed 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”, the excess of the value of the shares at acquisition over the amount paid was “deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares”; paragraphs (b) to (d) dealt with dispositions of the rights. Subsections 85A(2) and (3) allowed an election to pay tax at an averaged rate, reduced by 20 per cent of the benefit; subsection (4) dealt with trustees; and subsection (5) contained the exclusivity rule (“no benefit shall be deemed to have been received or enjoyed by the employee under or by virtue of the agreement … except as provided by this section”) and the employer-income rule. By section 73(2), section 85A applied “to the 1953 and subsequent taxation years in cases where the agreements were made after March 23, 1953”. Section 85A does not appear on an OCR search of R.S.C. 1952, vol. 3, which suggests that the revision predates it.
• Amendments of 1953-54 to 1966-67. The 1970 history note lists 1953-54, c. 57, s. 21; 1955, c. 54, s. 25; 1958, c. 32, s. 32; 1960-61, c. 49, s. 29; 1966-67, c. 47, s. 9; and 1966-67, c. 91, s. 17. These Acts were not examined. The Carter Commission recorded that “as a result of an amendment in 1966” the reduction from the averaged rate was limited to $200.
• R.S.C. 1970, c. I-5, s. 104. In the 1970 revision section 85A became section 104, under the heading “Benefits to employees”. It still carried the averaging election, capped at “the lesser of 20% of the amount of the benefit so deemed to have been received, and $200”, with the continuation rule for former employees (subsection 104(6)), the non-employment rule (subsection 104(7)) and the trustee rule (subsection 104(8)).
• S.C. 1970-71-72, c. 63, s. 1 “7” (Bill C-259; assented 23 December 1971; applicable to the 1972 and later taxation years). The tax reform statute repealed Parts I to IIIA and V to VII of the Act and enacted section 7, headed “Agreement to issue shares to employees”, in its present position in Subdivision A. Subsection 7(1) carried forward the 1953 inclusion for shares acquired “under the agreement”, measured as “the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him”. Subsection 7(3), headed “Special provision”, enacted the two rules that still form paragraphs 7(3)(a) and (b), and subsection 7(5) provided that the section “does not apply if the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of the employment”. Subsections 7(2), (4), and (6) carried forward the trustee, continuation, and employee-trust rules. The averaging election was dropped, as the Carter Commission had recommended.
• S.C. 1977-78, c. 1, s. 3 (An Act to amend the statute law relating to income tax; assented 15 December 1977). Subsection 7(1) was made “subject to subsection (1.1)” and three subsections were added for agreements made after 31 March 1977. As enacted, subsection 7(1.1) was an exemption rather than a deferral: where a Canadian-controlled private corporation agreed to sell or issue a share to an arm’s-length employee, “paragraph (1)(a) does not apply in respect of the employee’s acquisition of the share unless the employee disposes of the share, otherwise than as a consequence of his death, within two years from the date he acquired it”. Subsection 7(1.2) moved the inclusion to the year of disposition where the two-year condition failed, and subsection 7(1.3) introduced the ordering rule for identical shares.
• S.C. 1984, c. 45, ss. 2 and 35(3) (An Act to amend the Income Tax Act and related statutes; assented 20 December 1984). Section 35(3) added paragraph 110(1)(d), “Employee stock options”, allowing a deduction of “one-half of the amount of the benefit deemed by subsection 7(1) to have been received” where, after 15 February 1984, a corporation had agreed to sell or issue a share that was or would be a qualifying share by reference to subsection 192(6), the price was “not less than the fair market value of the share at the time the agreement was made”, and the employee dealt at arm’s length with the corporations concerned. Section 2 extended the trustee rule in subsection 7(2) to the new paragraph. This is the origin of the pairing, still in force, between the inclusion in section 7 and the deduction in section 110.
• S.C. 1986, c. 6, ss. 2 and 55 (An Act to amend the Income Tax Act and related statutes …; Bill C-84; assented 13 February 1986). Implementing the budget of 23 May 1985, section 2(1) replaced the closing words of subsection 7(1.1), so that, in applying paragraph 7(1)(a) to the employee’s acquisition of the share, the reference to “the taxation year in which he acquired the shares” is read as “the taxation year in which he disposed of or exchanged the shares”. The 1977 exemption thus became the present deferral. Section 2(2) repealed subsection 7(1.2), section 2(3) recast the opening words of subsection 7(1.5) to apply “For the purposes of subsection (1.1) and paragraph 110(1)(d.1)”, and section 2(4) replaced subsection 7(2) so that the trustee rule also applies for paragraph 110(1)(d.1); by section 2(5), these changes apply to shares acquired after 22 May 1985. Section 55(4) added paragraph 110(1)(d.1), a deduction of “1/2 of the amount of the benefit” deemed received under paragraph 7(1)(a) by virtue of subsection 7(1.1) for a share acquired after 22 May 1985 that the taxpayer has not disposed of or exchanged, otherwise than on death, within two years after acquiring it, where no paragraph 110(1)(d) deduction is claimed for the benefit (applicable, by section 55(13), to shares acquired after 22 May 1985).
• R.S.C. 1985, c. 1 (5th Supp.), s. 7. The revision is the base of the current Justice Laws history note. Its original text of section 7 was not examined; no scan of the fifth supplement was found on archive.org.
• S.C. 1991, c. 49, s. 4 (assented 17 December 1991), re-enacted in the form of the 1985 revision as S.C. 1994, c. 7, Sch. II, s. 4 (Bill C-15; assented 12 May 1994). Section 4(1) replaced paragraphs 7(1)(a) to (d), so that each benefit is reduced by any amount the employee paid to acquire the rights; section 4(2) added paragraph 7(1)(e), under which an employee who dies owning “a right to acquire shares under the agreement” is deemed to receive a benefit equal to the value of the right immediately after death less its cost, paragraphs (b), (c), and (d) not applying; section 4(3) restated, in gender-neutral English, the closing words of subsection 7(1.1); section 4(4) replaced subsections 7(1.4) (exchange of options) and (1.5) (exchange of shares acquired under subsection 7(1.1)), extending the option rule to exchanges on any reorganisation that leaves the in-the-money value no greater; and section 4(5) recast the opening words of subsection 7(6). By section 4(6) and (7), subsections (1), (3), (4), and (5) applied to the 1988 and later taxation years, with an election to disapply the new subsection 7(1.4) to dispositions before 14 July 1990, and paragraph 7(1)(e) to deaths after 13 July 1990.
• S.C. 1994, c. 21, s. 3 (Bill C-27; assented 15 June 1994). The opening words of subsection 7(1.5) were amended to read “For the purposes of this section and paragraph 110(1)(d.1)”, applicable to 1992 and later years.
• S.C. 1999, c. 22, s. 3 (Income Tax Amendments Act, 1998; Bill C-72; assented 17 June 1999). The Act recast the section around the concepts of “qualifying person” and “security”, replacing the opening words of subsection 7(1) and paragraphs (a) to (c) so that the rule applies where “a particular qualifying person has agreed to sell or issue securities”; added subsection 7(1.11), deeming a mutual fund trust not to deal at arm’s length with a corporation “only if the trust controls the corporation”; replaced subsections 7(1.4), (2), (3), and (6); and enacted subsection 7(7). The application provisions (section 3(8) to (10)) were staggered from 1995, with an election for trust-unit rights granted before March 1998.
• S.C. 2001, c. 17, ss. 2 and 84 (Income Tax Amendments Act, 2000; assented 14 June 2001). Section 2 made subsection 7(1) “subject to subsections (1.1) and (8)”, recast subsections 7(1.3) and (1.5), and enacted subsection 7(1.6) (emigrants; after 1992) and subsection 7(1.7) (rights ceasing to be exercisable; amounts received on or after 16 March 2001). Section 2(9) added subsections 7(8) to (16), an elective deferral for options over listed shares of a qualifying person other than a CCPC, limited to a “specified value” of $100,000 of securities for rights first exercisable in a year (paragraph 7(10)(c)) and to listed shares (paragraph 7(9)(d)), generally for the 2000 and later years. Section 84 set the paragraph 110(1)(d) deduction at “1/2” for 2000 and later years, with transitional readings of “1/4” for benefits arising before 28 February 2000 and “1/3” for benefits arising after 27 February and before 18 October 2000, tracking the capital gains inclusion rate.
• S.C. 2007, c. 35, s. 68(2)(a) (Budget and Economic Statement Implementation Act, 2007; assented 14 December 2007). “Prescribed stock exchange” became “designated stock exchange” in subparagraphs 7(9)(d)(i) and (ii).
• S.C. 2009, c. 2, s. 3 (Budget Implementation Act, 2009; assented 12 March 2009). Subparagraph 7(1.4)(b)(vi) was added, allowing a tax-neutral exchange before 2013 of options over equity of a SIFT wind-up entity for options of a SIFT wind-up corporation, applicable after 19 December 2007.
• S.C. 2010, c. 25, ss. 3, 20, 39, and 46 (Sustaining Canada’s Economic Recovery Act; Bill C-47; assented 15 December 2010). Implementing the 4 March 2010 budget, section 3 returned subsection 7(1) to “Subject to subsection (1.1)”; added paragraphs 7(1)(b.1) and (d.1), which tax as employment benefits dispositions of option rights to the issuer or a non-arm’s-length qualifying person; recast subsection 7(1.7) to apply “For the purposes of subsections (1) and 110(1)”; replaced subsection 7(1.3) and paragraph 7(1.5)(a); replaced the opening words of subsection 7(7) so that the definitions also apply in “subsections 110(1.1), (1.2), (1.5), (1.6) and (2.1)” (section 3(7)); and repealed subsections 7(8) to (15), including an interim subsection 7(9.1) enacted and repealed by section 3(9) and (10). The repeal and the new opening words of subsection 7(7) apply to rights exercised after 4:00 p.m. Eastern Standard Time on 4 March 2010, and the non-arm’s-length disposition rules to dispositions after that time. Section 20 added subsection 110(1.1), the employer’s election to forgo its deduction on a cash-out, for acquisitions and dispositions after the same time; section 39(2) enacted the withholding rule in subsection 153(1.01), applicable after 2010 except to benefits from rights granted before 2011 under an agreement in writing made before 4:00 p.m. Eastern Standard Time on 4 March 2010 that then included a written condition prohibiting the taxpayer from disposing of the securities for a period after exercise (section 39(5)), and section 39(3) enacted subsection 153(1.31), under which a benefit is not a basis for reduced withholding under subsection 153(1.1) “solely because it is received as a non-cash benefit”; and section 46 enacted Part I.01 (section 180.01), the special election for taxpayers who had used the former deferral and disposed of the securities before 2015. Subsection 7(16), and the reference to “subparagraph (9)(d)(ii)” in paragraph 7(1.4)(d), were left in place as residues of the repealed deferral.
• S.C. 2013, c. 34, s. 171 (Technical Tax Amendments Act, 2012; assented 26 June 2013). Section 171(1) replaced the opening words of subsection 7(7), changing the reference to subsections 110(1.5) and (1.6) to “subsections 110(1.1), (1.2), (1.5) to (1.8) and (2.1)”. By section 171(2), the change is deemed in force on 1 January 1999 but does not apply to rights under an agreement to which subsection 7(7) as enacted in 1999 did not apply (except for paragraph 7(3)(b)); before 2000 the opening words read only “this section and in paragraph 110(1)(d) and subsections 110(1.5) to (1.8)”; and for rights exercised after 2000 and up to 4:00 p.m. Eastern Standard Time on 4 March 2010 they omit subsections 110(1.1) and (1.2), which the 2010 Act had added.
• S.C. 2021, c. 23, ss. 3 and 15 (Budget Implementation Act, 2021, No. 1; assented 29 June 2021; in force 1 July 2021). Section 3 made the only change to section 7, extending the subsection 7(7) definitions to “subsection 110(0.1), paragraphs 110(1)(d), (d.01) and (e) and subsections 110(1.1) to (1.9) and (2.1)”. The substance of the reform is in section 15, which amended section 110 by adding the definitions in subsection 110(0.1), excluding non-qualified securities from paragraph 110(1)(d), and adding the employer deduction in paragraph 110(1)(e), the $200,000 vesting limit in subsection 110(1.31), the designation in subsection 110(1.4) and the notices in subsection 110(1.9). By section 15(7), the definitions and the new opening words of paragraph 110(1)(d) are in force on 1 July 2021. By section 15(8), paragraph 110(1)(e), the new opening words of subsection 110(1.1), subsections 110(1.2) to (1.44), and subsection 110(1.9) “apply in respect of agreements to sell or issue securities entered into after June 2021”, but not to rights under an agreement to which subsection 7(1.4) applies that are new options for which the exchanged option was issued before July 2021.
• S.C. 2024, c. 17, s. 3 (Budget Implementation Act, 2024, No. 1; assented 20 June 2024). Paragraph 7(1.11)(b) was added, so that a mutual fund trust also does not deal at arm’s length with a corporation where “the corporation holds securities that give the corporation not less than 50% of the votes that could be cast at a meeting of the unitholders of the trust”, applicable to rights exercised or disposed of after 2004 under agreements made after 2002; and subsection 7(1.31) was extended to a security acquired “as consideration for the disposition of rights under the agreement”, deemed in force on 1 January 2023. The section did not implement the Budget 2024 proposal on the capital gains inclusion rate.
• S.C. 2026, c. 3, s. 33. The amendment is to section 110, not section 7: it extended to the first three taxation years of the graduated rate estate the window in clause 110(1)(d)(i)(B) within which a security must be acquired for a paragraph 7(1)(e) death benefit to qualify for the deduction.
• Current consolidation. The Justice Laws history note for section 7 reads “R.S., 1985, c. 1 (5th Supp.), s. 7; 1994, c. 7, Sch. II, s. 4, c. 21, s. 3; 1999, c. 22, s. 3; 2001, c. 17, s. 2; 2007, c. 35, s. 68; 2009, c. 2, s. 3; 2010, c. 25, s. 3; 2013, c. 34, s. 171; 2021, c. 23, s. 3; 2024, c. 17, s. 3”. Application provisions are not included in the consolidated text. The Justice Laws HTML shows the Act current to 21 September 2026, last amended 18 June 2026.

Not examined: the amendments between 1953 and 1970 other than through the 1970 history note and the Carter Report; and section 7 as originally enacted in R.S.C. 1985, c. 1 (5th Supp.). Where an option agreement predates one of these changes, the application rule in the amending Act, not the consolidation, decides which text governs. The next tab explains how the section as it now reads applies, subsection by subsection.

Interpretation and application →

Interpretation and application

In plain terms, section 7 decides when an employee given the right to buy shares or trust units of the employer, or of a related entity, is taxed on the bargain, and how much. Nothing is taxed at grant. The spread between value and price is employment income when the securities are acquired, or, for a Canadian-controlled private corporation, when they are sold, and a deduction in section 110 can halve the taxable amount. This tab takes each subsection in turn and ends with the section 110 deductions and the cost-base rule.

Subsection 7(1): the agreement and the parties

Subsection 7(1) is engaged only where “a particular qualifying person has agreed to sell or issue securities” of itself or of a qualifying person with which it does not deal at arm’s length to an employee of either. There must be an agreement; the grantor must be a corporation or a mutual fund trust; the securities must be those of the grantor or of a qualifying person in its non-arm’s-length group; and the counterparty must be an employee of the grantor or of such a qualifying person. Because “employee” includes an officer and an office includes a directorship, the section reaches directors; it does not reach independent contractors, whose options the CRA treats as business income (2004-0087041C6).

The agreement must be a legally binding promise. In TransAlta Corporation v. The Queen, 2012 TCC 86, a share bonus plan under which the employer kept complete discretion was not an agreement to issue shares, the words suggesting “a meeting of the minds” and “the bestowing of legal rights on the employees” (paras. 71 to 80), so paragraph 7(3)(b) did not deny the employer’s deduction (paras. 45, 68, and 81). The agreement need not be in writing, and its date may precede the formal grant: an oral commitment by a president with ostensible authority fixed the date for the fair-market-value test in paragraph 110(1)(d) (McAnulty v. The Queen, T.C.C., 17 October 2001, paras. 22 to 24, 30, 33, and 36 to 37). A plan under which a trustee allocated a particular number of new shares to particular employees was a section 7 agreement as well as an employee benefit plan, and the more specific rule governed (M.N.R. v. Chrysler Canada Ltd., as characterised in Black v. The King, 2024 TCC 96, paras. 136 to 148); where no shares are earmarked for a particular employee, or a trust holds shares for employees without any agreement to sell or issue shares to them, section 7 does not apply (Black, paras. 161 to 164 and 170 to 171; Davis v. The Queen, 2008 TCC 31, paras. 16, 54, 56 to 57, and 62).

The issuer requirement draws the boundary in Canada (Attorney General) v. Henley, 2007 FCA 370. A dealer allocated to its employee warrants of a client that it had received as part of its fee. Section 7, “which is inapplicable in the circumstances under consideration, provides special rules with respect to stock options or rights to acquire shares of an employer corporation” (para. 13); the warrants were a paragraph 6(1)(a) benefit taxable at their value on allocation, and the later gain on exercise was not employment income (paras. 18 to 25). The Court read Robertson v. Canada, [1990] 2 F.C. 717 (C.A.), as holding that a conditional right gives only an expectation until the condition is met (paras. 19 to 21). Robertson itself rested on a broader ground: an option, in Lord Denning’s words that Marceau J.A. adopted, “conferred only the expectation of profit”, and the only quantifiable benefit within paragraph 6(1)(a) arose when it was exercised; Marceau J.A. expressed reservations about the trial judge’s reliance on the conditions, and section 7 did not apply because the employer was an individual (see also Mathieu v. The Queen, 2014 TCC 207, para. 74). Under Henley, outside section 7 an unconditional right received from the employer is taxed at its value on receipt and later growth is not employment income (para. 18); inside section 7, the grant is never taxed but the whole spread at acquisition is.

Subsection 7(1): paragraph (a), acquisition of the securities

Paragraph 7(1)(a) applies where the employee “has acquired securities under the agreement”. It deems a benefit equal to the amount by which “the value of the securities at the time the employee acquired them” exceeds the total of the amount paid or to be paid for the securities and “the amount, if any, paid by the employee to acquire the right to acquire the securities”, received in the year of acquisition “because of the employee’s employment”. Nothing is taxed at grant (Ferlaino v. Canada, 2017 FCA 105, para. 4, citing Steen): in Steen v. Canada, [1987] 1 F.C. 139 (T.D.), options priced at market value when granted were taxed on the spread at exercise, the shares being acquired when they were paid for and issued and valued at that day’s stock-exchange price. The time of acquisition is a question of fact: on a cashless exercise and sale the shares were valued on that date, not when the certificates issued (Benham v. The Queen, T.C.C., 18 June 2002, paras. 7 to 9). The amount paid for the right is an amount paid to the grantor for the option; fees paid to a consultant who steered the employee to the job did not qualify (Canada v. Morin, 2006 FCA 25, paras. 8 to 12). For options denominated in a foreign currency, price and value are both converted at the exercise-date rate (Ferlaino, paras. 5 to 6).

Value at acquisition is used whether or not the employee later sells, so a fall in price after exercise produces a capital loss, not a smaller benefit. The benefit is taxed in the year of exercise even where the shares have since become worth less than the tax (Trickovic v. The Queen, 2003 TCC 261, paras. 16 to 18 and 21), and remission was reasonably refused for that hardship (Fink v. Canada (Attorney General), 2019 FCA 276, paras. 5 to 10). Shares acquired on exercise have usually been found to be held on capital account (Robertson v. Canada, F.C.A., 26 March 1998, paras. 31 to 32; Corvalan v. The Queen, 2006 TCC 200, paras. 22, 35, and 37; Baird v. Canada, 2010 FCA 35, paras. 28 to 31).

The words “because of the employee’s employment” make the benefit income from an office or employment. Subsection 153(1.01) treats a benefit under paragraphs 7(1)(a) to (d.1) as “remuneration paid as a bonus” for withholding, except the part deductible under paragraph 110(1)(d), a benefit on shares to which subsection 7(1.1) applies, and the part determined under paragraph 110(2.1)(b).

Subsection 7(1): paragraphs (b) and (b.1), disposition of the rights

Paragraph 7(1)(b) applies where the employee “has transferred or otherwise disposed of rights under the agreement” to an arm’s-length person, and deems a benefit equal to the value of the consideration less the amount paid for the rights, received in the year of disposition. A former employee who sold his option rights was taxed on the amounts received, not on a larger amount computed as if he had exercised (MacMillan v. The Queen, 2008 TCC 56, paras. 39 to 43). The paragraph reaches a cash-out only where the surrender is a disposition. A surrender by mutual agreement is one (Greiner v. The Queen, [1984] C.T.C. 92 (F.C.A.), as characterised in Bernier v. Canada, F.C.A., 14 May 1999, para. 4); compensation for the employer’s unilateral cancellation is not (Reynolds v. The Queen, 77 D.T.C. 5044 (S.C.C.), as characterised in Bernier, para. 3; Bernier, paras. 2 to 6). In Buccini v. Canada, F.C.A., 20 November 2000, options extinguished by an amalgamation imposed by the employer had been repudiated, so the release payment was not a disposition and, as damages, was taxable neither under paragraph 6(1)(a) nor subsection 6(3). Subsection 7(1.7) now closes most of that gap. A gift of options is a disposition, valued at fair market value (Des Groseillers v. Quebec (Agence du revenu), 2022 SCC 42, paras. 2 to 4, on the Quebec counterpart).

Paragraph 7(1)(b.1), added in 2010, applies the same measure to a disposition to the grantor’s group by an employee not dealing at arm’s length with it, typically a controlling shareholder’s surrender to the corporation. Before 2010 such a cash-out escaped section 7, and paragraph 7(3)(a) barred recourse to paragraph 6(1)(a): an employee still “connected by marriage” to the controlling shareholder was not taxable on it, and the 2010 enactment changed the law rather than clarifying it (Mathieu, paras. 36 to 47, 69, and 73 to 85). In Rogers Estate v. The Queen, 2014 TCC 348, options surrendered in 2007 for cash under a share appreciation right added to the plan produced no employment benefit, the section being a complete code (paras. 38 and 43 to 48), the right not being separate property (paras. 63 to 64), and the gain being a capital gain under section 39 (paras. 76 to 77). The employer’s side of a cash-out is discussed under subsection 7(3).

Subsection 7(1): paragraphs (c) to (e), transferees and death

Paragraphs 7(1)(c), (d), and (d.1) stop an employee from shifting the benefit to a family member or holding company. Where the rights have, “by one or more transactions between persons not dealing at arm’s length”, become vested in another person, the benefit on that person’s acquisition of the securities, or disposition of the rights to an arm’s-length person or to the grantor’s group, is deemed received by the employee. If the employee was then deceased, the transferee is taxed instead, on “income from the duties of an employment” performed in the country where the employee primarily worked, a source rule that matters for a non-resident transferee.

Paragraph 7(1)(e) applies where the employee “has died and immediately before death owned a right to acquire securities under the agreement”. It deems a benefit in the year of death equal to the value of the right immediately after death less its cost, and paragraphs (b), (c), and (d) do not apply, so the estate’s later exercise or sale produces no second employment inclusion. Options that the plan cancels automatically on death have a nil value and give a nil benefit, and options not vested before death are not “owned” for the paragraph, which then does not apply (2014-0523011C6). The benefit may qualify for paragraph 110(1)(d) where the security is acquired within the first three taxation years of the graduated rate estate (clause 110(1)(d)(i)(B), as extended by S.C. 2026, c. 3, s. 33), and subsection 164(6.1) lets a later loss on the options be carried back.

Subsection 7(1.1): Canadian-controlled private corporations

Subsection 7(1.1) applies where, after 31 March 1977, a Canadian-controlled private corporation has agreed to sell or issue a share of its capital stock, or of a non-arm’s-length CCPC, to an employee of the corporation or of a non-arm’s-length CCPC, and “at the time immediately after the agreement was made” the employee was dealing at arm’s length with the grantor, the issuer and the employer. Paragraph 7(1)(a) is then read as referring to “the taxation year in which the employee disposed of or exchanged the securities”. The benefit is still the spread at acquisition; only its timing moves (Ethier v. The Queen, T.C.C., 29 August 2001, paras. 7 to 10 and 13).

The grantor, issuer, and employer must each be a CCPC; the subject must be shares, not trust units; the employee must be at arm’s length with each corporation, which excludes controlling shareholders and persons related to them; and CCPC status is tested when the agreement is made, so an option granted while the company is private keeps its deferral after a listing or a sale to a public or non-resident buyer (IT-113R4, para. 14). Status turns on control: a majority of non-resident shareholders with no common connection did not control the corporation, which remained a CCPC after its NASDAQ listing (Silicon Graphics Ltd. v. Canada, 2002 FCA 260, paras. 18 to 19, 67, and 72 to 73), so its employees had the deferral, though not the paragraph 110(1)(d.1) deduction where they sold within two years (McClintock v. The Queen, 2003 TCC 259, paras. 5 to 7 and 59 to 60). Options over shares of a corporation that was not a CCPC were taxed on exercise (Trickovic, paras. 6 to 7, 10, and 12).

Paragraph 153(1.01)(b) removes the deferred benefit from withholding (2017-0709811I7); paragraph 53(1)(j) adds it to the share’s cost from acquisition; and subsection 47(3) keeps the share out of the identical-property pool. The employee may claim one of two deductions: paragraph 110(1)(d), if the exercise price was at least fair market value at grant and its other conditions are met, or paragraph 110(1)(d.1), one half of the benefit on a share acquired after 22 May 1985 that is not disposed of or exchanged within two years (death excepted), with no pricing condition.

Subsection 7(1.11): mutual fund trusts and arm’s length

For section 7, a mutual fund trust is deemed not to deal at arm’s length with a corporation only if the trust controls the corporation or, since S.C. 2024, c. 17, s. 3, the corporation holds securities giving it not less than 50 per cent of the unitholder votes. The rule settles group membership without the factual inquiry under paragraph 251(1)(c). Control has its de jure meaning (Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, para. 85).

Subsections 7(1.3) and (1.31): order of disposition and quick sales

Subsection 7(1.3) replaces the averaging of identical properties with a first-in, first-out order for the purposes of subsections 7(1.3) and (1.1), Subdivision C, paragraph 110(1)(d.01), subparagraph 110(1)(d.1)(ii), and subsections 110(2.1) and 147(10.4). Under paragraph (a), a security acquired otherwise than under subsection 7(1.1) or 147(10.1), while identical deferred securities are held, is deemed acquired before all of them, so it is deemed sold first and the CCPC deferral is preserved; under paragraph (b), deferred securities acquired together are deemed acquired in the order of their agreements, which matters for the two-year hold.

Subsection 7(1.31) lets the taxpayer override that order for a quick sale. Where a security is acquired under a subsection 7(1) agreement, or since 2023 as consideration for the disposition of rights under it, and an identical security is disposed of within 30 days, the acquired security is deemed to be the one sold if no other identical securities are acquired or disposed of in between and the taxpayer so identifies it in the return. With subsection 47(3), an employee who exercises and sells at once realises little or no capital gain or loss, while the cost of older shares in the holding is undisturbed.

Subsections 7(1.4) and (1.5): exchanges on reorganisations

Replacing options over an old issuer with options over a successor would otherwise be a disposition under paragraph 7(1)(b). Subsection 7(1.4) prevents that where the taxpayer disposes of rights under a subsection 7(1) agreement (the “exchanged option” over the “old securities”) for no consideration other than rights to acquire securities of a “designated person” or its non-arm’s-length group (the “new option” over the “new securities”); the designated person is the grantor, a qualifying person not at arm’s length with it immediately after the disposition, a corporation formed on its amalgamation or merger, a mutual fund trust to which it transferred property under subsection 132.2(1), a qualifying person not at arm’s length with that corporation, or, before 2013, a SIFT wind-up corporation; and the in-the-money amount of the new option does not exceed that of the old (paragraph (c)). The taxpayer is then deemed not to have disposed of the old option or acquired the new one, which is a continuation of the old, and a designated person other than the grantor is a continuation of it. Paragraph (d) still refers to repealed “subparagraph (9)(d)(ii)”. Any increase in the in-the-money amount takes the exchange outside the rule, and it is then a disposition in which the amount paid for the rights is the amount paid for the old options (2015-0570801E5). Subparagraph 110(1)(d)(iii) carries the continuity into the deduction.

Subsection 7(1.5) is the parallel rule for shares already acquired under a deferred CCPC option. Where they are disposed of or exchanged for no consideration other than new securities of the issuer or a listed successor, of no greater total value, there is no disposition; the new securities, their issuer, and their agreement continue the old, except in determining whether they are identical to other securities. The deferred benefit, the CCPC status fixed at the original agreement, the two-year hold, and the paragraph 53(1)(j) amount all carry over.

Subsection 7(1.6): emigrants

For section 7 and paragraph 110(1)(d.1), a taxpayer is deemed not to have disposed of a share acquired under subsection 7(1.1) “solely because of subsection 128.1(4)”. The departure-tax capital gain on the share remains, computed on a cost that includes the paragraph 53(1)(j) amount, but the deferred employment benefit is not accelerated and the two-year hold is not interrupted; the benefit arises on the actual sale, and a non-resident then includes it to the extent it is income from duties performed in Canada. Unexercised options need no such rule: “a right of the individual under an agreement referred to in subsection 7(1)” is an “excluded right or interest” under paragraph (c) of that definition in subsection 128.1(10) (2013-0487961E5).

Subsection 7(1.7): rights ceasing to be exercisable

For the purposes of subsections 7(1) and 110(1), where the taxpayer receives an amount “in respect of rights of the taxpayer to acquire securities under an agreement referred to in subsection (1) ceasing to be exercisable in accordance with the terms of the agreement”, and the cessation would not otherwise be a transfer or disposition, the taxpayer is deemed to have disposed of the rights at that time to an arm’s-length person for the amount, so that paragraph 7(1)(b) applies; where several amounts are received over time, the amount deemed paid for the rights is reduced by earlier receipts. The provision answers the line from Reynolds to Buccini, in which a payment on the termination of options was neither consideration for a disposition nor, because of paragraph 7(3)(a), taxable under section 6. It reaches only a cessation “in accordance with the terms of the agreement”, so damages for a repudiation outside those terms may still fall within Buccini. Because it operates for subsection 110(1), the paragraph 110(1)(d) deduction is available if that paragraph’s conditions, read with subsection 110(1.1), are met.

Subsection 7(2): securities held by a trustee

Where a security is held by a trustee “in trust or otherwise, whether absolutely, conditionally or contingently, for an employee”, the employee is deemed, for section 7 and paragraphs 110(1)(d) to (d.1), to have acquired it when the trust began to hold it and to have disposed of it when the trust disposed of it to anyone other than the employee, even if the employee’s entitlement is still conditional. The trustee must hold particular securities for a particular employee: a trust that replaced an option plan without allocating a particular number of shares to a particular employee was outside the subsection, and its distributions were taxed under paragraph 6(1)(g) (Black, paras. 110 to 111 and 135 to 171). An employee share trust within the employee benefit plan definition could not escape it by also being a prescribed trust under section 4800.1 of the Regulations (McNeeley v. Canada, 2021 FCA 218, paras. 28 to 30). Paragraph 7(6)(b) disapplies subsection 7(2) for securities held under a subsection 7(6) arrangement.

Subsection 7(3): no other benefit, and no deduction for the issuer

Paragraph 7(3)(a) provides that “except as provided by this section, the employee is deemed to have neither received nor enjoyed any benefit under or because of the agreement”. The courts call the section a complete code (Rogers Estate, para. 38; Mathieu, para. 85; Ferlaino, paras. 3 to 6). That is why the grant of a section 7 option is never taxed, why a benefit the section does not reach escapes section 6 (Mathieu; Rogers Estate), and why section 7 prevails over the broader employee benefit plan rules (Chrysler, 92 D.T.C. 6346 (F.C.T.D.), as characterised in Rogers Estate, paras. 36 to 38). The exclusion reaches only the employment-benefit provisions: a gain on disposing of the rights may be a capital gain (Rogers Estate, para. 76), and the general fair-market-value rules still apply (Des Groseillers, para. 2).

Paragraph 7(3)(b) provides that “the income for a taxation year of any person is deemed to be not less than its income for the year would have been if a benefit had not been conferred on the employee by the sale or issue of the securities”. No one may deduct the spread or the notional cost of issuing shares below value. The paragraph is confined to a benefit conferred “by the sale or issue of the securities”: it does not apply without a binding agreement to issue (TransAlta, paras. 45, 68, and 81), and a cash payment to cancel options involves no sale or issue, so its deductibility turns on the general rules, which have usually put it on capital account. A pre-takeover payment to cancel options, eliminating “extraneous shares or share possibilities”, was a capital outlay (Kaiser Petroleum Ltd. v. M.N.R., 90 D.T.C. 6603 (F.C.A.), as characterised in Imperial Tobacco Canada Ltd. v. Canada, 2011 FCA 308, paras. 26 to 27); about $118 million paid to surrender options in a going-private transaction was on capital account under paragraph 18(1)(b), because the payments facilitated a capital reorganisation and ended the obligation to issue shares (Imperial Tobacco, paras. 16 to 17 and 29 to 33); and surrender payments on two takeovers were capital but qualified as eligible capital expenditures (Devon Canada Corporation v. The King, 2018 TCC 170, paras. 91, 95, and 136). A subsidiary’s reimbursement to its parent for its own employees’ cash surrenders, with no change to its capital, was deductible compensation (Shoppers Drug Mart Limited v. The Queen, 2007 TCC 636, para. 22). To give employees the paragraph 110(1)(d) deduction on a cash-out, the employer must elect under subsection 110(1.1) to forgo any deduction.

The only statutory deduction for the benefit itself is paragraph 110(1)(e), which allows a qualifying person, in computing taxable income, to deduct the benefit on a non-qualified security it agreed to sell or issue to its employee, if the paragraph 110(1)(d) deduction would otherwise have been available and the subsection 110(1.9) notices were given. It operates on taxable income and so sits beside paragraph 7(3)(b), which the CRA regards as unchanged (2023-0964391C6).

Subsection 7(4): application after employment ends

Subsection 7(4) declares, for greater certainty, that where a person “has ceased to be an employee before all things have happened that would make that provision applicable”, subsection 7(1) continues to apply as though the employment still existed. It governs the former employee who exercises or sells after leaving (MacMillan, paras. 39 to 43), and matters most for emigrants. Options granted while the employee was resident and employed in Canada arose because of that employment, so the benefit on exercise after departure is income from duties performed in Canada under subparagraph 115(1)(a)(i), subsections 7(1) and (4) applying as though the employment were still in existence, and the duties need not be performed in Canada in the year of exercise (Hurd v. The Queen, [1982] 1 F.C. 554 (F.C.A.), reasons of Urie J., Kerr D.J. concurring, Ryan J. dissenting; Mullen v. The Queen, 2012 TCC 139, paras. 16 and 19). Hale v. The Queen, [1992] 2 C.T.C. 379 (F.C.A.), confirmed Hurd (as characterised in Mullen, paras. 20 to 21). A non-resident who was still an employee was taxed through subsection 2(3), paragraph 7(1)(a), and subparagraph 115(1)(a)(i) without it (Mullen, paras. 12 to 22), and the Crown may plead that charge in the alternative (Walsh v. Canada, 2007 FCA 222, paras. 18 to 20).

Subsection 7(5): benefit not received by virtue of employment

Section 7 “does not apply if the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of, the employment”. The words echo paragraph 6(1)(a), and the inquiry is one of fact: an employee-shareholder who takes up shares offered to all shareholders pro rata, or invests on the same terms as arm’s-length investors, receives any benefit in that other capacity. The section 110 deductions are then unavailable, and neither branch of subsection 7(3) applies. The CRA has suggested that subsection 7(5) may apply where employees who held shares were able to exercise nearly all their options while the options of employees who held none mostly lapsed unexercised (2006-0217401I7).

Subsection 7(6): sale to a trustee for employees

Where a qualifying person arranges for its securities, or those of its group, to be sold or issued to a trustee to be held for sale to employees, the employee’s rights are deemed to be rights under an agreement with the qualifying person, securities acquired under the arrangement are deemed acquired under it, and amounts paid to the trustee are deemed paid to the qualifying person, for section 7 (other than subsection 7(2)) and paragraphs 110(1)(d) to (d.1). The plan is taxed as if the issuer sold directly, the benefit being measured when the employee acquires from the trustee.

Subsection 7(7): definitions

Subsection 7(7) defines “qualifying person” and “security”, for section 7 and for subsection 47(3), paragraph 53(1)(j), subsection 110(0.1), paragraphs 110(1)(d), (d.01), and (e), and subsections 110(1.1) to (1.9) and (2.1); see Definitions. It defines nothing else. “Specified person” and “vesting year” are defined in subsection 110(0.1), and “non-qualified security” is not a defined term; that status arises by deeming under subsections 110(1.31) and (1.4).

Subsections 7(8) to (15) (repealed) and subsection 7(16)

Subsections 7(8) to (15) let an employee of a listed, non-CCPC issuer elect to defer the paragraph 7(1)(a) benefit until the securities were sold, within an annual limit of $100,000; an election not filed with the employer by the deadline was ineffective (Calinisan v. The Queen, 2005 TCC 118, paras. 10 to 11). The deferral covered exercises after 27 February 2000 and up to 4:00 p.m. Eastern Standard Time on 4 March 2010, when it was repealed by S.C. 2010, c. 25, s. 3. Subsection 7(16) survives, requiring a taxpayer who holds a security acquired under former subsection 7(8) to file Form T1212 with the return. Section 180.01 let a taxpayer who had used the deferral and sold before 2015 elect a special tax equal to the proceeds (two thirds of them for a Quebec resident), with a full deduction under paragraph 110(1)(d) and a deemed capital gain to absorb the loss; that window has closed.

The section 110 deductions and paragraph 53(1)(j)

The section 110 deductions put qualifying section 7 benefits on the footing of a capital gain at a one-half inclusion rate. They apply in computing taxable income, so the full benefit remains employment income.

Paragraph 110(1)(d) allows one half of the subsection 7(1) benefit for a security, other than a non-qualified security, that a qualifying person agreed after 15 February 1984 to sell or issue, if the security was acquired under the agreement (or, on death, within the estate window), a condition that subsection 110(1.1) reads out for an elected cash-out; it is a prescribed share under section 6204 of the Regulations, or a mutual fund trust unit; the price is not less than its fair market value when the agreement was made, less any amount paid for the right; and the employee dealt at arm’s length, immediately after the agreement, with the grantor, the employer, and the issuer. The agreement for the price test is the one actually exercised, so an option repriced below grant-date value failed (Fettes v. The Queen, 2015 TCC 198, paras. 17 to 24), unless the repricing qualifies as an exchange under subsections 110(1.7) and (1.8). Factual non-arm’s-length dealing defeated the deduction although de jure control was not proved (Homburg v. The King, 2025 TCC 162, paras. 69 to 77 and 100 to 102). Paragraph 6204(1)(b) of the Regulations does not impose a two-year holding period; risk is secured by the plain share and the fair-market-value price (Montminy v. Canada, 2017 FCA 156, paras. 47 to 62). Subsection 110(1.5) ignores later exchange-rate movements and share reorganisations in applying the price test.

For agreements made after June 2021, where the grantor, issuer, or employer is a “specified person”, a qualifying person other than a CCPC whose consolidated group revenue, or own gross revenue, in its last financial statements exceeded $500 million (subsection 110(0.1)), subsection 110(1.31) deems securities non-qualified in the proportion that the excess over $200,000 of the grant-date value of those vesting in a “vesting year” bears to that value. The employer may designate further securities under subsection 110(1.4), losing the subsection 110(1.1) election for them; must notify the employee within 30 days and the Minister by its filing-due date (subsection 110(1.9)); and then has the paragraph 110(1)(e) deduction. Subsection 110(1.44) applies the cash-out rule to securities that are not non-qualified. CCPCs are outside the regime whatever their size.

The fraction in paragraph 110(1)(d) is one half; the 2024 proposal to reduce it to one third was cancelled on 21 March 2025. Paragraph 110(1)(d.01) adds a further half deduction where listed option shares are given to a qualified donee in the year and within 30 days of exercise, and subsection 110(2.1) extends it to a broker-directed gift of the proceeds. Paragraph 53(1)(j) adds the full section 7 benefit, without reduction for any deduction, to the adjusted cost base, so that the spread is taxed once as employment income and later growth once as a capital gain.

The tabs that follow set out the purposes behind the section, the decisions cited here grouped by issue, and the CRA material through which it is administered.

← Legislative historyPolicy purpose and commentary →

Policy purpose and commentary

This tab sets out the purposes given for section 7 and its companion deduction, from the Carter Commission to the 2024 budget, and the little commentary that has been read.

The structural object of the section has been constant since 1953: subsection 7(1) fixes the measure and the year of the benefit, paragraph 7(3)(a) excludes every other theory of benefit, and paragraph 7(3)(b) denies the issuer a deduction for issuing shares at a discount. The Report of the Royal Commission on Taxation (Carter, 1966), vol. 3, criticised the averaging relief then available under section 85A and recommended that “[a] stock option benefit should be taxable in full when the stock is acquired by the employee”, measured as the difference between the option price and the market price on exercise; it also observed that “[t]he cost of an option is not imposed on a company but is borne by shareholders in a dilution in the value of their shares”, the reasoning behind paragraph 7(3)(b). The 1971 text adopted full inclusion; the 1984 deduction reintroduced a preference by another route.

The deduction in paragraph 110(1)(d) has been tied to section 7 since 1984. Finance described it in Budget 2010 as resulting “in the taxation of stock option benefits at capital gains tax rates”, which is why the fraction moved with the capital gains inclusion rate in 2000. The private-company rule in subsection 7(1.1), with the separate deduction in paragraph 110(1)(d.1), rests on the illiquidity of private-company shares; Budget 2000 described the existing position as one in which “the taxable employment benefit is generally not included in income until the year of disposition of the share”. Budget 2000 (Budget Plan, Annex 7) then proposed a deferral for listed shares, “subject to an annual $100,000 limit”, “to make our tax treatment of employee stock options more competitive with the United States”.

Budget 2010 (Annex 5) reversed course. It reported that in 2007 about 78,500 individuals claimed $4,130 million of deductions; it stated that cash-out structures allowed “both the stock option deduction and a deduction by the employer” for the same benefit, contrary to the principle that “where preferential tax treatment is provided to the employee on stock-based benefits, the employer is generally not allowed a tax deduction”, which produced paragraph 7(1)(b.1) and subsection 110(1.1); and it repealed the deferral because employees whose securities had fallen “may not have sufficient proceeds from the disposition of the securities to satisfy his or her tax obligation”, granting the relief now in section 180.01. Budget 2019 (chapter 4) described the deduction as “highly regressive”, 64 per cent of its 2017 cost going to 2,330 individuals with income over $1 million, and announced “a $200,000 annual cap on employee stock option grants” for “large, long-established, mature firms”; the backgrounder of 17 June 2019 added that “[e]mployers that are CCPCs will not be subject to the new rules” and that employers would be “entitled to an income tax deduction” for options above the limit. The 2021 legislation follows that design. Budget 2024 proposed a “basic one-third deduction of the taxable benefit”, increased to one half on up to a combined annual $250,000 of option benefits and capital gains (Finance backgrounder, 10 June 2024), as part of the increase in the capital gains inclusion rate; on 21 March 2025 the Prime Minister announced that the government “will cancel the proposed hike”, and paragraph 110(1)(d) still reads one half.

Finance’s Report on Federal Tax Expenditures 2026 (Part 2) estimates the cost of the employee stock option deduction at $1,645 million for 2021 and $855 million for 2023 and projects $1,335 million for 2027 (figures rounded to the nearest $5 million).

The commentary read in full is Ryan Compton, Daniel Sandler, and Lindsay M. Tedds, “Backdating, Tax Evasion, and the Unintended Consequences of Canadian Tax Reform”, MPRA Paper No. 39788 (2010), published in Tax Notes International, 30 August 2010, 671, which argues that the 1984 and 2000 changes “were largely ineffective and perhaps unneeded” and that they “reward the backdating of employee stock options and promote tax evasion”. Two Canadian Tax Journal articles it cites were not read: Daniel Sandler, “The Tax Treatment of Employee Stock Options: Generous to a Fault” (2001) 49:2 Canadian Tax Journal 259 to 319, and Alan Mawani, “Tax Deductibility of Employee Stock Options” (2003) 51:3 Canadian Tax Journal 1230 to 1258. The treatise chapters (Krishna; Li and Magee, 11th ed.; Duff et al., 7th ed.) were not read, and nothing rests on them.

The decisions that have shaped these rules follow, grouped by the issue they decide.

← Interpretation and applicationRelevant case law →

Relevant case law

The decisions below, grouped by issue, were opened on the courts’ own sites unless the entry says otherwise; older decisions not in the courts’ databases are cited only as characterised in a later decision and are not relied on beyond that.

Scope of section 7: the agreement, the parties, and the complete code

• Canada (Attorney General) v. Henley, 2007 FCA 370. Warrants of an unrelated issuer allocated by a dealer to its employee were not section 7 rights (para. 13), so their value was a paragraph 6(1)(a) benefit on allocation, not on exercise (paras. 18 to 25).
• Robertson v. Canada, [1990] 2 F.C. 717 (C.A.). A ranch manager’s employer, an individual, gave him an option over public-company shares the employer owned, exercisable over five years while the employment continued. Section 7 had no application because the employer was not a corporation, and under paragraph 6(1)(a) the benefit was taxable in the year of exercise, not of grant: the option gave a real but unquantifiable benefit, and only the second, quantifiable benefit, the spread on exercise, falls within the paragraph (reasons of Marceau J.A., adopting the dissents of Lord Keith and Lord Denning in Abbott v. Philbin; Heald and Stone JJ.A. concurring). The report on the court’s site has no paragraph numbers. Henley, paras. 19 to 21, reads the decision as one about a conditional right; Mathieu, 2014 TCC 207, para. 74.
• M.N.R. v. Chrysler Canada Ltd., 91 D.T.C. 5526, [1991] 2 C.T.C. 156 (F.C.T.D.). A trustee’s allocation of a particular number of new shares to particular employees was both an employee benefit plan and a section 7 agreement; the agreement need not be in writing. Not opened; cited as characterised in Black, 2024 TCC 96, paras. 136 to 148, and McAnulty, para. 24.
• M.N.R. v. Chrysler Canada Ltd., 92 D.T.C. 6346, [1992] 2 C.T.C. 95 (F.C.T.D.). The more specific section 7 agreement governed over the employee benefit plan definition. Not opened; cited as characterised in McNeeley v. Canada, 2020 TCC 90, para. 14, and Rogers Estate, 2014 TCC 348, paras. 36 to 38.
• McAnulty v. The Queen, T.C.C., docket 2000-420(IT)G, 17 October 2001. An oral commitment by a president with ostensible authority was the “agreement” for paragraph 110(1)(d), fixing the date of the fair-market-value test (paras. 22 to 24, 30, 33, and 36 to 37).
• TransAlta Corporation v. The Queen, 2012 TCC 86. “Agree” and “agreement” require a legally binding agreement, so a wholly discretionary share bonus plan was not caught (paras. 71 to 80, treating McAnulty as obiter at para. 78); the unilateral-contract argument failed (paras. 82 to 86), and paragraph 7(3)(b) did not deny the employer’s deduction (paras. 45, 68, and 81).
• Canada v. Morin, 2006 FCA 25. Fees paid to an employment consultant were not an amount paid to acquire the right under subparagraph 7(1)(a)(iii) (paras. 8 to 11); “acquire” requires title or its incidents (para. 12).
• Mathieu v. The Queen, 2014 TCC 207. Before paragraph 7(1)(b.1), a non-arm’s-length employee’s cash-out to the employer was not taxed by section 7, and paragraph 7(3)(a) barred recourse to paragraph 6(1)(a) (paras. 69, 73 to 79, and 85); the 2010 enactment changed the law (paras. 80 to 85).
• Rogers Estate v. The Queen, 2014 TCC 348. Section 7 is a complete code excluding sections 5 and 6 (paras. 38 and 43 to 48); a share appreciation right was not separate property (paras. 63 to 64), and the gain on surrender was a capital gain (paras. 76 to 78).
• Des Groseillers v. Quebec (Agence du revenu), 2022 SCC 42, [2022] 2 S.C.R. 347. A gift of options was taxed under the Quebec counterparts of paragraphs 7(1)(b) and 7(3)(a) at fair market value under the general deemed-disposition rule (paras. 2 to 4, adopting 2021 QCCA 906).
• Ferlaino v. Canada, 2017 FCA 105, affirming 2016 TCC 105. Section 7 is a complete code; a benefit on options denominated in U.S. dollars converts both price and value at the exercise-date rate (paras. 3 and 5 to 6); nothing is taxable at grant, Henley being distinguished (para. 4).

Timing, valuation, and the character of later gains and losses

• Steen v. Canada, [1987] 1 F.C. 139 (T.D.), affirmed [1988] 1 C.T.C. 256 (F.C.A.). Shares are acquired under paragraph 7(1)(a) when the employee obtains “legal ownership or the incidence of legal ownership”, here on exercise, when they were paid for and issued; “value” means fair market value, here the Toronto Stock Exchange price on that day, although the option price had been set at market value on grant (reasons of Rouleau J.; the report has no paragraph numbers). Ferlaino, 2017 FCA 105, para. 4, cites the case for the rule that nothing is taxed at grant. The appeal decision was not opened.
• Benham v. The Queen, T.C.C., docket 2001-1821(IT)I, 18 June 2002. On a cashless exercise, the shares were valued at the exercise and sale date, not the later date of the certificates (paras. 7 to 9 and 11).
• MacMillan v. The Queen, 2008 TCC 56. A former employee’s sale of option rights to an arm’s-length purchaser was taxed under paragraph 7(1)(b) on the amounts received, with a paragraph 110(1)(d) deduction (paras. 39 to 43).
• Trickovic v. The Queen, 2003 TCC 261. Non-CCPC options exercised in 2000 were taxed in that year; neither deferral applied, and the later fall in value did not matter (paras. 6 to 7, 10, 12, and 16 to 18).
• Robertson v. Canada, F.C.A., docket A-243-96, 26 March 1998. It was open to the Tax Court to find that shares acquired on exercise of an employee option and later sold were an investment, not an adventure in the nature of trade (paras. 31 to 32).
• Corvalan v. The Queen, 2006 TCC 200. A loss on shares acquired on exercising options “by virtue of his employment” was a capital loss (paras. 22, 35, and 37).
• Baird v. Canada, 2010 FCA 35. Losses on shares acquired by exercising employee options were on capital account (paras. 28 to 31).
• Fink v. Canada (Attorney General), 2019 FCA 276; see also 2017 FCA 87. Remission was reasonably refused to an option holder taxed under section 7 who then had a capital loss on the shares (2019 FCA 276, paras. 5 to 10).

Canadian-controlled private corporations and the former deferral

• Ethier v. The Queen, T.C.C., 29 August 2001. The benefit under subsection 7(1.1) is the paragraph 7(1)(a) amount; the subsection changes only its timing (paras. 7 to 10), and the amount taxed is added to cost (para. 13).
• Silicon Graphics Ltd. v. Canada, 2002 FCA 260. Majority non-resident shareholding without a common connection was not control, so the corporation remained a CCPC (paras. 18 to 19, 67, and 72 to 73).
• McClintock v. The Queen, 2003 TCC 259. Following Silicon Graphics, the subsection 7(1.1) deferral was available after a NASDAQ listing (paras. 5 to 7 and 60), but paragraph 110(1)(d.1) was denied for a sale within two years (para. 59).
• Davis v. The Queen, 2008 TCC 31. With no agreement to sell or issue shares to the employees, section 7 and paragraph 110(1)(d.1) did not apply, and gains through a valid trust were capital gains (paras. 16, 54, 56 to 57, and 62).
• Calinisan v. The Queen, 2005 TCC 118. Without an election filed with the employer by the deadline, the former subsection 7(8) to (10) deferral was unavailable (paras. 10 to 11).

Cash-outs, cancellations, exchanges, and trusts

• Reynolds v. The Queen, 75 D.T.C. 5042 (F.C.T.D.), affirmed 75 D.T.C. 5393 (F.C.A.) and 77 D.T.C. 5044 (S.C.C.). Compensation for an employer’s unilateral cancellation of options is not consideration for a disposition of rights under the agreement. Not opened; cited as characterised in Bernier, para. 3.
• Greiner v. The Queen, [1984] C.T.C. 92 (F.C.A.). Options surrendered by mutual agreement for set consideration were disposed of under paragraph 7(1)(b). Not opened; cited as characterised in Bernier, para. 4.
• Bernier v. Canada, F.C.A., docket A-260-96, 14 May 1999, affirming 97 D.T.C. 317. A settlement after the employer unilaterally terminated its plan was outside paragraph 7(1)(b) (paras. 2 to 3 and 6); subsection 7(1.4) deals with consensual exchanges and did not displace Reynolds (para. 5).
• Buccini v. Canada, F.C.A., docket A-611-98, 20 November 2000, reversing 99 D.T.C. 242. Options extinguished by an amalgamation imposed by the employer were repudiated; the release payment was not a disposition and, as damages, was not taxable under paragraph 6(1)(a) or subsection 6(3) (reasons unnumbered).
• Black v. The King, 2024 TCC 96. A trust that replaced an option plan without allocating particular shares to particular employees was not a subsection 7(2) trust, so distributions were taxed under paragraph 6(1)(g) (paras. 110 to 111, 135 to 152, and 161 to 171).
• McNeeley v. Canada, 2021 FCA 218, affirming 2020 TCC 90. An employee share trust within the employee benefit plan definition could not escape it by also being a prescribed trust under section 4800.1 of the Regulations (paras. 28 to 30 and 52); the Chrysler conflict was distinguished (para. 28).

Subsection 7(3) and the employer’s deduction

• Kaiser Petroleum Ltd. v. M.N.R. (1990), 116 N.R. 209, 90 D.T.C. 6603 (F.C.A.). A pre-takeover payment to cancel employee options was on capital account. Not opened; cited as characterised in Imperial Tobacco, 2011 FCA 308, paras. 26 to 27 and 31 to 32, and Devon, 2018 TCC 170, para. 95.
• Shoppers Drug Mart Limited v. The Queen, 2007 TCC 636. A subsidiary’s reimbursement to its parent for its employees’ cash surrenders was deductible as employee compensation (para. 22).
• Imperial Tobacco Canada Ltd. v. Canada, 2011 FCA 308, affirming 2010 TCC 648. About $118 million paid to surrender options in a going-private transaction was on capital account under paragraph 18(1)(b) (paras. 16 to 17 and 29 to 33); the Court declined to depart from Kaiser (para. 32); leave to appeal was refused (Devon, 2015 FCA 214, para. 6).
• Devon Canada Corporation v. Canada, 2015 FCA 214. Objections held in abeyance pending Imperial Tobacco allowed alternative deductions to be argued on appeal (paras. 4 to 8, 24 to 25, and 34).
• Devon Canada Corporation v. The King, 2018 TCC 170. Option-surrender payments on two takeovers were on capital account (para. 91) but were eligible capital expenditures (paras. 95 and 136).

The deductions in paragraphs 110(1)(d) and (d.1)

• Montminy v. Canada, 2017 FCA 156, reversing 2016 TCC 110. Paragraph 6204(1)(b) of the Regulations does not impose a two-year holding period; in paragraph 110(1)(d) risk is ensured by the plain share and the fair-market-value price (paras. 47 to 61), and the deduction was allowed (para. 62).
• Fettes v. The Queen, 2015 TCC 198. An option repriced below its grant-date value failed subparagraph 110(1)(d)(ii), the agreement being the repriced one exercised (paras. 17 to 24).
• Homburg v. The King, 2025 TCC 162. The deduction was denied because the taxpayer did not deal at arm’s length with the grantor immediately after the grants, as a question of fact under paragraph 251(1)(c), although de jure control was not proved (paras. 69 to 77 and 100 to 102).

Penalties

• Panini v. Canada, 2006 FCA 224, affirming 2005 TCC 151 and companion appeals. Employees who did not report option benefits were liable to subsection 163(2) penalties on a wilful-blindness basis, despite the complexity of section 7 and the absence of T4 slips (paras. 41, 46, 60, and 67).
• Riordan v. The Queen, 2005 TCC 150. A companion decision affirmed in Panini: the failure to inquire was not excused and the penalties stood (paras. 17 and 19 to 20).

Non-residents and sourcing

• Hurd v. The Queen, [1982] 1 F.C. 554, 81 D.T.C. 5140 (F.C.A.), affirming [1980] 2 F.C. 252 (T.D.). An employee granted an option in 1967 while employed and resident in Canada, who moved to the United States in 1971 to work for an affiliate and exercised in 1973, was taxable in Canada on the whole spread under subsection 2(3) and subparagraph 115(1)(a)(i), read with subsections 7(1) and (4), because the option was granted only because of his Canadian employment; performance of duties in Canada in the year of receipt was not essential. He could not apportion the benefit under paragraphs 115(2)(c) and (e), and the Canada-United States convention then in force did not exempt it as a gain on capital assets (reasons of Urie J., Kerr D.J. concurring; Ryan J., dissenting, would have held that the benefit was not income from duties performed in Canada). The report has no paragraph numbers; see also Mullen, paras. 16 and 19.
• Hale v. The Queen, 90 D.T.C. 6481 (F.C.T.D.), affirmed [1992] 2 C.T.C. 379, 92 D.T.C. 6473 (F.C.A.). Confirmed Hurd, including through subsection 7(4) where the employment has ended. Not opened; cited as characterised in Mullen, paras. 20 to 21.
• Mullen v. The Queen, 2012 TCC 139. The benefit on options granted in 1988 while resident and employed in Canada and exercised as a non-resident in 1997 was taxable under subsection 2(3), paragraph 7(1)(a), and subparagraph 115(1)(a)(i); subsection 7(4) was not needed because he was still an employee (paras. 12 to 22).
• Walsh v. Canada, 2007 FCA 222; see also Walsh v. The Queen, 2009 TCC 301. The Crown could plead under subsection 152(9), in the alternative, that paragraph 115(1)(a) taxed Bre-X option benefits of non-residents (2007 FCA 222, paras. 3, 7, and 18 to 20), the question being whether the benefits were from duties performed in Canada (2009 TCC 301, paras. 13, 15, and 22).
• Zhu v. Canada, 2016 FCA 113. A non-resident’s losses on option shares were not deductible, selling listed shares through a U.S. broker not being carrying on business in Canada under section 253 (paras. 9 and 12 to 14).

No decision was found on the employer election in subsection 110(1.1), the $200,000 vesting limit in subsection 110(1.31), treaty apportionment of option benefits, or options granted to consultants. The CRA’s published positions on those points follow.

← Policy purpose and commentaryCRA documents →

CRA documents

The CRA has no folio on security options; its positions are in an archived bulletin, employer guides, web pages, and severed technical interpretations. The canada.ca pages were read on 11 October 2026, and the severed letters on taxinterpretations.com, because the CRA does not publish them.

• Income Tax Folios index. No chapter of Series 2 covers section 7.
• Archived IT-113R4, Benefits to Employees - Stock Options (7 August 1996). The CRA “will not be updating it”, and it predates the 2010 changes, the vesting limit, and paragraph 110(1)(d.01), but the CRA still cites it on the line 24900 and T4130 pages. It treats directors as employees (para. 12), CCPC status as tested when the agreement is made (para. 14), and paragraph 7(3)(b) as barring a deduction for the benefit (para. 8).
• Guide T4130, Employers’ Guide - Taxable Benefits and Allowances (T4130(E) Rev. 25, modified 17 August 2026), chapter 3, “Security options”. The benefit goes in box 14 and under code 38; the cash-out election under code 86, without which the employee has no deduction; no EI on option benefits and no withholding on an arm’s-length CCPC benefit; the deduction conditions (codes 39 and 41); and the $200,000 vesting limit with worked examples, the designation and the 30-day notice. Chapter 1 excludes options from undue-hardship spreading of withholding. The withholding passage says “paragraph 10(1)(d.01)” where paragraph 110(1)(d) is meant.
• Employee security (stock) options (payroll page, published 5 February 2004, modified 26 March 2026). The employer process, withholding by scenario, T4 coding, and the vesting limit. It records that the one-third deduction proposed in 2024 was cancelled on 21 March 2025; for 2025 slips employers may use codes 38, 39, and 41 if filed on or after 12 January 2026, or codes 90, 91, and 92, and from 2026 only codes 38, 39, and 41.
• Guide RC4120, Employers’ Guide - Filing the T4 Slip and Summary (modified 6 January 2026). Defines codes 38 (benefits), 39 (paragraph 110(1)(d) deduction), 41 (paragraph 110(1)(d.1) deduction), 86 (election), and 90 to 92 (the alternatives used only from 25 June 2024 to 2025); slips are due to employees by the last day of February, with a penalty of $25 a day, minimum $100 and maximum $2,500, for failing to give one.
• Line 10100, Employment income (modified 20 January 2026); Line 24900, Security options deductions; and Line 24901, Additional security options deduction (modified 3 March 2025). An arm’s-length CCPC employee reports the benefit in the year of sale; the deduction is the total of boxes 39, 41, 91, and 92, plus 50 per cent of line 2 of Form T1212 when deferred securities are sold; line 24901 restores the full half where the slip used codes 91 or 92.
• Cash-outs: 2017 CTF Roundtable Q. 9, 2017-0724191C6 (21 November 2017), and 2016-0674411E5 (1 November 2017): a subsection 110(1.1) election is valid even where the employer has no deduction to give up, including where paragraph 7(3)(b) already denies one or the settlement is a net issuance of shares; 2015-0572381E5 (3 August 2016): where a CCPC issues treasury shares equal to the option’s in-the-money value instead of the employee paying the exercise price, the employee disposes of the option, paragraph 7(1)(b), not (a), applies, and neither paragraph 110(1)(d) nor (d.1) is available.
• Exchanges: 2015-0570801E5 (7 May 2015): where subsection 7(1.4) fails, the exchange is a disposition under paragraph 7(1)(b), and the amount paid for the rights is the amount paid for the old options.
• Consultants: APFF Roundtable Q. 36, 2004-0087041C6 F (8 October 2004): section 7 does not apply to an independent contractor, whose option is business income at grant and, if consideration for services, on exercise.
• Vesting limit: 2022 IFA Roundtable Q. 11, 2022-0926411C6 (17 May 2022): whether RSUs count toward the $200,000 limit was referred to Finance; meanwhile they may be designated under subsection 110(1.4), but before later options are granted; the CRA did not answer on subsection 162(7) penalties.
• Emigrants: 2013-0487961E5 (26 February 2014): option rights are an excluded right or interest and are not deemed disposed of on emigration.
• Death: 2022 STEP Roundtable Q. 17, 2022-0929511C6 (15 June 2022): paragraph 110(1)(d) is available for a paragraph 7(1)(e) benefit after the 2017 amendments, replacing 2009-0327221I7 and 2011-0423441E5; 2013-0484181E5 (4 May 2015): the earlier administrative practice; 2014 STEP Roundtable Q. 16, 2014-0523011C6 (16 June 2014): options automatically cancelled on death give a nil benefit, paragraph 7(1)(e) does not apply to options not vested before death, and subsection 164(6.1) may apply where the estate may exercise for a limited period; APFF 2020 Q. 6, 2020-0851631C6 F (7 October 2020): paragraph 110(1)(d.01) is not available for a paragraph 7(1)(e) benefit.
• Date of agreement: 2006-0217401I7 F (29 May 2007): where options could not be exercised until the employer’s compensation committee issued an exercise notice, the agreement was made on the notice date, which sets the fair market value for the price test, and subsection 7(5) may apply where shareholder-employees could exercise nearly all their options while other participants’ options lapsed.
• Prescribed shares: 2005-0157381E5 (7 March 2007): a loan covenant can make a share fail paragraph 6204(1)(a), all written and implied agreements about the share being considered; 2023-0974491I7 F (25 August 2025): shares convertible into a class whose liquidation entitlement is capped by formula fail subparagraph 6204(1)(a)(iii), even though that class is convertible back, and a formula that fixes a minimum liquidation amount fails subparagraph 6204(1)(a)(ii).
• Withholding: 2017-0709811I7 (3 January 2018): subsection 153(1.01) does not apply to a benefit governed by subsection 7(1.1); 2012-0440741I7 (6 July 2012): a U.S. resident’s benefit for Canadian duties was exempt under Article XV of the Canada-United States convention on the facts, but the non-resident employer still had to withhold absent a waiver under section 102 of the Regulations.
• Employer deduction and RSUs: 2023-0964391C6 (2023 IFA): paragraph 7(3)(b) is unchanged and paragraph 110(1)(e) is too limited to alter recharge practice; 2020-0864831I7: doubted the three-year bonus exception for an early-year RSU grant tied to prior service and, relying on TransAlta, 2012 TCC 86, treated a plan the issuer may settle in cash or shares at its discretion as outside paragraph 7(3)(b).
• Revenu Québec, line 297, point 2: the Quebec deduction of 25 per cent, or 50 per cent where conditions are met, claimed with code 02.

No stand-alone CRA page on non-qualified securities or on withholding on security options was found; that material sits in the payroll page and Guide T4130. The regulations, forms, and elections those documents refer to are listed next.

← Relevant case lawRegulations, forms, and elections →

Regulations, forms, and elections

The section is administered through a few regulations, forms and elections.

• Income Tax Regulations, section 6204. The prescribed share for subparagraph 110(1)(d)(i.1): uncapped dividend and liquidation rights, no conversion except into another prescribed share, no holder retraction, no obligation to reduce paid-up capital, and no redemption above fair market value (paragraph (1)(a)), and no reasonable expectation of redemption or a change of terms within two years (paragraphs (1)(b) and (c)). Subsection 6204(2) disregards a put or call held by an arm’s-length holder for loss protection (capped at adjusted cost base) or to provide a market (capped at fair market value); subsections (3) and (4) define “specified person” for the section. Section 6205 prescribes shares for subsections 110.6(8) and (9) only and has no bearing on paragraph 110(1)(d.1), which has no prescribed-share condition.
• Income Tax Regulations, subsections 200(1) and 205(1). The T4 return for payments described in subsection 153(1), due on the last day of February; option benefits enter through subsection 153(1.01), the definition “remuneration” in subsection 100(1) having no paragraph on them. Paragraph 6801(d) prescribes the phantom-share arrangement used for cash-settled plans.
• Forms: T1212, Statement of Deferred Security Options Benefits, still published (2025 edition) for the subsection 7(16) filing; T2SCH59, Information Return for Non-Qualified Securities (edition 21e), the employer’s notice to the Minister under subsection 110(1.9); the T4 slip with codes 38, 39, 41, and 86; T1 lines 10100, 24900, and 24901; and Schedule 3 for the later capital gain or loss.
• Elections and designations: the employer’s election under subsection 110(1.1) to forgo its deduction on a cash-out, in prescribed form, with written evidence to the employee, who files it with the return (shown in practice by code 86); the employer’s designation of non-qualified securities under subsection 110(1.4), which bars a subsection 110(1.1) election, and the notices under subsection 110(1.9) to the employee within 30 days and to the Minister by the filing-due date; and the employee’s identification under paragraph 7(1.31)(b) in the return. The former deferral election under subsection 7(10) was repealed by S.C. 2010, c. 25, s. 3, and the section 180.01 election required a disposition before 2015. Subsection 7(1.1) is automatic, not elective.

How these produce filing and withholding obligations is set out next.

← CRA documentsCompliance →

Compliance

In short, the employer withholds and reports as if the benefit were a bonus, unless it is a CCPC, and the employee claims the deduction on the return.

The employee reports the benefit (box 14, code 38) on line 10100 for the year of acquisition, disposition, cessation, or death, or for a CCPC share the year of sale, and claims the deduction (code 39 or 41, or code 86 on a cash-out) on line 24900, together with any paragraph 110(1)(d.01) deduction, which the employer does not report. A holder of securities deferred under former subsection 7(8) files Form T1212 each year. Unreported option benefits attract gross-negligence penalties even without a T4 (Panini v. Canada, 2006 FCA 224).

For withholding, subsection 153(1.01) treats the benefit as a bonus paid when the securities are acquired, net of the part deductible under paragraph 110(1)(d) or determined under paragraph 110(2.1)(b). CPP is deducted; EI is not, the benefit being non-cash; a cash-out is cash and attracts tax, CPP, and EI. Nothing is withheld on a subsection 7(1.1) benefit (paragraph 153(1.01)(b); 2017-0709811I7). The statute gives no relief for illiquid shares: under subsection 153(1.31) a benefit is not a basis for reduced withholding under subsection 153(1.1) “solely because it is received as a non-cash benefit”, and Guide T4130 excludes options from undue-hardship spreading, so the employer must collect the tax from the employee, arrange a sell-to-cover, or fund and recover it. Failure to withhold attracts a penalty of 10 per cent, rising to 20 per cent for a repeated failure made knowingly or with gross negligence (subsection 227(8)). T4 slips are due by the last day of February (Regulations, subsection 205(1)).

An employer subject to the vesting limit must give the employee written notice of non-qualified securities within 30 days of the agreement and file Schedule 59 with its T2 by the filing-due date for the year of the agreement; without the notices there is no paragraph 110(1)(e) deduction. Failure to file an information return or comply with a duty falls under subsection 162(7), on which the CRA has not said how it applies here. The individual’s normal reassessment period is three years from the original notice of assessment, and four years for a corporate employer that is not a CCPC (subsection 152(3.1)).

Employers should keep, for each grant, the agreement and its date, the grant-date value and how it was set, the vesting schedule, any designation and notices, the exercise-date value and exchange rates, and any subsection 110(1.1) election, in records that allow the tax that should have been withheld to be determined (subsection 230(1)); employees should keep their T1212 history and cost records. The planning and dispute points that follow build on these records.

← Regulations, forms, and electionsPlanning and dispute notes →

Planning and dispute notes

These notes collect practical points for designing, documenting and defending option arrangements.

Planning

Most planning turns on fitting the grant to paragraph 110(1)(d). The price must be at least fair market value when the agreement is made, which can be earlier than the board resolution (McAnulty) or later, where exercise awaits the employer’s notice (2006-0217401I7); grants should be documented as binding agreements priced the same day, and a repricing below grant-date value defeats the deduction unless it qualifies as an exchange (Fettes).

The optioned shares must be prescribed shares. Private-company shares often fail section 6204 of the Regulations because of formula buy-backs in a shareholder agreement, retraction features, or an expected repurchase within two years; paragraph 6204(2)(c) saves a put or call that protects an arm’s-length holder against loss or provides a market, and collateral agreements such as loan covenants count (2005-0157381E5). The employee must deal at arm’s length with the grantor and employer immediately after the grant, which excludes controlling shareholders and, as a question of fact, others who act in concert with them (Homburg).

For a CCPC, subsection 7(1.1) is automatic for arm’s-length employees, and paragraph 110(1)(d.1) gives the half deduction after a two-year hold even for a discounted option. Pricing at fair market value keeps paragraph 110(1)(d) available as well, protecting an employee who sells within two years on an exit. CCPC status is tested at grant, so options should be granted before a transaction that will cost the corporation its status.

For a non-CCPC specified person, grants above the $200,000 vesting limit lose the employee deduction but give the employer one under paragraph 110(1)(e), and for highly paid employees a designation under subsection 110(1.4) may be worth more to the group than the half deduction. RSU-type rights should be designated before later options are granted (2022-0926411C6). On a cash-out, the employer chooses between its own deduction and the employee’s; the subsection 110(1.1) election is accepted even where paragraph 7(3)(b) already denies the deduction (2017-0724191C6; 2016-0674411E5). Cash-settled RSUs, phantom units, and DSUs are outside section 7 and must avoid the salary deferral arrangement rules, through the three-year exception in paragraph (k) of that definition or paragraph 6801(d) of the Regulations.

A gift of listed option shares within 30 days of exercise can reduce the inclusion to nil, but not for non-qualified securities or a death benefit (2020-0851631C6). An estate should exercise or sell within its first three taxation years to keep the paragraph 110(1)(d) deduction. An emigrant realises nothing on unexercised options or deferred CCPC shares, but should model the later benefit, its source, and foreign tax credits.

Disputes

The usual questions are fair market value at grant, for the price test, and at exercise, for the size of the benefit; whether the agreement exists and when it was made (TransAlta; McAnulty); arm’s-length dealing (Homburg); and, for employers, whether a cancellation payment is on capital account (Imperial Tobacco). Private-company valuations need contemporaneous support, such as independent valuations, arm’s-length financings, and board minutes. The taxpayer must rebut the Minister’s assumptions of fact; the Minister bears the burden for a subsection 163(2) penalty (subsection 163(3)) and for a reassessment outside the normal period. Objections held in abeyance pending a lead case were wide enough to let a large corporation argue alternative deductions on appeal (Devon, 2015 FCA 214, paras. 24 to 25 and 34).

An individual objects by the later of one year after the filing-due date and 90 days after the notice of assessment (paragraph 165(1)(a)), and others within 90 days; an appeal to the Tax Court lies after confirmation, or after 90 days without a decision (subsection 169(1)). The Minister may waive or cancel interest and penalties under subsection 220(3.1) on or before the day that is ten calendar years after the end of the taxation year concerned, or on an application made by then. The provincial and treaty rules that follow can change the result for Quebec residents and cross-border employees.

← ComplianceProvincial and treaty parallels →

Provincial and treaty parallels

Most provinces adopt federal taxable income, so the federal deduction flows through automatically; Quebec keeps its own code with a smaller deduction; and the Canada-United States convention has a specific rule for splitting option income between the two countries.

Ontario’s Taxation Act, 2007, S.O. 2007, c. 11, Sch. A, defines an individual’s tax base as “the individual’s taxable income for the year” (subsection 3(1)), so Ontario tax is computed after the paragraphs 110(1)(d) and (d.1) deductions; a search of the current e-Laws consolidation found no Ontario provision on employee security options. Alberta’s Personal Income Tax Act, R.S.A. 2000, c. A-30, subsection 5(1), takes taxable income as computed for Part I of the federal Act, and British Columbia’s Income Tax Act, R.S.B.C. 1996, c. 215, subsection 1(1), gives “taxable income” the federal meaning; neither has a separate option rule.

Quebec’s Taxation Act, CQLR c. I-3, contains a self-standing division, “Agreement to issue securities to employees” (sections 47.18 to 58.0.7). Section 47.18 defines “qualifying person” and “security” as subsection 7(7) does; section 49 corresponds to paragraph 7(1)(a), section 49.2 to subsection 7(1.1), and section 49.2.1 to subsection 7(1.11), including the 50 per cent unitholder-vote branch; sections 50 and 54, the counterparts of paragraphs 7(1)(b) and 7(3)(a), were applied in Des Groseillers; and section 58.0.7 parallels subsection 7(16). The deduction differs: section 725.2 allows 25 per cent of the benefit for a security other than a non-qualified security, read as 50 per cent where the qualifying person was a “qualified corporation” for the calendar year in which the employee acquired the rights (section 725.2.0.1), or for a listed share where the right was granted to an employee of a “specified corporation” for a calendar year that includes the agreement or the acquisition (section 725.2.0.1.1). Both terms are defined in section 725.1.3: a qualified corporation operates a business and has an establishment in Quebec and has been deemed to have paid amounts to the Minister under specified refundable credit divisions, with assets under $50,000,000 (the conditions differ for years before 2025, for 2025, and for later years), and a specified corporation is one whose wages for the Health Services Fund contribution under section 34 of the Act respecting the Régie de l’assurance maladie du Québec are at least $10,000,000 for the year; section 725.3 allows 25 per cent in parallel with paragraph 110(1)(d.1); and section 725.2.0.2 coordinates with the federal cash-out election.

The OECD Commentary on Article 15 (2017), paragraphs 12 to 12.15, applies Article 15 to a benefit from an employee option until it is exercised, sold, or alienated, and Article 13 to later gains on the shares (para. 12.2); treats options as relating to the services required to earn the right to exercise them (para. 12.7) and as “primarily related to future services” (para. 12.13); and allocates the benefit by days of employment in each country (para. 12.14). The Canada-United States convention, as amended by Article 10 of the Fifth Protocol (signed 21 September 2007), taxes remuneration only in the state of residence unless the employment is exercised in the other state, subject to the $10,000 and 183-day exemptions in Article XV(2). Paragraph 6 of Annex B (the diplomatic note of 21 September 2007) allocates income from an option “granted to the individual as an employee of a corporation or mutual fund trust” to each state by the days between grant and exercise or disposition on which the individual’s principal place of employment was there, unless the competent authorities agree otherwise where the grant is properly treated as a transfer of ownership of the securities. Under section 3 of the Income Tax Conventions Interpretation Act, an undefined treaty term has its current meaning under the Act, so the section 7 benefit carries into Article XV except as Annex B otherwise provides. Its interaction with section 115 was not researched.

The provisions of the Act that work with section 7 are listed next.

← Planning and dispute notesAnnotated cross-references →

Annotated cross-references

• Section 5 and section 6: the general employment inclusions that paragraph 7(3)(a) displaces, and that apply where section 7 does not (Henley; Black).
• Section 47: subsection 47(3) keeps securities acquired under subsection 7(1.1) or (1.31) out of the identical-property average.
• Section 53: paragraph 53(1)(j) adds the full section 7 benefit to the adjusted cost base.
• Section 110: the definitions in subsection 110(0.1); the deductions in paragraphs 110(1)(d), (d.01), (d.1), and (e); the cash-out election in subsections 110(1.1) and (1.2); the vesting limit, designation, and notices in subsections 110(1.3) to (1.9); and the broker-directed gift in subsection 110(2.1).
• Section 115: subparagraph 115(1)(a)(i), the non-resident charge on option benefits from Canadian employment (Mullen).
• Section 125: the definition “Canadian-controlled private corporation” in subsection 125(7), on which subsection 7(1.1) depends.
• Section 128.1: the departure deemed disposition in subsection 128.1(4), qualified by subsection 7(1.6) and by the excluded right or interest in subsection 128.1(10).
• Section 153: subsection 153(1.01), withholding on option benefits as a bonus.
• Section 164: subsection 164(6.1), the estate’s loss carry-back for options taxed on death.
• Section 248: “employee”, “office”, “employment”, “share”, “property”, “disposition”, and “salary deferral arrangement”, the last relevant to cash-settled plans.
• Section 251: arm’s length, subject to subsection 7(1.11).

← Provincial and treaty parallelsSources →

Sources

The sources below were read on 11 October 2026 on the site named, unless noted.

• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 7: Justice Laws Website (Act current to 21 September 2026, last amended 18 June 2026; page modified 28 September 2026), the seven point-in-time versions from 31 August 2004 to 20 June 2024 (for example 2004-08-31) and the amendments not in force; and sections 47, 53, 110, 115, 128.1, 152, 153, 162, 164, 180.01, 227, 248, 249, and 251 on the same site (for example section 110). Sections 150, 165, 169, 220, and 230 were read on 12 October 2026.
• Income Tax Regulations, C.R.C., c. 945, ss. 100, 200, 205, 6204, 6205, and 6801; Interpretation Act, R.S.C. 1985, c. I-21, ss. 15, 33, 35, and 37; Income Tax Application Rules, R.S.C. 1985, c. 2 (5th Supp.), chapter I-3.31 (no section 25 and no provision referring to section 7); Income Tax Conventions Interpretation Act, R.S.C. 1985, c. I-4, ss. 3 and 5; Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20, Schedules I and VI (Annex B, para. 6; Fifth Protocol, Article 10).
• Amending Acts on Justice Laws: S.C. 2001, c. 17, 2007, c. 35, 2009, c. 2, 2010, c. 25, 2013, c. 34, 2021, c. 23 and 2024, c. 17; royal-assent bills on parl.ca for S.C. 1994, c. 7 (C-15), S.C. 1994, c. 21 (C-27) and S.C. 1999, c. 22 (C-72).
• Historical texts on archive.org: S.C. 1917, c. 28; S.C. 1948, c. 52; S.C. 1952-53, c. 40; R.S.C. 1952, vol. 3 (OCR search only); R.S.C. 1970, c. I-5; S.C. 1970-71-72, c. 63; S.C. 1977-78, c. 1; S.C. 1984, c. 45; S.C. 1986, c. 6; S.C. 1991, c. 49. Not examined: R.S.C. 1985 (5th Supp.), s. 7 as enacted.
• Government documents: Report of the Royal Commission on Taxation (1966), vol. 3 (archive.org); Budget Plan 2000, Annex 7; Budget 2010, Annex 5; Budget 2019, chapter 4; Finance backgrounders of 17 June 2019 and 10 June 2024; Finance explanatory notes, April 2024 and August 2024; Prime Minister’s news release of 21 March 2025; Report on Federal Tax Expenditures 2026, Part 2; Finance technical amendments of 23 July 2026. The backgrounders, the April 2024 notes, the Prime Minister’s release, and the tax expenditure table were read in full on 12 October 2026.
• Case law on the courts’ sites: Supreme Court of Canada, decisions.scc-csc.ca (Des Groseillers; Duha Printers); Federal Court of Appeal, decisions.fca-caf.gc.ca (Henley, Morin, Ferlaino, Panini, Robertson (1998), Baird, Silicon Graphics, Bernier, Buccini, McNeeley, Imperial Tobacco, Devon (2015), Montminy, Fink, Walsh, Zhu); Tax Court of Canada, decision.tcc-cci.gc.ca (McAnulty, TransAlta, Mathieu, Rogers Estate, Benham, MacMillan, Riordan, Corvalan, Ethier, McClintock, Davis, Trickovic, Calinisan, Black, Shoppers Drug Mart, Devon (2018), Fettes, Homburg, Mullen). Robertson (1990), Steen (1986 trial decision), Hurd, and Buckerfield’s were read in the Federal Courts Reports collection of the Office of the Commissioner for Federal Judicial Affairs on the same Lexum platform (decision.tcc-cci.ca/fja-cmf). Six older decisions (the two Chrysler decisions, Reynolds, Greiner, Kaiser Petroleum, and Hale) were not found on the courts’ sites and are cited only as characterised in the decisions named with them.
• CRA documents on canada.ca as linked under CRA documents; severed letters on taxinterpretations.com, each read in its full severed text.
• Provincial texts: Ontario Taxation Act, 2007; Quebec Taxation Act (official PDF); Alberta Personal Income Tax Act; British Columbia Income Tax Act. Treaty commentary: OECD Model Tax Convention, Condensed Version 2017.
• Commentary: Compton, Sandler, and Tedds (2010), MPRA Paper 39788 (read); Sandler (2001) 49:2 CTJ 259 and Mawani (2003) 51:3 CTJ 1230 (citations only, from the MPRA paper’s reference list; ctf.ca not accessible); Li and Magee, 11th ed. (publisher), Duff, Loomer, Bryan, and Gillis, 7th ed. (Toronto: LexisNexis, 2023) (UBC record) and Krishna, vol. 1, 2nd ed. (publisher), not read.

← Annotated cross-references