One of the measures in Budget 2010 (Pages 356 to 358) will be of special interest to Ottawa-area residents who elected to defer taxes on stock options. Some taxpayers who took advantage of tax deferral on stock options experienced financial difficulties when the value of the stock they received when exercising stock options declined in value. Budget 2010 proposes a special elective treatment to ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of disposition of the optioned securities taking into account tax relief resulting from the use of capital losses on the optioned securities against capital gains from other sources.
For example, let’s say you exercised options in 2001 to buy ABC at $50 and your strike price was $10. You elected to defer the taxes on the stock option benefit of $40 to the future. Your ABC stock only worth $5. If you sell ABC today, you’ll owe a tax on the stock option benefit of $40 but you’ll also have a capital loss of $45. Budget 2010 will allow you a deduction equal to the stock option benefit ($40). You’ll also declare an amount equal to half of the lesser of the stock option benefit and the capital loss on the optioned securities (1/2 of the lesser of $40 or $45) in your income as a capital gain. Essentially, the capital gain will wipe out the capital loss on the optioned securities.
If you disposed your optioned securities before 2010, you have to make an election for this special treatment on or before April 30, 2011. If you have not disposed of optioned securities before 2010, you must do so before 2015. Also, the Government has repealed the tax deferral election effective today.