How are stock options in a CCPC taxed, and when does my client pay the tax?
In 2026, an arm's length employee of a CCPC still pays no tax on exercising options: subsection 7(1.1) defers the benefit (share value at exercise minus the price paid) to the year the shares are sold. Half is then deductible under 110(1)(d) if the price was at least fair market value at grant, or 110(1)(d.1) after a two year hold.
When does a CCPC option holder pay tax, compared with a public company employee?
Your client pays nothing at grant and nothing at exercise. Where a CCPC agrees to issue shares to an employee who deals at arm's length with it immediately after the agreement, subsection 7(1.1) reads the year of acquisition as the year the employee disposes of or exchanges the shares laws-lois.justice.gc.ca. The CRA's employer page says the same thing in plain terms: for a CCPC, include the benefit in the year your employee disposed of the shares
canada.ca.
| Point | CCPC employer, arm's length employee | Other employer (public or foreign controlled) |
|---|---|---|
| Tax at grant | None | None |
| Year the benefit is taxed | Year the shares are sold or exchanged | Year the shares are acquired (exercise) |
| Income tax withheld on a share exercise | No | Yes |
| CPP withheld on a share exercise | No | Yes |
| EI withheld on a share exercise | No | No |
| Deductions available | 110(1)(d) or 110(1)(d.1) | 110(1)(d) only |
| $200,000 annual vesting limit | Never applies | Applies to grants on or after July 1, 2021 if group revenue is over $500 million |
| Cash payout instead of shares | Income tax, CPP and EI withheld | Income tax, CPP and EI withheld |
The withholding and vesting limit rows come from the CRA's security options page: no income tax, CPP or EI on a non cash CCPC benefit, and the $200,000 limit only for employers that are not CCPCs and have, or belong to a group with, revenue over $500 million canada.ca. The deferral is the reason a CCPC employee can end up with a large balance owing in the year of sale: nothing was withheld when the shares came out of the option.
Which deduction cuts the benefit in half, 110(1)(d) or 110(1)(d.1)?
Both deduct one half of the benefit, and your client can claim only one of them for the same benefit laws-lois.justice.gc.ca. A CCPC employee gets to choose whichever one they qualify for, which matters when the exercise price was set below value.
| Test | 110(1)(d) | 110(1)(d.1) |
|---|---|---|
| Who can use it | Any employer | CCPC shares acquired under 7(1.1) only |
| Exercise price | At least the fair market value of the share when the option was granted, less any amount paid for the option | No price test |
| Type of share | Prescribed share under Regulation 6204(1) | Any share of the CCPC |
| Arm's length | Required immediately after the agreement | Required (it rides on 7(1.1)) |
| Holding period | None | Shares not sold or exchanged within two years of acquisition, except on death |
| Amount | 1/2 of the benefit | 1/2 of the benefit |
| T4 code | 39 | 41 |
The conditions are in paragraphs 110(1)(d) and (d.1) of the Act laws-lois.justice.gc.ca, and the CRA lists the same tests, including the prescribed share requirement under Regulation 6204(1) for 110(1)(d)
canada.ca. So an option priced at fair market value qualifies on day one, while an option priced at a discount still gets the 50% deduction if your client holds the shares for two years after exercise.
What does a 2024 exercise and a 2026 sale add to taxable income?
Your client was granted 10,000 options in 2022 at $1.00 a share, which was the fair market value of the CCPC's common shares at grant. They exercised in March 2024 when a share was worth $5.00, paying $10,000. They sold all 10,000 shares in April 2026 for $12.00 each. They deal at arm's length with the company.
| Step | Amount |
|---|---|
| Value of the shares at exercise (10,000 x $5.00) | $50,000 |
| Less the exercise price paid (10,000 x $1.00) | $10,000 |
| Employment benefit, taxed in 2026 (T4 box 14, code 38) | $40,000 |
| 110(1)(d) deduction, 1/2 of $40,000 (code 39, line 24900) | $20,000 |
| Net employment income from the options | $20,000 |
| Proceeds of sale (10,000 x $12.00) | $120,000 |
| Adjusted cost base ($10,000 paid plus the $40,000 benefit) | $50,000 |
| Capital gain | $70,000 |
| Taxable capital gain at 50% | $35,000 |
| Total added to 2026 taxable income | $55,000 |
Nothing was taxed in 2024. Subsection 7(1.1) pushed the $40,000 benefit into 2026, the year of sale laws-lois.justice.gc.ca, and paragraph 53(1)(j) adds that benefit to the cost base of the shares, so it isn't taxed a second time as a gain
laws-lois.justice.gc.ca. Your client claims the $20,000 on line 24900, which picks up the amounts in boxes 39 and 41 of the T4
canada.ca.
Change one fact: the exercise price was $0.50 when the shares were worth $1.00 at grant. The benefit becomes $45,000, the price test for 110(1)(d) fails, and your client still deducts $22,500 under 110(1)(d.1) because the sale came more than two years after the March 2024 exercise. Sell in January 2026 instead and neither deduction works: all $45,000 is taxable.
Can the lifetime capital gains exemption shelter option shares?
Only the capital gain can be sheltered, never the employment benefit. Section 7 deems the benefit received because of the employee's employment laws-lois.justice.gc.ca, so it's employment income on the T4, and the lifetime capital gains exemption under section 110.6 covers capital gains. In the example, the $70,000 gain is the most the exemption could reach.
The 24 month holding test starts at exercise, not at grant. Paragraph 110.6(14)(f) deems shares issued by a corporation to have been owned immediately before their issue by an unrelated person, unless they were issued for other shares, for the assets of an active business, or as a stock dividend laws-lois.justice.gc.ca. Treasury shares issued on an option exercise fit none of those exceptions. Shares exercised in March 2024 and sold in April 2026 pass the clock; a cashless exercise and sale on the same day never can. The other QSBC tests still have to be met at the sale.
What does the CCPC report on the T4, and in which year?
The CCPC reports the benefit on the T4 for the year the employee disposes of the shares, in box 14 with code 38, and the deduction under code 39 for 110(1)(d) or code 41 for 110(1)(d.1) canada.ca. For 2026 and later slips only codes 38, 39 and 41 can be used; the alternative codes 90, 91 and 92 were last allowed on 2025 slips. The full code list is in T4 other information codes.
That puts an awkward duty on the employer: it has to learn when a current or former employee sold shares, sometimes years after the exercise, so it can issue a T4 for that year. Build a sale notice into the option agreement or the shareholders' agreement. The benefit is the fair market value of the shares when acquired minus the amount paid for the shares and for the option rights canada.ca, so keep the valuation that supports the price at exercise as well as the one at grant.
Where owner managers and large sales lose the favourable treatment
Owners and their family members usually fail the arm's length test. The CRA says workers are usually arm's length employees unless they are an owner or an owner's family member canada.ca. Without arm's length dealing, subsection 7(1.1) doesn't apply
laws-lois.justice.gc.ca, so the benefit is taxed in the year of exercise under 7(1)(a), and neither 110(1)(d) nor 110(1)(d.1) is available
laws-lois.justice.gc.ca.
A large sale can trigger the alternative minimum tax. Paragraph 127.52(1)(h) lists the only section 110 deductions allowed in adjusted taxable income, and 110(1)(d) and (d.1) aren't on it laws-lois.justice.gc.ca. The whole benefit sits in the AMT base, on top of the capital gain at 100%. Run Form T691 in the year of sale when the benefit is large.
Sources
Does the deferral survive if the CCPC later goes public?
For options already granted, yes on the wording of the Act. Subsection 7(1.1) applies where a CCPC agrees to sell or issue the shares to an arm's length employee, so the test is the company's status when the agreement is made laws-lois.justice.gc.ca. Options granted after the company stops being a CCPC follow the rules for other employers, including the $200,000 limit if group revenue is over $500 million.
Does the $200,000 vesting limit apply to CCPC stock options?
No. The CRA applies the limit only to employers that are not CCPCs and have, or are part of a consolidated group with, revenue over $500 million, for options granted on or after July 1, 2021 canada.ca. A CCPC is excluded from the specified person definition in subsection 110(0.1)
laws-lois.justice.gc.ca.
What happens if the employee dies holding unexercised CCPC options?
The benefit is included in the year of death: the fair market value of the option rights immediately after death minus the amount paid for them, or nil if the plan says the options expire on death canada.ca. For shares already exercised, the two year hold for 110(1)(d.1) doesn't apply to a disposition caused by death
laws-lois.justice.gc.ca.
Is anything withheld from the employee when they exercise CCPC options?
No. For a non cash CCPC security option benefit the employer withholds no income tax, CPP or EI canada.ca. Only a cash payout of the options gets all three withheld, so plan for the tax owing on the return for the year of sale.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.