2019-0796641E5 Stock options issued to a corporation

Principal Issues: When should the unrealized benefit of the stock options issued to a corporation for services rendered be recognized in income for tax purposes under the Act?

Position: Depends on the facts of the situation.

Reasons: See below.

Author: Couvrette, Amanda
Section: 7(1); 9(1);

XXXXXXXXXX                                                           2019-079664
                                                                                   Amanda Couvrette, CPA, CA

June 7, 2022



Dear XXXXXXXXXX:

Re: Stock options issued to a corporation

This is in reply to your email of February 11, 2019, in which you requested our views regarding the tax treatment of stock options issued to a corporation that is a “Canadian controlled private corporation” (“CCPC”) under the Income Tax Act (“the Act”).

In the situation you presented, a corporation, that is a CCPC, enters into a agreement to provide medical research consulting for a three-year long-term research project. Income received from medical research consulting has always been reported as income from a business pursuant to subsection 9(1) of the Act. As part of the agreement, the corporation was granted an option to purchase shares of an arm’s-length CCPC. The agreement provides that the option will only vest upon completion of the long-term project. You indicate that the project was completed at the end of the third year and that the corporation exercised its option to purchase the shares at the beginning of fourth year.

You would like to know when the income should be recognized for tax purposes for the corporation and if there are any specific rules in the Act that would apply in the situation presented.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Generally speaking, the Act does not contain specific rules, like the employee stock option rules found in section 7, for stock options issued to a arm’s-length CCPC for the provision of services. The general principles of taxation are applicable and therefore, depending on the circumstances, the value received from stock options for services rendered could be taxed at various points, including at the date of the grant, at the date of vesting, and at the date of exercise.

Subsection 9(1) of the Act provides that a taxpayer’s income for a taxation year from a business or property is the profit from that business or property for the year, subject to the particular rules set out in Part I of the Act. Following the principles set by the Supreme Court of Canada in Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147 concerning the computation of profit, a taxpayer is free to adopt any method, so long as the method chosen is not inconsistent with the provisions of the Act, established case law principles or “rules of law,” and well-accepted business principles.

Generally speaking, where stock options are granted to a taxpayer as payment for consulting services rendered, the FMV of the underlying shares on this date over the aggregate of the exercise price of the option should be included in the taxpayer’s business income, pursuant to subsection 9(1). However, in circumstances where it can be determined, on examination of all the facts, that the option is granted in consideration for services that are to be rendered after the time of grant and upon the fulfillment of a condition or contingency, the income should instead be recognized when the services are rendered, the amount is quantifiable and the rights are unrestricted.

In the present case, the information you provided suggests that the vesting of the option is linked to the completion of the long-term research project. As such, it may be difficult to conclude that the income is earned before the vesting date under the particular arrangement. While a question of fact, generally, it is at the time where the services have been rendered and the contingency has been fulfilled, that the FMV of the underlying share over the aggregate of the exercise price of the option should be included in income under subsection 9(1). The determination of the FMV of the option at a specific point and time is a question of fact.

When the option is exercised, the incremental value realized on the acquisition of the shares through the exercise of the stock option may have to be included in income. The determination of whether any incremental value realized on the exercise of the stock option represents business income or a capital gain can only be made after consideration of all the relevant facts and circumstances. Where the facts indicate that the incremental value represents part of the consideration received by the taxpayer for consulting services rendered, the incremental value should generally be treated as business income for purposes of the Act.

We trust our comments will be of assistance.

Yours truly,





Sandro D’Angelo, CPA, CMA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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