Canada: Stock Options In The Technology Sector – The Good, The Bad And The Ugly

Last Updated: March 3 2016
Article by Logan Hoffert

Stock options are an often-used employee incentive in the tech sector. The options grant employees the right to buy shares of the company at a predetermined price, allowing them to participate in its future growth. There is no obligation for employees to exercise their options. The options will often vest over a period of time, rewarding employees for their loyalty.

The Good

Stock options are a great compensation tool for a few reasons:

  • No cash outflow. For a start-up company, cash burn-rate is a key item to manage. By granting stock options, you can compensate your employees more without draining the bank account.
  • Motivates employees. You often hear the reason for this in Westjet ads as "Because owners care." The goal is to align an employee's interests with the company's. The employee will be motivated to make the company more profitable, as they will be better off financially as well.
  • Talent attraction. Tech companies that offer perks such as stock options will be more attractive to talent.
  • Retention. Stock options plans encourage employees to think long-term about the company, increasing retention.
  • Potential for cash inflow. Employees exercising their stock options will actually be contributing cash to the company.

The Bad

When employees exercise their options, they become shareholders. They then have certain rights, depending on the type of shares issued and the company bylaws.

This can include voting and attendance at annual general meetings, receiving audited financial statements, and entitlement to dividends. While you may trust your employees to not cause shareholder disputes, what happens if they leave the company? What happens if they sell their shares? A shareholders agreement can be a very useful document to manage these types of situations. Keep in mind that you are not just giving up a percentage of the pie, you're giving up a portion of control too.

Determining the exercise price for the options can be tricky. If the price is too high, employees won't be motivated as they might see it as unattainable. If the price is too low, the stock option's incentive power is reduced as the reward is all but guaranteed. There are also tax rules that encourage granting options with an exercise price that is at least equal to the fair market value of the company's stock at the time of issuance. If you're raising financing by issuing shares, you might have a good idea of the company's value. Otherwise, how do you really know how much the company is worth in order to decide an appropriate option price?

Stock options also come with a fair amount of administrative work. The stock option plan and agreements need to be created and approved. Options granted, vested, exercised, cancelled and expired all need to be tracked as well.
One thing that is often overlooked by employees receiving the options is in order to realize any benefits of the options, they have to pay the exercise price to receive the shares. When the shares are not easily resalable, this can tie up their cash. As such, employees are not as inclined to exercise options unless they can see a potential payout via an IPO or private purchaser.

The Ugly

So how does all this affect tax and financial statements at the end of the day? The company's taxes are unaffected. It gets no deduction for stock options granted, vested or exercised.

The employee gets taxed on the options, but in a somewhat favourable manner. There is no taxable benefit when the options are granted or vested. When the options are exercised, there is no immediate tax to pay if the company is a Canadian-controlled private corporation. The tax gets deferred until the employee sells the shares. Generally speaking, when shares purchased using stock options are sold, the employee gets a deduction of half of the taxable benefit on the option (fair value when exercised less exercise price), as long as:

a) the exercise price was equal to or greater than the fair value of the stock when the option was granted, or
b) the employee holds the shares for at least two years if the company is a Canadian-controlled private corporation.

Note: The current Liberal government has announced its intention to limit the half deduction. No legislation has been issued yet with respect to this proposal but it is anticipated that the new rules will only impact employees with more than $100,000 of annual stock option gains and will not impact existing stock option plans. 

For financial statement purposes, options that vest in the year are reported as an expense. The value of the options is estimated using mathematical models, such as Black-Scholes. Financial statements must also disclose various details on the stock options issued and outstanding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Logan Hoffert
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.