Employee Stock Options and RSUs in Canada: The T5008 Double-Tax Trap
An Ontario employee on $140,000.00 exercises 2,000 options at a $20.00 strike when the shares are worth $55.00, then sells at $62.00. Filed off the broker’s slip as issued, that sale reports a capital gain of $84,000.00. The real gain is $14,000.00. The difference is $16,596.16 of tax on money payroll already taxed. Employee stock options tax in Canada runs through two systems that never speak: the T4 taxes the exercise as employment income, and the T5008 reports the sale without seeing the T4.
The benefit is employment income, and it lands at exercise
Paragraph 7(1)(a) applies where a qualifying person has agreed to sell or issue securities to an employee:
“if the employee has acquired securities under the agreement, a benefit equal to the amount, if any, by which (i) the value of the securities at the time the employee acquired them exceeds the total of (ii) the amount paid or to be paid to the particular qualifying person by the employee for the securities … is deemed to have been received, in the taxation year in which the employee acquired the securities, by the employee because of the employee’s employment”
Two phrases decide everything downstream. The benefit is received “because of the employee’s employment”, so it is salary and not a capital gain. And it lands “in the taxation year in which the employee acquired the securities”, which is the exercise.
Subsection 7(6) pulls in securities issued to a trustee to be held in trust for sale to an employee, which is how a trustee-administered plan sits inside section 7. Under 7(1.1), a CCPC employee dealing at arm’s length has the inclusion moved to the year of disposition. See ITA section 7 on Justice Laws, current to 2026-07-21.
What your T4 already did with it
The employer reports the benefit in box 14, the same box as salary. The CRA T4 slip instructions for employers tell them to do it “using box 14 and either codes code 38 or code 90”. Box 38, or code 90 for 2025 and later, breaks out an amount already inside box 14, not a second amount. Half the benefit goes in box 39 under 110(1)(d), or box 41 under 110(1)(d.1), with codes 91 and 92 the newer equivalents. It has been taxed and withheld on like salary before you open your tax software.
The 1/2 deduction, and the price test behind it
Paragraph 110(1)(d) gives back half the benefit, provided the security is not a non-qualified security. The gate is the price test at 110(1)(d)(ii)(A): “the amount payable by the taxpayer to acquire the security under the agreement is not less than” the fair market value of the security when the agreement was made, less anything paid for the right to acquire it. The conditions are in ITA section 110 on Justice Laws.
You claim the deduction yourself. The CRA’s line 24900 security options deductions page says to claim “the total of the amounts shown in box 39, 41, 91 and 92 of your T4 slips”.
Paragraph 53(1)(j) rebuilds the cost base
Subsection 53(1) adds amounts to the cost of property in computing its adjusted cost base. Paragraph (j) decides this return:
“if the property is a security (within the meaning assigned by subsection 7(7)) and, in respect of its acquisition by the taxpayer, a benefit was deemed by section 7 to have been received … or, if the security was acquired after February 27, 2000, would have been so deemed if section 7 were read without reference to subsections 7(1.1) and (8), the amount of the benefit that was, or would have been, so deemed to have been received”
Read it three ways. The amount added is the whole benefit, not the half left after the deduction: the statute points to “the amount of the benefit that was … so deemed to have been received”, which is the subsection 7(1) figure. Reading section 7 “without reference to subsections 7(1.1)” gives a CCPC employee that cost base increase at acquisition, even though the income inclusion waits for the sale. So cost base equals what you paid plus the full benefit, which for an option exercised below market is the market value on the exercise date. The text is at ITA section 53 on Justice Laws.
Exercise more than once and those lots pool into a single average cost per share, which is its own piece of arithmetic that our guide to adjusted cost base works through.
Box 20 of the T5008 does not know any of this
Your broker knows the cash that left the account to buy the shares. It does not see your T4. So box 20, “Cost or book value”, shows the exercise price or nothing at all, and the benefit that 53(1)(j) adds is invisible to it.
The warning in CRA Guide T4091, the T5008 guide, is aimed at the reader of the slip:
“This amount may or may not reflect the investor’s ACB for the purpose of determining their gain or loss from the disposition of the security. The investor should be aware that they may have to make adjustments to the amount indicated in box 20 at the time of determining and reporting their gain or loss from the disposition.”
The slip is not wrong. It is answering a different question.
What the mistake costs
The Ontario employee again, whose employer is not a CCPC. Figures are for the 2026 tax year, data as of September 22, 2026.
| Line | Amount | Authority |
|---|---|---|
| Amount paid on exercise | $40,000.00 | 7(1)(a)(ii) |
| Value at acquisition | $110,000.00 | 7(1)(a)(i) |
| Employment benefit | $70,000.00 | 7(1)(a), T4 box 14 and 38 |
| 110(1)(d) deduction | $35,000.00 | T4 box 39, line 24900 |
| Net added to taxable income | $35,000.00 | |
| Taxable income for the year | $175,000.00 | |
| Combined Ontario marginal rate | 44.97% | |
| Adjusted cost base | $110,000.00 ($55.00 per share) | 53(1)(j) |
| Proceeds on 2,000 at $62.00 | $124,000.00 | |
| True capital gain | $14,000.00 | |
| Gain if filed off box 20 of $40,000.00 | $84,000.00 | |
| Tax paid a second time | $16,596.16 |
The overstatement is $70,000.00, the benefit to the dollar, because the only thing the slip omits is the 53(1)(j) addition. The $16,596.16 is the real difference in tax between taxable income of $210,000.00 and $175,000.00, not the taxable half of $35,000.00 at the 44.97% marginal rate, because the phantom gain pushes income into a higher federal bracket. To run your own strike and sale prices through it, our capital gains tax calculator handles the gain and the tax on it.
The same-day sale that proves the cost base
Take the same grant and sell at $55.00 on the day of exercise: proceeds $110,000.00, cost base $110,000.00, capital gain $0.00. All of the value is employment income and none of it is a capital gain. A same-day exercise and sale cannot produce a gain, so a calculation that says it did has dropped the 53(1)(j) addition.
RSUs: same cost base, no deduction
Where a unit plan settles in the employer’s own shares, or in shares a trustee holds under 7(6), section 7 applies and the benefit is the full value at vesting, because the employee paid nothing for them. That is also why the deduction fails. A unit costing nothing cannot meet a price test that requires the amount payable to be at least the share’s fair market value when the agreement was made, unless the share was worth nothing at grant. Paragraph 53(1)(j) still applies, so the cost base is the vesting-day value.
On 2,000 units vesting at $55.00: $110,000.00 of employment income, a 110(1)(d) deduction of $0.00, and a cost base of $110,000.00, or $55.00 per share. The option route above added $35,000.00 to taxable income on shares of that same $55.00 value. Units delivering that price added $110,000.00. The comparison is of how delivered value is taxed, not of two grants of equal economic worth, because options carry a strike the employee has to pay and units do not.
The $200,000 limit, and who it actually reaches
Subsection 110(1.31) deems securities non-qualified “for each vesting year of those securities … in the proportion determined by the formula A/B”, where A is “C + D – $200,000”, C is the fair market value of the securities carrying that vesting year measured when the agreement was entered into, D is the lesser of $200,000 and the same total under other agreements, and B is C.
Who it reaches is the part that gets left out. Paragraph 110(1.3)(c) makes the limit bite only where the employer or issuer is a “specified person”, which 110(0.1) defines as a qualifying person where “(a) it is not a Canadian-controlled private corporation” and consolidated group revenue “exceeds $500 million”, or failing that, one that “has gross revenue in excess of $500 million”. A CCPC is out. A non-CCPC under $500 million of revenue is out. Neither has a cap. The CRA’s Employee security (stock) options page gives the same test, the start date “For options granted on or after July 1, 2021”, and the employer’s duty to inform an employee in writing “no later than 30 days after the security option agreement is entered into” of any non-qualified shares. Never having received that letter is itself a fact about your grant.
Where it does bite: 10,000 options, share worth $50.00 when the agreement was made, one vesting year, no other agreements. C is $500,000.00, D is $0.00, A is $300,000.00 and B is $500,000.00, so A/B is 60.00%. Six thousand shares are non-qualified, 4,000 qualified. On a benefit of $30.00 per share, or $300,000.00, the deduction is half the qualified portion only: $60,000.00 against $150,000.00 without the limit, which is $90,000.00 of extra taxable income. The limit caps the value of securities at grant, and the deduction follows.
Shares you hold once the cost base is settled
You now hold shares with a cost base you can defend, and the decision that surprises people next is a transfer into a registered account. Moving them into a TFSA or RRSP in kind is a disposition at fair market value on the day of the transfer, with any resulting loss denied. The cost base tells you whether that transfer triggers a gain.
Scope and caveats
The worked figures are an Ontario resident in the 2026 tax year. Federal treatment is the same across Canada, provincial rates are not, so the $16,596.16 result is Ontario’s alone. Quebec has its own deduction rules for security options, and this article does not cover them.
Plans differ in their terms, and the plan document decides whether an award is a section 7 agreement at all. The 110(1)(d) conditions also turn on facts no article can check for you, including whether the share is a prescribed share at the time of its sale or issue.
If you have already filed off an unadjusted box 20, a filed return can be corrected. The figures to pull are the security options benefit on the T4 for the year of exercise and the cost base you reported on the sale. If the second does not include the first, that is the error.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Income Tax Act sections 7, 110 and 53 from Justice Laws, consolidated text current to 2026-07-21 and last amended 2026-06-18, fetched September 22, 2026. CRA ‘Employee security (stock) options’, CRA ‘T4 slip – Information for employers’, CRA Guide T4091 ‘T5008 Guide – Return of Securities Transactions’, CRA ‘Line 24900 Security options deductions’ and CRA ‘Line 24901 Additional security options deduction’, all fetched September 22, 2026. Federal and Ontario 2026 brackets, basic personal amounts and the Ontario surtax from CRA ‘Current year tax rates and income brackets (2026)’ and CRA T4032ON January 2026 edition. All tax arithmetic is ours, and the rate engine behind it is validated against Ontario’s published 53.53% top combined marginal rate before it computes anything.
