Canadian Stock Option Deduction 110(1)(d) Explained (2026)

When a Canadian employee exercises a stock option, the gain is not treated as a capital gain — it is employment income under the Income Tax Act. However, if the option and the shares meet specific conditions, the employee can claim a 50% deduction under section 110(1)(d), effectively halving the tax on the benefit. Understanding how this deduction works, and when it applies, is essential for anyone with equity compensation from a public company.

How Section 7 and Section 110(1)(d) Work Together

The tax event for stock options is triggered under ITA section 7. When you exercise an option and acquire shares, the difference between the fair market value (FMV) of the shares on the exercise date and the strike price (the exercise price you paid) is included in your employment income for that year.

For example: if you exercise options to buy 1,000 shares at a strike price of $10 when the shares are worth $30, the section 7 benefit is $20,000 — and that amount is added to your T4 employment income.

Section 110(1)(d) then allows you to deduct 50% of that benefit when calculating taxable income, provided the conditions below are met. The practical effect is that only half the benefit is taxed — similar to how a capital gain is taxed at a 50% inclusion rate, though the legal mechanism is different.

The Regulation 6204 Share-Prescription Test

The 50% deduction is not automatic. The shares acquired must be “prescribed shares” under Income Tax Regulations section 6204. The main requirements are:

• The shares must be common shares (or shares convertible into common shares) of the employer or a related corporation
• The shares must not carry special redemption rights, guaranteed returns, or preferential entitlements that ordinary shareholders do not have
• The strike price must be at least equal to the FMV of the shares at the time the option was granted — not at exercise

This last point is critical. If options are granted in-the-money (i.e., the strike price is set below FMV on grant date), the deduction is lost entirely.

Additionally, the option agreement itself must not include conditions that would otherwise disqualify the shares from the prescribed category.

The 2021 $200,000 Annual Vesting Cap for Non-CCPC Public Companies

Before 2021, the section 110(1)(d) deduction was available without limit on the amount of options that vested in a given year. That changed for options granted on or after July 1, 2021, by employers that are not Canadian-Controlled Private Corporations (CCPCs).

The cap works as follows:

• The deduction is only available on benefits from options whose grant-date value does not exceed $200,000 per calendar year of vesting
• Grant-date value is determined by the FMV of the underlying shares on the grant date (i.e., the strike price, since options must be at-the-money at grant)
• Options that vest above the $200,000 threshold in a given year do not qualify for the deduction — the entire benefit from those excess options is taxed as ordinary employment income

Multiple grants interact: if you receive grants from multiple years that all vest in the same calendar year, the $200,000 cap applies to the combined vesting in that year. Employers are required to track this and notify employees when grants will be designated as non-qualifying (above the cap).

Options granted before July 1, 2021 are grandfathered — the old unlimited deduction still applies to those grants.

How to Claim — T4 Box 38 and Box 39

Your employer reports the stock option benefit on your T4:

• Box 38 — the total section 7 employment benefit included in your income (this amount is also included in Box 14, total employment income)
• Box 39 — the amount eligible for the 50% deduction under section 110(1)(d)

On your T1 return, you claim the deduction on line 24900 (Stock option and shares deductions). The deduction equals the amount in Box 39 multiplied by 50%. If your employer has not correctly segregated qualifying vs. non-qualifying options in Box 39 (especially post-2021), the calculation should be reviewed before filing.

If you exercised options without the employer’s payroll team properly coding the qualifying vs. non-qualifying split, it is worth requesting a corrected T4 rather than trying to self-calculate the deduction.

Calculate Your Net Tax

Use our Employee Stock Option Deduction Calculator to estimate your federal and provincial tax on an option exercise, the 110(1)(d) deduction, and your after-tax proceeds — accounting for the $200,000 vesting cap where applicable.

Sources

• ITA — Section 110 (Deductions permitted in computing taxable income)
• ITA — Section 7 (Agreement to issue securities to employees)
• CRA — Employee stock options