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When filing taxes in Canada, when does box 39 get reported as half of box 38? In my case, I got ESPP amount reported in box 38, with box 39 missing in my T4 altogether. According to my accountant, the payroll should amend T4 by adding box 39 with 50% of the amount reported in box 38. Is he correct? I did not exercise any stock options (those typically go into box 39), only ESPP.

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/rtrns/t4/slps/cmpltng/cd39-eng.html discusses this case, but it is hard to obtain further explanation as to when this applies and when it does not. There probably is a standard way most companies report ESPP ...

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Here's the best explanation I found relating to why your T4 box 39 might not have an amount filled in, even when box 38 has one: Department of Finance – Explanatory Notes Relating to the Income Tax Act [...]. It's a long document, but here's the part I believe relevant, with my emphasis:

Employee Stock Options

ITA 110(1)
[...]
Paragraph 110(1)(d) is amended to include a requirement that the employee [...] exercise the employee’s rights under the stock option agreement and acquire the securities underlying the agreement in order for the deduction in computing taxable income to be available [...] ensures that only one deduction is available in respect of an employment benefit.

In other words, if employee stock option rights are surrendered to an employer for cash or an in-kind payment, then (subject to new subsections 110(1.1) and (1.2)) the employer may deduct the payment but the employee cannot claim the stock option deduction. Conversely, where an employer issues securities pursuant to an employee’s exercise of stock options, the employer can not deduct an amount in respect of the issuance, but the employee may be eligible to claim a deduction under paragraph 110(1)(d).

Did you receive real shares based on your participation in the ESPP, or did you get a cash payment for the net value of shares you would have been issued under the plan? From what I can tell, if you opted for a cash payment (or if your plan only allows for such), then the part I emphasized comes into play.

Essentially, if conditions were such that your employer could claim a deduction on their corporate income tax return for the compensation paid to you as part of the plan, then you are not also able to claim a similar deduction on your personal income tax return. The money received in that manner is effectively taxed in your hands the same as any bonus employment income would be; i.e. it isn't afforded tax treatment equivalent to capital gains income.

Your employer and/or ESPP administrator are best able to confirm the conditions which led to no amount in your box 39, but at least based on above you can see there are legitimate cases where box 38 would have an amount while box 39 doesn't.

  • very interesting, thanks for the information; I did receive real shares though. – Joe Mar 25 '15 at 4:48
  • Hmm. Did you purchase the shares at a discount, or were they given to you at no cost? Do you still hold them? – Chris W. Rea Mar 25 '15 at 12:50
  • I did purchase them at a discount, and then sold next day. – Joe Mar 25 '15 at 15:14
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    to clarify - given extra info - would you then expect 50% of box 38 translating into box 39? thanks again for the help. – Joe Mar 25 '15 at 16:01
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    No, I wouldn't expect that. The discount received is a taxable benefit and should be treated the same as if your employer simply gave you a cash bonus to subsidize your stock purchase at fair market value in the open market. Rather, I imagine box 38 would apply in a situation where, say, you were granted securities in the plan at some time in the past at their then fair market value (not at a discount), and since that time until your sale/exercise the market value had increased. A box 38 amount would then serve to tax that "gain" part of the plan benefit like it were a real capital gain. – Chris W. Rea Mar 25 '15 at 17:23
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Apparently box 39 does not receive half of box 38 if "The price of the share or unit is less than its fair market value when the agreement was made." - the last point in paragraph 110(1)(d): *http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/fnncl/scrty/stckpt03-eng.html#dspst The employee can claim a deduction under paragraph 110(1)(d) of the Income Tax Act if all of the following conditions are met:

  • A qualifying person agreed to sell or issue to the employee shares of its capital stock or the capital stock of another corporation that it does not deal with at arm's length, or agree to sell or issue units of a mutual fund trust.
  • The employee dealt at arm's length with these qualifying persons right after the agreement was made.
  • If the security is a share, it is a prescribed share (as defined in the Income Tax Regulations) and if it is a unit, it is a unit of a mutual fund trust.
  • The price of the share or unit is not less than its fair market value when the agreement was made.*
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Assuming you purchased shares that were granted at a discount under the ESPP the 50% exemption would not apply. It's pretty unusual to see a US parent company ESPP qualify for the 110(1)(d) exemption, as most US plans provide for a discount

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