A recent Canada Revenue Agency technical interpretation sheds light on the treatment of the deceased’s unexercised stock options and tax relief in the event the value of the stock has declined since the date of death.
Our tax rules provide that where an employee has died and the employee owned unexercised stock options prior to their death, the deceased is considered to have received an employment benefit in the year of death. The employment benefit is equal to the value of the stock options immediately after death less any amount paid by the deceased employee to acquire the options. Where the terms of the owned unexercised stock option provide that the stock options are automatically cancelled in the event of the employee’s death, the value of the options immediately after death, and the employment benefit, will be nil. If the employee stock options are not vested prior to the employee’s death, the employee would not own unexercised stock options prior to their death and the benefit rule would not apply.
Tax relief is provided where a stock option is exercised, expires, or is otherwise disposed of within the first taxation year of the deceased taxpayer’s estate and the value of the stock option has declined since the employee’s death, such that the benefit realized by the deceased’s estate is less than the employment benefit deemed to have been received by the deceased taxpayer. If the legal representative of the deceased elects in prescribed manner, an amount is deemed to be a loss from employment of the deceased taxpayer for the year of death resulting in a reduction of the terminal tax liability.
Keep an eye out for those unexercised or expired stock options as they may be worth something to the estate.