Call options – tax position of holder
There is no tax consequence to the holder until the holder exercises the option and acquires the property. At that time, the holder’s cost of the property, for tax purposes, will include the exercise price to acquire the property plus the holder’s cost of the option.
If the holder does not exercise the option and it expires, at that time of expiration the holder will have a capital loss equal to the amount paid for the option.
Call options – position of grantor of option
On granting the option, the grantor will have deemed proceeds of disposition equal to the amount received from the holder for the option. In most cases, an indivi-dual grantor’s cost of the option is deemed to be nil. As such, the grantor will realize a capital gain equal to the amount received for the option. Half of the capital gain is included in income for tax purposes, as a taxable capital gain.
However, if the option is exercised by the holder, the grantor’s initial grant of the option will be deemed not to result in a disposition or capital gain. Instead, the exercise price under the option plus the amount received for the grant of the option will form the grantor’s proceeds of disposition of the property. If the exercise takes place in a year subsequent to the initial year of the grant of the option, the CRA will reassess the initial year and eliminate the initial gain (described in the preceding paragraph).
Put options – tax position of holder
There is no tax consequence until the holder exer-cises the option and sells the subject property. Upon exercise, the holder’s cost of the option is subtracted from the proceeds of disposition of the property, effectively reducing any gain (or increasing any loss) on that disposition.
If the option is not exercised and expires, at that time the holder will have a capital loss equal to the amount paid for the option.
Put options – tax position of grantor of option
As above, upon granting the option, the grantor will have proceeds of disposition equal to the amount received from the holder for the option, and will generally realize a capital gain equal to that amount.
If the put option is exercised by the holder, such that the grantor must purchase the property subject to the option, the grant of the option is deemed not to have occurred, so the gain in the preceding paragraph will be nil. Instead, on the exercise, the grantor’s cost of the purchased property is reduced by the amount received for the option. As above, if the exercise takes place in a year subsequent to the initial year of the grant of the option, the CRA will reassess the initial year and eliminate the initial gain.