Deductions that reduce your taxable income below your net income
Deductions permitted in computing taxable income
Section 110 lists deductions allowed in computing taxable income (after net income is calculated under s.3) — including the stock option deduction, the capital gains deduction mechanism, and certain other amounts.
Plain-language explanation
Section 110 applies after you have calculated your "income" under s.3. It provides additional deductions that reduce your income to arrive at "taxable income" — the actual base on which tax rates are applied under s.117.
s.110(1)(d) — Employee stock option deduction: When you exercise a qualifying employee stock option and include the benefit in income under s.7, you may deduct one-half of that benefit under s.110(1)(d) if certain conditions are met (the option price was at least the FMV of the share when the option was granted, you are dealing at arm's length, etc.). This gives the benefit capital gains treatment.
s.110(1)(d.1) — CCPC stock options: For options granted by a Canadian-controlled private corporation, the deduction is available even if the conditions above are not met, provided you hold the shares for at least two years before selling.
s.110(1)(f) — Social assistance and workers' compensation: Social assistance payments and workers' compensation are technically included in "income" for OAS/GST/CCB clawback calculations, but are deducted here to arrive at taxable income so they are not actually taxed.
s.110(1)(j) — Home buyers' deduction: First home buyers may deduct up to $10,000 of the qualifying home buyer's plan withdrawal under s.146.01 conditions.
Example
David exercises a stock option to buy 1,000 shares at $10 each when the market price is $25. His employment benefit (s.7) is $15,000. If the option qualified, he deducts $7,500 under s.110(1)(d) — effectively paying tax on only half the benefit, at capital gains rates.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Budget 2021 introduced a $200,000 annual cap on the employee stock option deduction for employees of large, mature companies. Options granted by CCPCs and early-stage companies exempt from the cap.
Common questions
What is the difference between a deduction from income and a deduction from taxable income? +
A deduction from income (s.3) reduces your income and affects income-tested benefits (OAS, CCB, GST credit). A deduction from taxable income (s.110) reduces the amount you actually pay tax on, but may not affect income-tested clawbacks. Social assistance, for example, shows up in income for clawback purposes but is deducted before tax is calculated.
Who qualifies for the employee stock option deduction? +
You must meet conditions in s.110(1)(d): the option price must be at or above FMV when granted, the shares must be prescribed shares (common shares), and you must be dealing at arm's length with the employer. Post-2021 rules cap the deduction at $200,000 of options granted per year for large employers.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 110. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.