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Stocks, Bonds etc.  ->  Investing Tax Issues -> Warrants and rights to acquire shares

Tax Treatment of Warrants and Rights to Purchase Additional Shares

Income Tax Act s. 15(1), s. 49

This information is regarding warrants or rights (options) which are received outside of RRSPs or other registered accounts.

When a corporation grants, to existing owners of its common shares, rights to acquire additional shares of the corporation, in the form of a warrant or option, the following tax consequences result:

bullet the value of the options must be included in the shareholder's income, unless identical rights to acquire shares have been offered to all owners of the corporation's common shares
bullet the amount included in the shareholder's income becomes the cost basis of the rights for the shareholder

The amount of the benefit under s. 15(1) is normally the greater of:

bullet the trading value of the rights received; and
bullet the amount by which the fair market value of the shares subject to the option, at the time of the option's distribution, exceeds the exercise price provided in the option.

Rights expired

If the rights expire without being exercised, the holder of the option is considered to have disposed of the option for no proceeds of disposition.  This results in a loss equal to the cost basis of the rights.

Rights exercised

If the rights are exercised to purchase shares, the cost basis of the shares acquired will be equal to:

bullet the cost basis of the rights; plus
bullet the amount paid to exercise the rights and acquire the shares

Rights sold

If the rights are sold without being exercised, there will be a gain in the amount of:

bullet proceeds received, less
bullet the cost basis of the rights

Capital or Income?

For most taxpayers, the gain or loss will be a capital gain or loss, 50% of which is subject to tax.  See the article Capital or Income? as to whether the gain is taxable as a capital gain or an income gain.

Canada Revenue Agency (CRA) Resources

IT116R3 Rights to Buy Additional Shares (Archived)

IT96R6 Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units (Archived)

Revised: October 26, 2023


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