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:
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
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:
the trading value of the rights received; and
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:
the cost basis of the rights; plus
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:
proceeds received, less
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.