2 February 2009 External T.I. 2008-0279251E5 - Determination of stock option benefit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Should a stock option benefit be determined at the time an employee exercises the stock option or when the shares are fully paid for?

2. Is there any difference if we assume that the shares were transferred into a trust for the benefit of the employee?

Position:

1. The stock option benefit under paragraph 7(1)(a) of the Income Tax Act should be determined at the time the shares are "acquired" by the employee using the fair market value of the shares at the time of acquisition.

2. If it is determined that a trust arrangement exists whereby the shares acquired under the agreement are held for the employee until certain conditions are met, the provisions of subsection 7(2) of the Act will apply and the employee will be considered to have acquired the shares at the time the trust acquired the shares.

Reasons:

Whether shares have been acquired by an employee is a question of fact turning on whether title passes or the incidents of title, such as possession, use and risk pass. The existence of a trust is also a question of fact and is determined under trust law.

2008-027925
XXXXXXXXXX Wayne Harding
(613) 957-3496
February 2, 2008

Dear XXXXXXXXXX :

Re: Timing of Stock Option Benefits

This is in reply to your correspondence of May 21, 2008 and further to our telephone conversation of June 3, 2008 (XXXXXXXXXX /Thomson) wherein you requested CRA's comments on the determination of a stock option benefit under the Income Tax Act (the "Act").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website.

While we cannot comment on your specific situation, we can provide the following general comments.

As noted in Interpretation Bulletin IT-113R4 - Benefits to Employees - Stock Options, subsection 7(1) of the Act will apply when a corporation agrees to sell or issue shares of the corporation or shares of a corporation with which it does not deal at arm's length to an employee of either corporation or to an employee of another corporation with which it does not deal at arm's length. As further noted in the Interpretation Bulletin IT-113R4, an employee who acquires shares under such an agreement is generally required to include a benefit from employment in income in the taxation year in which the shares are acquired pursuant to paragraph 6(1)(a) and 7(1)(a) of the Act. The benefit is equal to:

• the fair market value of the shares at the time the shares are acquired by the employee;
  minus
• any amount paid or payable by the employee for the shares, and
• any amount paid by the employee to acquire the right to acquire the shares.

It is a question of fact when shares are acquired. However, an acquisition of shares will generally occur, as noted in paragraph 10 of Interpretation Bulletin IT-113R4, when title passes or, if title remains with the vendor as security for the unpaid balance, when all the incidents of title (such as possession, use, and risk) pass.

It is also a question of fact what the value of a share is at the time it is acquired. However, as noted in paragraph 9 of Interpretation Bulletin IT-113R4, if the provisions of an agreement prohibit the transfer of the shares acquired for a period of time, the value of the shares is considered to be the fair market value of identical shares at the time of acquisition that have no trading restriction less an appropriate discount (which may vary according to the circumstances) in respect of the restriction.

Subsection 7(2) of the Act provides specific rules where a trust is established and upon the exercise of an option agreement by an employee, the trustee acquires the shares absolutely, conditionally or contingently in trust for the employee. In this event, subsection 7(2) of the Act deems, inter alia, the employee to have acquired the shares for purposes of section 7, at the time that the trust begins to hold them, such that paragraph 7(1)(a) of the Act will apply to deem the employee to receive a benefit at the time the trust acquires the shares.

Whether a trust is established in a particular situation is again a question of fact and trust law. However, the courts have concluded that in order to have a trust there must be a settler, a transfer of property and a beneficiary in respect of such property.

If shares held in a trust described in subsection 7(2) of the Act do not vest in an employee and the stock option agreement requires the shares be forfeited and returned to the corporation by the trustee, subsection 8(12) of the Act may apply to allow the employee to deduct an amount in respect of a benefit previously included in the employees income pursuant to paragraph 7(1)(a) of the Act. The provisions of subsection 8(12) are further discussed in paragraph 23 of Interpretation Bulletin IT-113R4.

We also note that an employee is generally entitled to claim a deduction under paragraph 110(1)(d) of the Act equal to 50% of the benefit included in income by virtue of paragraph 7(1)(a) of the Act if the provisions of paragraph 110(1)(d) are met. However, this deduction is not available if an employee acquires the shares under an agreement for an amount that is less than the fair market value of the shares at the time the agreement to acquire the shares was entered into. For further information on the application of paragraph 110(1)(d) please refer to paragraph 18 of Interpretation Bulletin IT-113R4.

We trust that our comments will be of assistance to you.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch