CRA finds that where shares acquired on a stock option exercise are immediately sold on an earn-out basis, the s. 7 benefit should include the current earn-out value

If an employee exercises options to acquire shares of a private company with a view to immediately becoming party to an agreement for the sale of the shares on an earnout basis, CRA considers that the s. 7 employment benefit recognized on such exercise should take the value at that time of the earnout clause into account.

CRA recognized that the right question is: what was the fair market value of the acquired shares at the time of exercise? Trying to answer by valuing the proceeds for which they in fact were sold might give the wrong number given the difficulties of valuing an earn-out clause.

Neal Armstrong. Summary of 4 May 2015 T.I. 2013-0502761E5 F under s. 7(1)(a).