On a cashless stock option exercise, the stock option benefit is based on the shares’ value on the issuance date rather than the short sale date

Where a cashless exercise procedure is used for employee stock options, the broker short sells identical shares with a value at the time of the trade (as opposed to the time of settlement) equal to the exercise price, then on the settlement date the employer issues a portion of the exercised shares to the broker to cover the short sale, with the balance being issued to the employee.  CRA considers that the stock option benefit (under s. 7(1)(a)), including for the shares used to cover the short sale, is to be measured on the basis of the fair market value of the shares at the time the shares are issued rather than the value for which the shares were previously sold short.

Neal Armstrong.  Summary of 19 July 2013 2012-0458961E5 F under s. 7(1)(a).