CRA considers that shares acquired on stock option exercise must be disposed of in one transaction to avoid basis averaging

The s. 7(1.31) rule is intended to avoid basis averaging under s. 47 when executives exercise stock options and then immediately sell the acquired shares – so that they will not realize a capital gain even if they also held low-basis shares of the same company. This rule does not work if the executive, immediately after exercise, disposes of the acquired shares in two tranches, e.g., she donates some of them to a charity and transfers the balance to her personal holding company. The second disposition is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition) following the exercise.

It is not clear whether feeding the acquired stock into the market over the course of a trading day but with settlement occurring in three days’ time essentially independent of the precise trading times, would be problematic.

Neal Armstrong. Summary and translation of 2015-0595841C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 2.