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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Would shares held by an employee that are subjected to 7(1.1) of the Act be eligible for the 110(1)(d.1) deduction where the shares are purchased for cancellation by the employer corporation?
Position: Yes.
Reasons: Where all of the conditions of 110(1)(d.1) are satisfied, the fact that shares are purchased for cancellation will not result in the employee losing the 110(1)(d.1) deduction.
XXXXXXXXXX 1999-000842
M. P. Sarazin
Attention: XXXXXXXXXX
February 10, 2000
Dear Sirs:
Re: Redemption of Shares subjected to Subsection 7(1.1) of the Income Tax Act
This is in response to your letter dated November 22, 1999, wherein you requested our comments regarding the significant increase in taxes when shares subjected to subsection 7(1.1) of the Income Tax Act (the "Act") are purchased by the employer for cancellation versus the situation when the shares are sold by the employee.
In your letter, you provided an example showing the taxes computed for each situation. We reviewed your examples and noted that the 110(1)(d.1) deduction was claimed in the disposition example but not claimed in the purchase for cancellation example. In our telephone conversation on February 9, 2000 (XXXXXXXXXX/Sarazin), you were advised that the omission of the 110(1)(d.1) deduction in the cancellation example was the cause of the significant tax difference between the two situations. You asked us to confirm that the deduction under 110(1)(d.1) of the Act would be available when an employer purchases shares, subjected to subsection 7(1.1) of the Act, that are held by an employee.
Subparagraph (b)(i) of the definition of "disposition" in both section 54 and proposed subsection 248(1) includes any share that is purchased for cancellation by a corporation. Clearly, shares of an employer held by an employee that are purchased for cancellation by the employer are considered to be disposed of by the employee for purposes of the Act.
The Canada Customs and Revenue Agency's general views regarding stock options are found in Interpretation Bulletin IT-113R4 titled Benefits to Employees - Stock Options. Paragraph 19 of IT-113R4 provides general comments with respect to each of the conditions that has to be satisfied in order to qualify for the deduction under paragraph 110(1)(d.1) of the Act. We note that there is no exclusion in respect of shares that are purchased for cancellation by the employer.
Where the conditions in paragraph 110(1)(d.1) are satisfied, we are of the view that an employee will be entitled to the deduction whether the shares are sold by the employee or the shares are purchased for cancellation by the employer.
We trust the above comments will be of assistance to you.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch
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