26 April 2000 External T.I. 2000-0014185 - IDENTICAL PROPERTIES DISP OPTIONS

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: Where an individual who already owns employer shares acquires additional employer shares under a section 7 option resulting in two pools of identical shares with different adjusted cost bases because of the application of subsection 47(1) and paragraph 53(1)(j) of the Act and the individual immediately disposes of a number of shares equal in number to those acquired under the stock option, can we confirm the Agency's general position that the disposition will be considered to be pro-rata from each pool of identical shares in determining the gains on the disposition of the shares?

Position: This method or the new method described below to determine gains is acceptable.

Reasons: The Agency has reconsidered its long standing position and it is now of the view that, where it would seem obvious to conclude that the particular shares acquired under the option are in fact the shares that are being disposed of by the individual, the shares acquired may be identified as the particular shares being disposed of for purposes of computing any capital gain on the disposition.

XXXXXXXXXX 2000-001418
M. P. Sarazin
Attention: XXXXXXXXXX

April 26, 2000

Dear Sirs:

Re: Subsection 47(1) and Paragraph 53(1)(j)

This is in response to your letter dated March 6, 2000, wherein you requested the views of the Canada Customs and Revenue Agency (the "Agency") with respect to the acquisition of shares under a stock option and the immediate disposition or partial disposition of such shares when the individual holds two groups of the shares with different adjusted cost bases.

Where an individual acquires additional shares of a company under a section 7 option at a time when the individual already holds shares of the company, the individual would hold two groups of the same shares with different adjusted cost bases because the paragraph 53(1)(j) increase in the adjusted cost base in respect of the stock option benefit would only apply to the newly-acquired shares in the computation of their adjusted cost base. Where the individual disposes of the shares acquired under the stock option immediately after their acquisition, the Agency has taken the view that, due to the fungible nature of the shares, there would be a pro-rata disposition of all identical properties held. Consequently, the acquisition of the shares could result in a benefit under section 7 of the Act and the disposition may also result in a capital gain when such shares are disposed of because of our position regarding the pro-rata disposition of identical properties.

Comments

The Agency has recently reconsidered its position on partial dispositions of identical properties with different adjusted cost bases.

We have concluded that the Agency has sufficient scope under current legislation to permit a taxpayer to instead identify the shares acquired under a section 7 option as those being disposed of in the situation where it would seem obvious to conclude that the particular shares acquired under the option are in fact the shares that are being disposed of by the individual. In order to support specific identification an individual would have to show the correlation between the particular acquisition and disposition of shares. For example, where the number of shares acquired under a section 7 option is equal to the number of shares which are disposed of and the disposition occurs immediately after exercise of the option, the Agency will accept the taxpayer's identification of the particular shares acquired under the option as being the shares disposed of by the taxpayer. Consequently, only the adjusted cost base of the particular shares acquired under the option will be relevant for computing any capital gains or losses on the disposition of such shares. The Agency's revised position will be made public in Income Tax Technical News #19 which has not been published yet but which will be available at our website shortly (www.ccra-adrc.gc.ca/formspubs/menu-e.html).

We note that the Agency is not able to extend the position where the individual acquires additional shares subsequent to his or her acquisition under the section 7 option and before the disposition because the provisions of subsection 47(1) of the Act would apply to average the 53(1)(j) increase over all of the identical properties.

As a result of this new position, individuals who own identical properties will be able to exercise section 7 options and dispose of the shares/securities immediately without suffering the adverse tax consequences resulting from the averaging of the 53(1)(j) increase which was the effective result of the pro-rata position.

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