12 May 2000 Internal T.I. 2000-0023197 - STOCK OPTION DEFERRED BENEFIT

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: A taxpayer acquires shares under an employee stock option and the employer reports the benefit and 110(1)(d) deduction entitlements on the taxpayer's T4. Can the taxpayer claim a deduction for the portion of the benefit that relates to shares that were not disposed of in that year?

Position: No.

Reasons: There is no provision in the Act providing for the deferral of 1998 benefits until the shares are sold.

                                                      May 12, 2000

TORONTO CENTRAL TSO                       HEADQUARTERS
Brian Dawe                                      M.P. Sarazin
Director                                        (613) 824-5441

      Attention: Dorothy Murray
                                                      2000-002319

XXXXXXXXXX (the "Taxpayer")

We are writing to you in response to your Round Trip Memorandum dated April 20, 2000, wherein you requested our comments regarding the deduction claimed by the Taxpayer on line 256 of her 1998 General Income Tax and Benefit Return (the "Return") as a reduction of the amount of stock option benefit included in her employment income.

The Taxpayer is employed by XXXXXXXXXX (the "Employer"), a public company whose shares trade on the XXXXXXXXXX. As part of her remuneration package, the Taxpayer is granted stock options by her Employer. In XXXXXXXXXX, the Taxpayer acquired XXXXXXXXXX shares of the Employer under her stock options and the Employer included a stock option benefit of $XXXXXXXXXX in her income for XXXXXXXXXX under paragraph 7(1)(a) of the Income Tax Act (the "Act"). The Taxpayer disposed of XXXXXXXXXX of her XXXXXXXXXX shares in XXXXXXXXXX.

In her XXXXXXXXXX Return, the Taxpayer included the total income reported on her T4 (which included the stock option benefit of $XXXXXXXXXX computed by the Employer) and claimed a deduction of $XXXXXXXXXX on line 249 of her Return for the "Stock Option and Shares Deduction" reported in box 39 of her T4 slip and a deduction on line 256 for $XXXXXXXXXX. The deduction on line 256 was computed as 3/5 of ($XXXXXXXXXX - $XXXXXXXXXX) to defer the income that related to the XXXXXXXXXX stock option shares that she acquired and did not sell in XXXXXXXXXX.

You are not aware of any deduction that is allowed in respect of the shares that are retained by the Taxpayer and, before reassessing the Return, you would like us to confirm that your understanding is correct.

Comments

We confirm that your understanding of the application of the Act to stock option benefits is correct.

The Canada Customs and Revenue Agency's general comments with respect to stock option benefits are found in Interpretation Bulletin IT-113R4. We would suggest that you provide the Taxpayer with a copy of IT-113R4. We note that the February 28, 2000 Budget proposals announced by the Department of Finance will allow for the deferral of stock option benefits until shares are disposed of where certain conditions are satisfied. However, the proposals do not apply to 1998.

Under paragraph 1 of IT-113R4, the Taxpayer should note that the stock option benefit has to be included in income in the year that the employee exercises a stock option and acquires shares. The only exception is when the employer granting the stock option is a Canadian-controlled private corporation. In this case, the stock option benefit is included in the year that the employee disposes of the shares acquired under the stock option. In either case, it is the employer that reports the amount of the applicable stock option benefit in the employee's T4. The stock option benefit is included in the employee's total income and the employee has to report the total income in his or her return.

Since it is evident that the Taxpayer's Employer is not a Canadian-controlled private corporation, the Employer appears to have reported the stock option benefit and the stock option deduction as required under the Act. The Taxpayer had to report her employment income which included the stock option benefit and she was only entitled to deduct the amount allowed as a deduction under paragraph 110(1)(d) of the Act (as reported on the T4). There is no deferral of any portion of the stock option benefit because the Taxpayer did not dispose of all of her shares. Consequently, the deduction claimed on line 256 of her 1998 Return should be disallowed.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate