4 July 2000 Internal T.I. 2000-0023887 - STOCK 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: Does the particular individual get a deduction pursuant to paragraph 110(1)(d) on his stock option benefit

Position: no

Reasons: Because he purchases shares at a XXXXXXXXXX % discount from the lower of FMValues of the shares at the beginning or end of a six-month period, he does not meet the criteria in subparagraph 110(1)(d)(ii)

		July 4, 2000

	Edmonton TSO	HEADQUARTERS
	Business and Enquiries Area	Mary Pat Baldwin
		957-2087
	Attention : Ms. Sue Sohnle
		2000-002388

Stock Options and 110(1)(d)

This is reply to your Enquiry Disposal Sheet of April 28, 2000 regarding the treatment of a stock purchase plan in which XXXXXXXXXX participated and whether he is eligible for a subparagraph 110(1)(d) deduction.

The situation described in your enquiry is an actual fact situation and as noted in paragraph 22 of Information Circular 70-6R3, the tax services offices are responsible for providing written opinions on completed transactions. However, we can offer the following general comments which should help you respond to the clients.

Subsection 7(1) of the Income Tax Act (the "Act") applies when a particular corporation, or a trustee acting under its direction, has agreed to sell or issue shares of that corporation or shares of another corporation with which it does not deal at arm's length to an employee of either the particular corporation or of any corporation with which it does not deal at arm's length.

Subject to some exceptions, an employee who acquires shares under such an agreement (commonly referred to as a "stock option") is generally required under paragraph 7(1)(a) of the Act to include in employment income, in the taxation year in which the shares are acquired, a benefit equal to :

• the fair market value of the shares at the time the shares are acquired by the employee

minus

• any amount paid or payable by the employee to the corporation for the shares, and
• any amount paid by the employee to acquire the right to acquire the shares.

The date of the acquisition of shares is a question of fact and law. Generally, acquisition will be considered to have taken place when title passes or, if title remains with the vendor as security for the unpaid balance, when all the incidents of title (such as possession, use, and risk) pass (see current version of IT-170, Sale of Property - When Included in Income Computation).

In computing taxable income for the taxation year a subsection 7(1) benefit is included in income, a taxpayer may deduct one-quarter of that benefit pursuant to paragraph 110(1)(d) of the Act if certain conditions are met, one of which is the amount payable by the taxpayer to acquire the shares under the stock option agreement is not less than the excess of the fair market value of the shares at the time the stock option agreement was made over any amount paid by the taxpayer to acquire the rights. (Please refer to paragraph 18 of Interpretation Bulletin IT-113R4 Benefits to Employees - Stock Options for more information concerning this deduction.)

As noted in the information supplied to us for the period of XXXXXXXXXX, the fair market value of the shares at the time the agreement was entered into was US$ XXXXXXXXXX and at the end of the period US$XXXXXXXXXX therefore entitling the taxpayer to acquire the shares at a discount of XXXXXXXXXX% from the lower of the fair market value at the beginning and end of the six-month period for a price of US$ XXXXXXXXXX; for the period of XXXXXXXXXX the fair market value of the shares at the beginning of the period was US$ XXXXXXXXXX and at the end was US$ XXXXXXXXXX and the taxpayer acquired the shares at a XXXXXXXXXX% discount for a price of US$XXXXXXXXXX. Based on this information it is our opinion that the conditions of subparagraph 110(1)(d)(ii) were not met and the individual is not entitled to the deduction under paragraph 110(1)(d) of the Act.

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 to Mrs. Jackie Page at 613-994-2898. A severed copy will be sent to you for delivery to the client.

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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