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: Can a net capital loss be carried over and applied against stock option benefits included in income under section 7 of the Income Tax Act?
Position: No
Reasons: Net capital losses are applied against taxable capital gains. Stock option benefits are treated as employment income.
XXXXXXXXXX 2000-003980
S. Parnanzone
August 2, 2000
Dear XXXXXXXXXX:
Re: Capital Losses
This is in reply to your letter of July 12, 2000, and is further to our telephone conversation (Parnanzone/XXXXXXXXXX) of August 1, 2000, concerning the application of capital losses against stock option benefits.
You described a situation involving an individual who in 1997 incurred a capital loss of $85,000 on the sale of shares. Pursuant to a stock option agreement, the individual is entitled to acquire, at a discounted value, shares of the individual's employer's parent company. The stock option was received by the individual by virtue of employment.
Your question is whether the individual is able to apply the 1997 capital loss to reduce the stock option benefits that the individual would be required to include in computing income as a result of exercising the option to acquire shares of the employer's parent company. You are not concerned with the capital gains the individual may realize on the disposition of the acquired shares.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of assistance to you.
The rules under the Income Tax Act concerning capital gains and losses are discussed in detail in the guide titled 1999 Capital Gains. Capital losses incurred in a year have to be applied against capital gains for that year. If the capital losses exceed the capital gains, a portion of the excess is a net capital loss. The portion for 1997 is 3/4. The net capital loss can be used to reduce taxable capital gains in any of the three preceding years or in any future year.
The tax rules concerning stock options are explained in Interpretation Bulletin IT-113R4, Benefits to employees - stock options. Stock option benefits realized by an individual by virtue or in the course of employment are included in income as employment income under section 7 of the Income Tax Act.
In view of the foregoing, a net capital loss cannot be claimed against stock option benefits because these are not treated as taxable capital gains but rather are considered employment income.
We trust that our comments are of assistance to you.
Yours truly,
B. Dath
Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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