23 October 2000 External T.I. 2000-0046305 - STOCK OPTIONS IDENTICAL PROPERTY

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:

1. To which taxation years will the new position regarding identical shares acquired on a stock option exercise (as described in Technical News #19) be applicable?

2. What is the scope of the new position?

Position:

1. The new position is effective the date that Technical News #19 was published.

2. Cannot provide specific comments.

Reasons:

1. The new position will apply to taxation years that were open as of the date that Technical News #19 and are open at the time the new position is utilized.

2. Any variations from the general guidelines provided in Technical News #19 will be considered in the context of an advance income tax ruling.

XXXXXXXXXX 			2000-004630
G. Kauppinen
Attention: XXXXXXXXXX 

October 23, 2000

Dear Sirs:

Re: Stock Options and Identical Property - Technical News No. 19

This is in reply to your letter dated July 25, 2000 wherein you requested our opinion on the above-noted subject.

Specifically, you ask which taxation years will be open to a taxpayer who wishes to take advantage of the new position in Technical News No. 19 regarding the disposition of identical properties acquired on the exercise of a stock option (the "New Position").

You have also inquired as to the scope of the applicability of the New Position (e.g. acceptable time frame between the date the option is exercised and the shares are sold and whether it is permissible to sell more or less shares than those acquired by virtue of the exercise of the option).

Comments

The New Position is effective as of June 16, 2000, the date Technical News #19 was published, and, in keeping with our normal policy, will apply to all future assessments and reassessments. Consequently, where there is a correlation between the acquisition of securities under a securities option and the disposition of the particular securities, the individual will be able to identify the particular securities acquired under the securities option as being the securities disposed of for any taxation years that are still open as of June 16, 2000. Where a return has been assessed for a previous year and the individual has not objected to the assessment within the time allowed under subsection 165(1) of the Income Tax Act, that return will be closed and the individual will not be entitled to use the New Position.

The scope of the New Position will depend upon the facts of a particular case. The following excerpt from Technical News No. 19 is meant to provide general guidelines only. As stated in the 2nd paragraph below, we will provide an advance income tax ruling for specific proposed transactions which do not strictly comply with the general guidelines.

Where it would seem obvious to conclude that the particular securities acquired under a section 7 option are in fact the securities that are being disposed of by the employee, we have concluded that the current legislation permits an employee to instead identify the securities acquired under the option as those being disposed of. In order to support specific identification, the employee would have to show the correlation between the particular acquisition and disposition of securities. For example, where the number of securities acquired under a section 7 option is equal to the number of securities which are disposed of and the disposition occurs immediately after exercise of the option, the Canada Customs and Revenue Agency will accept the employee's identification of the particular securities acquired under the option as being the securities disposed of by the employee. Consequently, only the adjusted cost base of the particular securities acquired under the option will be relevant for computing any capital gains or losses on the disposition of such securities. This interpretation does not apply where the employee acquires additional securities 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 paragraph 53(1)(j) increase over all of the identical properties.

As a result of this new position, employees who own identical properties will be able to exercise section 7 securities options and dispose of the securities immediately without suffering adverse tax consequences resulting from an averaging of the paragraph 53(1)(j) increase. We will provide advance income tax rulings on specific proposed transactions should there be concerns about the applicability of this interpretation to a particular situation.

We trust our comments will be of assistance to you.

Yours truly,

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