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: Questions on disposition of CCPC shares acquired on the exercise of a stock option and the exchange of shares under subsection 7(1.5).
Position: Explained operation of the law.
Reasons: Explanation of law requested.
XXXXXXXXXX 2001-007359
G. Kauppinen
June 29, 2001
Dear XXXXXXXXXX:
Re: Stock Options
This is in reply to your letter dated February 20, 2001 regarding stock options.
You have posed two hypothetical scenarios for our consideration.
Scenario 1
An employee exercises stock options and acquires 100 shares of a Canadian-controlled private corporation ("CCPC") for a nominal amount when the shares have a market value of $225 per share. The employee immediately sells the shares for $225 per share and one week later buys 100 of the same shares for $215 per share. The market value of the shares is now $60 per share.
You ask our opinion regarding the income tax consequences of the foregoing transactions.
Pursuant to section 7(1.1) and paragraph 7(1)(a) of the Income Tax Act (the "Act"), the taxpayer will have an income inclusion of $22,500 (100 x $225) on the sale of the shares. Pursuant to paragraph 53(1)(j) of the Act, the adjusted cost base of the shares is $22,500 and there is no capital gain or loss on the disposition of the shares since the proceeds of disposition are also $22,500 (assuming no other costs of disposition).
The adjusted cost base of the re-acquired shares is $21,500 (100 x $215).
If the taxpayer sold the shares for $60 per share, he or she would realize a capital loss of $15,500 ($21,500 - (100 x $60)) and an allowable capital loss of $7,750.
Scenario 2
An employee acquires shares of a CCPC on the exercise of a stock option. The CCPC is taken over by a related U.S. corporation whose shares are publically traded. As part of the take-over, the employee is required to exchange the shares of the CCPC for shares of the U.S. corporation. The shares of the U.S. corporation are disposed of one year after the exchange. You ask for our comments regarding the income tax consequences of the foregoing.
Because the option was in respect of a CCPC, the employee will not recognize a benefit until the shares are disposed of pursuant to subsections 7(1) and 7(1.1). Pursuant to subsection 7(1.5) of the Act, the employee will be deemed not to have disposed of the shares of the CCPC (the "CCPC shares") when they are exchanged for shares of the U.S. corporation (the "U.S. shares"), if the taxpayer receives no consideration for the disposition or exchange of the CCPC shares other than the U.S. shares and the total value of the U.S. shares immediately after the disposition or exchange does not exceed the total value of the CCPC shares immediately before the disposition or exchange. Also, pursuant to subsection 7(1.5) of the Act, the employee will be deemed not to have acquired the U.S. shares; the U.S. shares will be deemed to be the CCPC shares; the U.S. corporation will be deemed to be the CCPC; and, the U.S. shares shall be deemed to have been issued under the original agreement between the employee and the CCPC.
Accordingly, when the U.S. shares are disposed of, the employee will realize a benefit pursuant to subsections 7(1) and 7(1.1) equal to the difference between the fair market value of the CCPC shares at the time the option was exercised and the aggregate of the amount paid to acquire the CCPC shares and the amount paid to acquire the option. The amount of the benefit will be added to the adjusted cost base of the U.S. shares pursuant to paragraph 53(1)(j), for the purposes of calculating any capital gain or loss on the disposition.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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