4 April 2001 External T.I. 2001-0074445 - OPTION BENEFIT SUBSEQUENT REDUCTION

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) Is the 7(1)(a) benefit computed based on the date the option is exercised? 2) Can the stock option benefit be reduced because of the subsequent reduction in fmv of the shares?

Position: 1) No. 2) No.

Reasons: 1) The benefit is computed based on the date the share is acquired by the employee. 2) There is no provision providing for the reduction.

XXXXXXXXXX 2001-007444

M. P. Sarazin, C.A.

April 4, 2001

Dear XXXXXXXXXX:

Re: Section 7 Stock Option Benefit

This is in reply to your letter of March 12, 2001, requesting our comments regarding the computation of a stock option benefit included in your income under paragraph 7(1)(a) of the Income Tax Act (the "Act").

Comments

In your letter you have outlined an actual fact situation related to completed transactions. As noted in Information Circular 70-6R4, this directorate can only provide advance income tax rulings in respect of specific proposed transactions. We must advise you that the review of completed transactions falls within the responsibility of tax services offices. Consequently, we can only provide you with the following general comments.

Under paragraph 7(1)(a) of the Act, an employee is deemed to have received an employment benefit equal to the amount, if any, by which the value of the share at the time the employee acquired the share under the stock option agreement exceeds the total of the amount paid to the employer to acquire the share and the amount, if any, paid to acquire the stock option.

The date of the acquisition of shares is a question of fact and law. The Canada Customs and Revenue Agency's general views regarding stock options are found in Interpretation Bulletin IT-113R4 titled "Benefits to Employees - Stock Options". The date of acquisition of shares in certain circumstances is discussed in 10 of IT-113R4. 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). Consequently, an employee will be considered to have acquired his or her shares under a stock option at the time that title, possession and risk in respect of the shares pass to the employee.

We note that once title to employer shares passes to an employee and the employment benefit has been reported by the employer, the employee assumes all risk of ownership in respect of those shares. Consequently, where there is a reduction in the fair market value of the shares subsequent to their acquisition by the employee, the employment benefit previously reported in respect of the acquisition of the shares is not reduced to reflect the subsequent reduction in value of the shares.

Copies of Information Circulars and Interpretation Bulletins are available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust that the above comments will be of assistance to you.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate