31 May 2001 External T.I. 2001-0076195 - OPTION BENEFITS VALUATION

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:

The writer made representations with respect to the timing and computation of benefits under paragraph 7(1)(a) of the Act where the value of the shares under the option decreases.

Position:

Provided general information and included commentary related to concerns on valuation declines experienced in 2000.

Reasons:

The benefit is calculated at the time of the shares acquisition and the time of the acquisition is a question of fact.

XXXXXXXXXX 2001-007619
W. C.Harding
May 31, 2001

Dear XXXXXXXXXX:

Re: Calculation of Benefits Under an Employee Stock Option or Stock Purchase Plan

This is in reply to your letter of March 12, 2001, concerning the determination of benefits under an employee stock option or stock purchase plan.

Although your request is for a technical interpretation in respect of a hypothetical situation, it appears that it could relate to an actual, proposed or completed transaction. Written confirmation of the tax implications of proposed transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Canada Customs and Revenue Agency's Information Circular IC70-6R4 Advance Income Tax Rulings. If the transaction has been completed, the appropriate tax services office may be able to assist you in clarifying the tax consequences pertaining thereto, upon disclosure of all of the relevant facts. A copy of Information Circular IC70-6R4 as well as the Interpretation Bulletins referred to below, may be obtained on the Internet at http://www.ccra-adrc.gc.ca

While we cannot comment directly on your situation, we are able to provide you with the following general comments, which may be of assistance.

Employees who participate in stock option or purchase plans will normally be able to acquire shares of their employer's capital stock for an amount that is less than the value of the stock at the time the agreement is exercised and the shares are acquired. The difference reflects the portion of the cost of the shares that the employer is willing to absorb on behalf of employees, and represents a benefit to the employees from their employment. Accordingly, the legislation requires the benefit to be included in the employees' income from employment at the time the shares are acquired.

The date of the acquisition of shares under an agreement is a question of fact and law. Questions concerning a factual determination should be addressed to your local tax services office. 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". Paragraph 10 of the bulletin discusses the date of acquisition of shares in certain circumstances and indicates that generally, an acquisition is considered to occur when title to the share 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. (Additional commentary is also provided in IT-170, Sale of Property - When Included in Income Computation.) Consequently, employees will be considered to have acquired their shares under a stock bonus or option plan at the time that title, possession and risk in respect of the shares pass to the employee.

Once title to the shares passes and the employees assume all of the risks of ownership in respect of those shares, the employees have to make an investment decision to either keep or sell the shares. Consequently, if 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. If employees decide to hold the shares as an investment, any future growth or decline in the value of the shares is generally on capital account and will be treated as a capital gain or loss when the shares are sold. Any allowable capital loss incurred can only be used to offset any taxable capital gains and cannot be applied to offset any previous employment benefit included in income.

It has recently been brought to our attention that the benefits that must be reported by a number of employees for the year 2000 will be exceptionally large because the value of their employers' shares that they had agreed to acquire had increased significantly by the time the shares were acquired. It has also been noted that the value of the shares decreased shortly thereafter and that this has left a number of employees in a position of having to pay tax in respect of a benefit that is no longer reflected in the value of shares acquired. We also understand that many of the employees may, in fact, not have the resources to pay the tax because of the decrease in the value of the shares.

As this situation is of great concern to a number of citizens, and since it appears any remedies will require a change to the law, Canada Customs and Revenue Agency officials raised the issue with officials of the Department of Finance. Finance officials are urgently reviewing a number of different cases, but this will take some time.

Consequently, all employees should file their 2000 income tax returns as required and either report the full amount of the benefit reported on their T4 information slips as income from employment or claim a deferral of the benefit to the extent possible, in accordance with the draft proposals presently before Parliament. Once Finance's review is completed and a course of action is decided upon, the Canada Customs and Revenue Agency will then be in a position to work with Finance to determine the impact on individual cases.

Employees should endeavour to pay the income taxes that are due on filing to the extent possible without causing themselves any severe hardship. If it is determined that they cannot pay all of the tax payable, they should contact their local tax services office for further guidance.

I trust that these 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