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.
Signed on June 1, 2001
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Martin Cauchon, Minister of National Revenue, has asked me to respond to your correspondence addressed to XXXXXXXXXX, concerning your son-in-law's participation in his employer's stock purchase plan. XXXXXXXXXX sent a copy of your letter to Mr. Cauchon on March 6, 2001.
Employees who participate in a stock option or purchase plan will normally be able to acquire shares of the employer's capital stock for an amount that is less than the value of the stock at the time of the acquisition. 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.
To encourage more widespread use of employee stock option and purchase plans, which promote greater employee participation and increased productivity, a provision was added to the legislation, which provides that employees may claim a deduction from the amount included as a benefit. The deduction is generally available if the shares are ordinary common shares that the employees acquire through a stock option or purchase plan. However, there are several conditions that the employees must meet before the deduction can be claimed. In particular, the employees must deal at arm's length with their employer and must agree to pay an amount for the shares that is not less than the fair market value of the shares at the time the agreement was established.
As well, draft legislation now before the House of Commons will, in certain cases, provide for a deferral of the taxation of benefits from employees' participation in an employee stock option or purchase plan until the shares are sold. However, the proposals are also subject to some limitations. Most notably, the provisions will not apply in any situation where the deduction discussed in the previous paragraph is not available to offset the employment benefit. Accordingly, if the plan provides that employees may acquire shares for an amount that is less than the fair market value of the shares at the time the agreement was established, some individuals may not be able to use this deferral option.
On acquiring the shares, employees have to make an investment decision to either keep or sell the shares. If employees decide to hold them 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.
Through letters such as yours, it has been brought to my 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. I 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 (CCRA) 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 CCRA will work with Finance to determine the impact on individual cases.
Employees should thus endeavour to pay the income taxes that are due on filing to the extent possible without causing themselves any severe hardship. If it is then determined that they cannot pay all of the tax payable, they should contact their local tax services office for further guidance. Officials of your son-in-law's tax services office will be alerted to the situation and the status of the review. If additional information is required, Mr. Wayne Harding of the Income Tax Rulings Directorate, Policy and Legislation Branch, will also be available to provide any necessary assistance to him or to the tax services office. Mr. Harding may be reached by calling 0-613-957-9769 collect, or by writing to Place de Ville, 16th Floor, Tower A, 320 Queen Street, Ottawa, Ontario K1A 0L5.
I have also noted your comments with respect to the policy position underlying the proposed legislation on the deferral of stock option benefits. Tax policy is the responsibility of the Department of Finance. I assure you that Finance officials are aware of the issues you have raised.
I trust that my comments will be of assistance to you.
Yours sincerely,
Bill McCloskey
Assistant Commissioner
Policy and Legislation Branch
Wayne Harding 957-9769
May 8, 2001
Finalized: 01/05/28 JG/ps.
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