1 June 2001 External T.I. 2001-0081515 - EMPLOYEE STOCK PLANS

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:

How should a particular employee stock bonus plan be treated for taxation purposes?

Position:

The questions relate to an actual proposal. We provided general information that is basic to the understanding of such plans.

Reasons:

A basic understanding of section 7 was required.

XXXXXXXXXX 2001-008151
W. C. Harding
June 1, 2001

Dear XXXXXXXXXX:

Re: Calculation of Benefits Under an Employee Bonus Plan

This is in reply to your correspondence of April 25, 2001, concerning the determination of benefits under an employee stock bonus plan.

Your request is for a technical interpretation, relates to an actual, proposed or completed transaction. Written confirmation of the tax implications 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 Bulletin and guides 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.

In your letter, you provided a brief description of an arrangement under which employees may elect to purchase shares of their employer through payroll deductions. As an incentive, the employees may also receive 1 additional share for every 10 shares they acquire and will receive 1 additional share at the end of each of the following 5 years for every 10 shares they continue to own.

In the absence of the actual terms of the arrangement, we cannot make a specific determination of the tax consequences. However, it would appear that the plan would be a stock bonus plan. Accordingly, the value of the additional shares at the time they are acquired by the employees, would be included in their income as a taxable benefit under section 7 of the Income Tax Act (the "Act").

Section 7 of the Act applies to any arrangement where an employer agrees to sell or issue shares to an employee. Employees who participate in a stock bonus plan will normally be able to acquire shares of their employer's capital stock at no cost or for an amount that is less than the value of the stock at the time 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 plan at the time that title, possession and risk in respect of the shares pass to the employee.

Interpretation Bulletin IT-113R4 noted above provides information in respect of the year end reporting of benefits under section 7 of the Act. Additional information may be found in the Employers Guide - Taxable Benefits.

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.

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