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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1. For purposes of subsection 7(11), is the specified value based on the market value of the shares on a subsequent date when the option is re-priced?
Position:
No
Reasons:
The provision is clear that the fair market value at the date of granting the option must be used.
2002-013148
XXXXXXXXXX Karen Power, CA
(613) 957-8953
May 29, 2002
Dear XXXXXXXXXX:
Re: Stock Option Deferral
This is in reply to your facsimile of March 18, 2002, requesting our comments concerning the application of subsections 7(8) and 7(11) of the Income Tax Act (the "Act") in the following examples.
Example 1
On September 1, 2001, Employee A's corporate employer grants him options to acquire 500 company shares which vest immediately on granting of the options. The exercise price is $30 a share, which is the fair market value at the time the options are granted. On September 1, 2004, due to a significant reduction in the fair market value of the employer shares subsequent to the issuance of the options, the employer re-prices the exercise price of the options to $12 per share, the fair market value of the shares on that date. Employee A exercises 300 of the options on September 1, 2005. Employee A owns no other shares of the employer.
Example 2
On January 1, 2002, Employee B's corporate employer grants him options to acquire 100 company shares which vest immediately on granting of the options. The exercise price is $20 a share, which is the fair market value at the time the options are granted. There is a 2-for-1 share split, with an automatic adjustment to Employee B's options allowing him to acquire 2 shares for each option at an exercise price of $10 each. After the split, Employee B exercises his options and acquires all 200 shares. Employee B owns no other shares of the employer.
In both of the above examples, the corporate employer is not a Canadian-controlled private corporation ("CCPC"), within the meaning assigned by subsection 125(7) of the Act, the options all vest at the same time and all of the other conditions described in subsections 7(9) and 7(10) of the Act have been satisfied.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4 entitled Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the CCRA.
Where an employee acquires a security under an option granted by a corporate employer that is not a CCPC, the acquisition is a qualifying acquisition as defined in subsection 7(9) of the Act and the employee files an election in accordance with subsection 7(10), the taxation of the employment benefit computed under paragraph 7(1)(a) of the Act may be deferred under subsection 7(8) of the Act. The deferred benefit would be included in the employee's income in the year the employee disposes of the security, the year the employee dies or at the time the employee ceases to be resident in Canada, whichever occurs first.
The election under subsection 7(10) of the Act is limited to the value computed under paragraph 7(10)(c) of the Act. Under paragraph 7(10)(c) of the Act, the specified value cannot exceed the amount by which $100,000 exceeds amounts previously claimed under subsection 7(8) of the Act in respect of security options that vested in the same year as the particular security options that were exercised and are being considered for the current deduction under subsection 7(8) of the Act. Subsection 7(11) of the Act is the relevant provision for determining the "specified value" of option shares for purposes of the limit imposed under paragraph 7(10)(c). Under subsection 7(11), the specified value is defined as the amount determined by the formula A/B where A is the fair market value of the security that could be acquired under the option at the time the option was granted and B is the number of securities that it is reasonable to consider that the employee could acquire in lieu of one security under the original option at the time the option was granted. The variable B will only apply where there is a modification in the number of shares that could be acquired as a result of an exchange of options, a stock split of the employer's shares or a stock consolidation of the employer's shares.
In our view, the provision clearly provides that the specified value has to be based on the fair market value of the security at the time that the securities option was granted to the employee and not on the fair market value of the security at the time that the securities option was re-priced.
In example 1, the specified value of the 300 shares that will be exercised in 2007 is $9,000 ($30/1 x 300). Consequently, Employee A will be eligible to elect under subsection 7(10) in respect of the employment benefit resulting from the acquisition of all 300 shares. Where a valid election is made, a deferral of the entire employment benefit computed under paragraph 7(1)(a) of the Act will result. The benefit under paragraph 7(1)(a) will be equal to the difference between the fair market value of the shares at the time they are acquired, and the amount paid by the employee to acquire the shares.
In example 2, amount A in the specified value formula is $20, which is the fair market value, at the time the original option was granted. Amount B in the formula is 2, since Employee B was able to acquire 2 shares in lieu of the 1 share that could be acquired under the option at the time the option was granted. Therefore, the specified value of all 200 shares is $2,000 ($20/2 x 200). Consequently, Employee B will be eligible to elect under subsection 7(10) in respect of the employment benefit resulting from the acquisition of all 200 shares. Where a valid election is made, a deferral of the entire employment benefit computed under paragraph 7(1)(a) of the Act will result.
We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.
Yours truly,
Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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