15 April 2003 External T.I. 2003-0007795 - OPTION BENEFITS REDUCTION IN SHARE VALUE

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:

Calculation of benefits under an employee stock option or stock purchase plan.

Position:

Provided follow-up commentary based on the results of a recent review of the provisions by the Department of Finance.

Reasons:

The Department of Finance views on the matter were made available.

XXXXXXXXXX 2003-000779
W. C.Harding
April 15, 2003

Dear XXXXXXXXXX:

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

We are writing further to the June 11, 2001, letter that Mr. William McCloskey wrote to you at the request of the previous Minister of National Revenue, the Honourable Martin Cauchon, concerning your participation in your employer's stock purchase plan. At that time, Mr. McCloskey noted that officials of the Department of Finance were reviewing the provisions of the Income Tax Act as they pertained to employees who exercised options and acquired shares just prior to a decline in the value of the shares acquired, such that they were required to report a benefit that was significantly greater than the value of the shares held.

The Department of Finance has completed its review of the policy basis for the provisions of the Income Tax Act relating to employer-sponsored share purchase plans. The current income tax system reflects the conclusion that employees who acquire shares under a share purchase plan and decide to hold their shares may be compared to individual investors who acquire shares, often in the same corporation, with after-tax dollars or borrowed money. Accordingly, the tax system reflects the result that, at the point of acquisition, those employees who hold their shares have chosen to accept a market risk, as an investor, in the expectation of a return on that investment, including the future appreciation in the value of those shares. Thus, they are subject to the same general income tax rules respecting capital gains and losses on the underlying shares as other investors and are generally not allowed to deduct their capital losses from other income. These rules have been in place for many years.

The Department of Finance has concluded that while the circumstances that individuals such as you are in are unfortunate, it is difficult to justify granting special retroactive tax relief to individuals who chose to accept the risk of the market after acquiring shares under their employer's share purchase plan, while at the same time retaining the income tax rules of general application that limits capital loss offset for other investors who find themselves in similar circumstances due to the stock market downturn. Accordingly, Finance is not prepared to propose amendments to the income tax rules relating to the application of capital losses.

With respect to the issue of being able to defer taxation of the employment benefit realized on the acquisition of shares until the shares are disposed of, it should be noted that one of the conditions to qualify for the deferral measure introduced in the 2000 budget is that the amount paid to acquire the shares not be less than the fair market value of the shares at the time the agreement to purchase the shares was established. This recognizes that an initial built-in discount represents, in effect, an immediate employment benefit, which should not be the subject of preferential tax treatment. Accordingly, if your plan allowed you to acquire the shares at less than the fair market value at the time the agreement was established, you do not qualify for this deferral measure.

As reflected in the June 11, 2001 letter, you may have found or find yourself in difficult financial circumstances if you had a large tax liability resulting from the employment benefit relating to the shares that you acquired under your employer's share purchase plan. In this regard, you may wish to contact your local CCRA Tax Services Office to determine if an arrangement can be made regarding payment of your tax liability.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch