20 February 2003 External T.I. 2003-0182535 - TAXATION OF EMPLOYEE STOCK OPTIONS

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: Taxation of employee non-CCPC stock options.

Position: This is a completed transaction and not a ruling request. General information provided.

Reasons: Reference to the legislation and Information Bulletins.

XXXXXXXXXX 2003-018253
Renée Shields
(613) 948-5273
February 20, 2003

Dear XXXXXXXXXX:

Re: Taxation of Employee Stock Options

This is in response to your letter received on January 10, 2003 inquiring about the taxation of employee stock options as provided by a Canadian public corporation.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry 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 Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Details of the CCRA's position on taxation of employee stock options can be reviewed in Interpretation Bulletin IT-113R4, "Benefits to Employees - Stock Options". Employees who participate in a stock option 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 between what the employee pays for the shares (together with any cost of acquiring the stock option) and the fair market value of the shares at the time the option is exercised reflects the portion of the cost of the shares that the employer is willing to absorb on behalf of employees. It is also an employment benefit to the employees. Accordingly, paragraphs 6(1)(a) and 7(1)(a) of the Income Tax Act (the "Act") 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 Act, which provides that in certain circumstances where all of the conditions are satisfied, employees may claim a deduction from the amount included as a benefit. The deduction is equal to 50% of the amount that is to be included in income as income from employment. The deduction is generally available if the shares are ordinary common shares that the employee acquires through a stock option or purchase plan. However, as mentioned, there are several conditions that the employee must meet before the deduction can be claimed. In particular, the employee must deal at arm's length with the 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.

When an individual exercises a stock option for the public corporation shares and immediately disposes of the shares on the open market, the employer will include the amount of the benefit as employment income in Box 14 of the individual's T4 Statement of Remuneration ("T4") and report it as Code 38, "Stock option benefits". This amount would be included by the individual on Line 101 of the T1 Tax Return. If the 50% deduction is available, the employer would report it as Code 39, "Stock option and shares deductions (110(1)(d))" on the T4 and the employee would enter this amount on Line 249 of the T1 Tax Return.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch