13 August 2004 External T.I. 2004-0072771E5 - Stock Option Agreement - Treasury Shares

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.

Principal Issues: General questions regarding the T4 reporting requirements for subsection 7(1) taxable benefit.

Position: General comments given

Reasons: Reporting requirements as set out in the T4130 Guide entitled Employers' Guide - Taxable Benefits 2003 -2004

									2004-007277
XXXXXXXXXX 								G. Moore
(613) 957-2747
August 13, 2004

Dear XXXXXXXXXX:

This is in reply to your letter of April 17, 2004, requesting our views concerning the T4 reporting of amounts earned by employees for stock grants.

We understand from the telephone conversation (Moore/XXXXXXXXXX) of July 29, 2004, that an employer corporation (the "Corporation"), that is not a Canadian-controlled private corporation, has issued treasury shares to its employees at no monetary cost to the employees. You are requesting clarification of the taxation and reporting requirements relating to the issuance of treasury shares to an employee by the 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 Revenue Agency ("CRA").

Details of the CRA's position on taxation of employee stock options can be reviewed in Interpretation Bulletin IT-113R4, Benefits to Employees - Stock Options. This and other publications referred to in this letter can be accessed on the CRA web site at the following address: http://www.ccra-adrc.gc.ca/formspubs/menu-3.html.

Subsection 7(1) of the Income Tax Act (the "Act") applies when a particular corporation, or a trustee acting under its direction, has agreed to sell or issue shares of that corporation or shares of another corporation with which it does not deal at arm's length to an employee of either the particular corporation or any corporation with which it does not deal at arm's length, at less than fair market value or for no monetary consideration.

Generally, in that situation, the employee is required to include in employment income, in the taxation year in which the shares are acquired, a taxable benefit, equal to the fair market value of the shares at the time they are acquired by the employee minus any amount the employee paid to acquire the right to acquire the shares and the amount paid or payable to the corporation for the shares.

To encourage more widespread use of employee stock option and purchase plans, which promote greater employee participation and increased productivity, paragraph 110(1)(d) was added to the Act, to provide that in certain circumstances where all of the conditions are satisfied, employees may claim a deduction from the amount included as a result of subsection 7(1) of the Act as a benefit. The deduction is equal to 50% of the amount of the benefit that is to be included in income as income from employment. There are several conditions that the employee must meet before the deduction can be claimed. For example, the employee must deal at arm's length with the employer, and, at the time of their issue or sale, the shares issued or sold must be prescribed shares, as described in section 6204 of the Income Tax Regulations. In addition, in order to be eligible for a deduction under paragraph 110(1)(d) of the Act, an employee must pay an amount for the shares that is not less than the fair market value of the shares at the time the agreement to issue shares was established. This condition would not be met where an employee was issued shares of the corporation for no monetary consideration. Therefore, a deduction under paragraph 110(1)(d) of the Act would not be available.

Provided certain conditions are met, subsection 7(8) of the Act allows for the deferral of taxation on the employment benefit realized when an employee acquires securities under an agreement to issue shares by the employer or a person not dealing at arm's length with the employer. However, the deferral is not available if the employee is not entitled to a deduction under paragraph 110(1)(d) of the Act.

The amount of the taxable benefit under subsection 7(1) of the Act is to be included in box 14 of the employee's T4 slip, and is also reported as code 38 on the T4 slip. For general information on T4 reporting requirements by an employer, please refer to Section 2.21 of the CRA's T4130 guide entitled Employers' Guide - Taxable Benefits 2003 -2004.

We trust these comments will be of assistance.

Roxane Brazeau-LeBlond, C.A.

For Director
Financial Industries Division
Income Tax Rulings Directorate