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: The writer made representations with respect to the timing and computation of benefits under paragraph 7(1)(a) of the Act where the value of the shares under the option decreases.
Position: We provided comments particular to the situation.
Reasons: The reply is based on decisions reached by the Department of Finance.
Signed on June 15, 2004
The Honourable Stan Keyes, Minister of National Revenue, has asked me to reply to your correspondence of May 10, 2004, concerning your daughter and her family's situation as a result of her husband's participation in an employee stock purchase plan (ESPP).
The confidentiality provisions of the Income Tax Act preclude me from discussing information from a specific taxpayer's file without his or her written authorization. I can, however, provide you with some general information on this topic.
My predecessor, Mr. Bill McCloskey, wrote to you in respect of this matter on June 1, 2001. As you are aware, under the current provisions of the Act, the value of any shares acquired under an ESPP at the time the shares were acquired is used in calculating the amount of the benefit that must be included in income at the time the option is exercised.
As a consequence of numerous representations such as yours, the Department of Finance, which is responsible for tax policy and the implementation of any changes to the Act, reviewed the policy basis for the relevant provisions of the Act. Finance officials determined that the current income tax system reflects that employees who acquire shares under an ESPP and decide to hold their shares are no different than individual investors who acquire shares. Accordingly, the tax system reflects the result that, at the point of acquisition, those employees who decide to hold their shares have chosen to accept a market risk, as investors, in the expectation of a return on that investment. Thus, they are subject to the same general income tax rules concerning 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 concluded that, while the circumstances that some individuals are in is unfortunate, it is difficult to justify granting relief to those individuals who chose to accept the risk of the market after acquiring shares under their ESPP. They could not find any support to provide special retroactive tax relief to one group of individuals when a significant number of investors suffered losses due to the stock market downturn. Accordingly, the Department of Finance is not prepared to propose amendments to the income tax rules relating to the application of capital losses.
The Canada Revenue Agency (CRA) is responsible for administering and enforcing the Act and must apply the legislation as it is presently written. However, individuals who find themselves in difficult financial circumstances because of the large tax liability resulting from the employment benefit for shares acquired under an ESPP, should contact their local CRA tax services office to determine what arrangements can be made with respect to the tax liability and the interest that has accrued on it.
I trust that these comments will be helpful.
Policy and Planning Branch
May 20, 2004
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