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: Where an employee held unexercised employee stock options at the time of the employee's death, what are the tax consequences to the deceased employee and the estate of the deceased employee? What are an employer's reporting obligations in this situation?
Position: The employee is deemed to have received a benefit in the year of death equal to the value of the stock options immediately after death less any amount paid by the employee to acquire the options. We generally accept to apply the provisions of paragraph 69(1)(c) of the Act such that the stock option is deemed to have been acquired by the estate at a cost equal to its fair market value. In general, where the estate exercises an employee stock option, the adjusted cost base of the option will be added to the cost of the shares acquired. The employer is required to issue a T4 slip in the name of the deceased employee in the year of death.
Reasons: Paragraph 7(1)(e). The provisions of paragraphs 69(1)(c) and 49(3)(b). Subsection 200(1) and (2) of the Income Tax Regulations.
December 21, 2012
Joshua Drake G. Allen
Senior Programs Officer 946-3558
Trust Accounts Programs Division
Paragraph 7(1)(e) Death of a Taxpayer
This is in reply to your email of September 28, 2011 and further to XXXXXXXXXX email of June 3, 2009 requesting our comments with respect to the tax treatment of employee stock option benefits on death of an employee. Specifically, XXXXXXXXXX email concerns a situation where an employee held unexercised stock options at the time of the employee's death and the tax consequences in this situation to the deceased employee, the estate of the deceased employee and what an employer's reporting obligations are in this situation.
Unless otherwise stated in this letter, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Suppl.), as amended to the date of this letter.
Where an employee held unexercised employee stock options at the time of the employee's death, paragraph 7(1)(e) deems the employee to have received an employment benefit in the year of death. This benefit is equal to the value of the options immediately after death less any amount paid by the employee to acquire the options. Paragraphs 7(1)(b), (c), and (d) do not apply if paragraph 7(1)(e) applies.
The amount of the employment benefit calculated in accordance with paragraph 7(1)(e) must be reported by the employer on the appropriate information return in the name of the deceased employee in the year of death, pursuant to subsections 200(1) or 200(2) of the Income Tax Regulations.
Where a deceased taxpayer's estate receives an employee stock option, we generally accept to apply paragraph 69(1)(c). Consequently, the option is deemed to have been acquired by the estate at a cost equal to its fair market value (FMV). XXXXXXXXXX. In general, if an estate exercises an employee stock option, subparagraph 49(3)(b)(ii) will apply to add the adjusted cost base (ACB) of the option to the cost of the shares acquired under the option.
Consequently, no additional benefit is reported by the employer other than the benefit reported under paragraph 7(1)(e) in respect of the deceased employee. Where an employee stock option provides that the option is automatically cancelled on death of an employee, the value of the option immediately after death will be nil with the result that no amount will be included in the deceased's income in accordance with paragraphs 7(1)(e) and 6(1)(a). If, however, the terms of a stock option provide that the deceased's estate may exercise the stock option during a limited period commencing after the employee's death, e.g., one year after an employee's death, paragraph 7(1)(e) may result in an income inclusion. Consequently, there may be situations where an option declines in value after the taxpayer's death, such that the benefit actually realized by the taxpayer's estate when the option is exercised or disposed of is less than the benefit required to be reported by the deceased taxpayer under paragraph 7(1)(e).
Subsection 164(6.1) is intended to provide relief in such situations and applies where a stock option is exercised, expires, or is otherwise disposed of within the first taxation year of the deceased taxpayer's estate. Where the legal representative elects in prescribed manner, the amount is deemed to be a loss from employment of the deceased taxpayer for the year of death. The amount of the loss is determined under paragraph 164(6.1)(a) and is equal to:
the amount of the benefit deemed to have been received by the deceased taxpayer in the year of death under paragraph 7(1)(e)
the value of the option immediately before the time it was exercised or disposed of minus any amount paid by the deceased to acquire the option.
If a deduction was claimed under paragraph 110(1)(d) in respect of the amount included in the deceased's income in the year of death under paragraph 7(1)(e), the amount of the loss that may be carried back is reduced by the deduction claimed pursuant to paragraph 110(1)(d). However, as a result of the amendment to subparagraph 110(1)(d)(i) that requires a taxpayer to acquire shares under the stock option agreement, a deduction pursuant to paragraph 110(1)(d) may not be available in circumstances where paragraph 7(1)(e) applies after March 4, 2010.
As mentioned above, the cost to the estate of the stock option would be its FMV at the time the stock option is acquired by the estate. Under paragraphs 53(2)(t) and 164(6.1)(b), the ACB of the option will be reduced by the amount of the loss, if any, determined under subsection 164(6.1) (but without reference to any deduction having been claimed under paragraph 110(1)(d)).
We trust our comments are of assistance.
Louise J. Roy, CPA, CGA
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Canada Revenue Agency
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