20 August 2009 Ministerial Correspondence 2009-0331391M4 - employee stock option losses

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: Under section 7 of the Act, a taxpayer has to include an amount in income that is based on the value of the shares acquired under a stock option determined at the time the option is exercised. Is there any relief where the shares have decrease in value at the time the taxpayer disposes of them.

Position: The letter provides a brief explanation of the existing legislation.

Reasons: CRA must apply the law as written. The Department of Finance is responsible for the implementation and amendment of tax policy.

August 20, 2009

XXXXXXXXXX

Dear XXXXXXXXXX :

Thank you for your correspondence received on June 24, 2009, responding to my email to you of the same date. You further expressed concern with respect to the taxation of employment benefits derived from participation in an employee stock option plan.

Under the Income Tax Act, a benefit received by an employee from his or her employer is generally subject to income tax. If an agreement between the employee and the employer allows the employee to acquire shares of the employer, the difference between the fair market value of the shares at the time they are acquired and the amount paid to purchase the shares constitutes a taxable benefit to the employee at the time the shares are acquired. However, if certain conditions are satisfied, the employee may elect to defer the inclusion of the benefit in income until the employee disposes of the shares, emigrates from Canada, or dies.

The employment benefit is always calculated at the time an employee exercises his or her stock option and acquires the shares. Therefore, the amount of the benefit is the same whether the employee includes the benefit in his or her income when exercising the option or, in cases where the benefit is deferred, when disposing of the shares. The employee must treat any gains or losses that are experienced after the employee acquires the shares in the same manner as any other investment in shares acquired in the stock market by that employee. In general, this means that the employee cannot apply any capital losses that arise as a result of the disposition of the shares to offset the benefit from employment that arose from exercising the option. However, an exception to this treatment is provided when the employee disposes of the shares as a consequence of death. In that case, any allowable capital loss that occurs as a result of the disposition may fully or partially offset the employment benefit that must be reported at that time.

The Canada Revenue Agency is responsible for administering and enforcing the Act and must apply the legislation as written. The Department of Finance Canada is responsible for implementing and amending tax policy. Therefore, I am forwarding a copy of our correspondence to the Honourable James M. Flaherty, Minister of Finance, for his consideration.

I trust the information I have provided is helpful.

Sincerely,

Jean-Pierre Blackburn, P.C., M.P
Minister of National Revenue

W. Harding
957-9769
2009-033139