26 April 1990 Internal T.I. 7900409 F - Audit Review

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.

This is in reply to your memorandum of April 11, 1990.

Your particular concern relates to the following questions raised by a "local study group" with whom you intend to meet in mid-May:

     "At the date of death, a taxpayer resident in Canada holds an option to purchase shares in the capital stock of his employer. The employee stock option agreement provides that on the death of an employee his estate may exercise the option to purchase stock within one year. The stock option is otherwise non-transferable. The employer is a public corporation of Canada.

     Questions

     Will Revenue Canada confirm that:

     (a) there is no stock option benefit to the employee at date of death of death under section 7 of the Act:

     (b) upon the exercise of the stock option, the estate will have an adjusted cost base ("ACB") in the shares equal to the amount paid by it (i.e., the option price); and

     (c) upon a future disposition, the estate will realize a capital gain or loss equal, to the difference, if any, between its ACB (the option price) and the fair market value proceeds of disposition."

Our Comments

It is our view that section 7 of the Act is not applicable in this situation inasmuch as the employee neither acquired the shares in question nor disposed of his rights for valuable consideration. While by virtue of his death, the rights under the plan were transferred to his estate, it is our view that neither paragraph 7(1)(c) of the Act applies since death is not a transaction.

Subsection 70(2) of the Act generally operates to include in income for the final return of a taxpayer any amount which, if realized, would have been realized, would have been included in the taxpayer's income. However, it is our view that employee stock options are not covered by this subsection because an employee stock option is a right to purchase stock rather than a right to an amount of money which would have been included in the employee's income if it had been realized. Subsection 70(5) of the Act creates a deemed disposition of all capital property held as of the date of death. However, as stated in paragraph 17 of Interpretation Bulletin IT-113R3, employee stock options are not capital property. Consequently, it is our view that there are no tax consequences to the deceased employee in respect of the unexercised employee stock option upon his death.

The tax implications to the taxpayer's estate are based on paragraph 69(1)(c) of the Act. Where an estate acquires property by way of bequest or inheritance, it is deemed to acquire the property at the fair market value at the time it so acquired it. Provided that the shares so acquired are capital property to the estate, the estate would add the deemed cost of the option under paragraph 69(1)(c) to the adjusted cost base of the shares for the purpose of computing the capital gain on the ultimate disposition of the shares.

21(1)(b)

for DirectorFinancial Industries DivisionRulings Directorate