6 September 1990 Internal T.I. 901309 F - Employee Stock Options

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.

September 6, 1990

Dear Sirs:

Re: Employee Stock Options

This is in reply to your correspondence dated June 19, 1990 wherein you requested a technical interpretation given the following hypothetical situation: 

•     The taxpayer, an employee of a Canadian Public Company, is granted a stock option to acquire shares of Company A at $10 per share.

•     The stock option is exercisable by the taxpayer's estate. 

•     Subsequent to the taxpayer's death, the Estate exercises the stock option and immediately disposes of the shares at $25 per share.

It is your understanding that the tax consequences of the above are:

(1)     On the death of the taxpayer, no amount is required to be reported in respect of the stock options.

(2)     The Estate will recognize a gain equal to the difference between the proceeds from the sale ($25 per share) and the exercise price ($10 per share).

We concur with your first conclusion. However, we would also point out that the Draft Amendments to the Income Tax Act and Related Statutes, issued by the Honourable Michael H. Wilson, Minister of Finance (July 1990) proposes introducing new subparagraph 7(1)(e) of the Act which will apply with respect to deaths of taxpayers occurring after Announcement Date (July 13, 1990). Paragraph 7(1)(e) will apply to an employee who holds unexercised options under an employee stock option plan at the date of death. A benefit in the year in which he dies equal to the difference between the fair market value of the option immediately before the employee's death and the amount paid by the employee to acquire the option will be included in the employee's income under the new paragraph.

We cannot agree with your second conclusion. 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) of the Act to the adjusted cost base of the shares for the purpose of computing the capital gain on the ultimate disposition of the shares.

We trust that the above comments are of assistance to you.

Yours truly,

for Director Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch