8 November 1991 Ruling 912013 F - Employee Shares Purchase Plan

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.

Dear Sirs:

Re: Employee Shares Purchase Plan

We refer to your letter of July 18, l991 to our Charlottetown District Office, which was forwarded to this office for a response. In your letter, you requested an opinion as to the tax consequences of,

24(1)

Opinions

It appears that the interpretation you seek relates to specific transactions which your company proposes to implement and therefore, we refer you to Information Circular 70-6R2 dated September 28, l990. Confirmation with respect to proposed transactions will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling in respect of specific proposed transactions, a request for an advance ruling can be submitted in accordance with the Information Circular.  We can, however, provide the following general comments.

Shares issued at a discount under the rights offering

If a corporation confers a benefit on a shareholder, such as issuing shares of its capital stock at a discount, in general terms, subsection 15(1) of the Act would apply to include the amount or value of the benefit in computing the income of the shareholder for the taxation year in which the benefit would be conferred.  However, if the corporation conferred the right to buy additional common shares at a discount on all holders of common shares of the corporation, then pursuant to the provisions of paragraph 15(1)(c) of the Act, no benefit would be required to be so included in computing the income of the shareholder.  Here, it may be noted that paragraph 15(1)(c) of the Act only applies to exempt holders of common shares of a corporation from the application of subsection 15(1) of the Act; the paragraph does not apply to rights received by holders of preferred shares of a corporation.

The cost to a common shareholder of his additional common shares acquired at a discount would initially be determined as being the actual discounted cost of those shares.  However, the provisions of subsection 47(1) of the Act would then apply to average the adjusted cost base of all common shares of a corporation held by a particular shareholder at the time the additional common shares were acquired, since such common shares would be "identical properties" within the meaning of subsection 47(1) of the Act.  Adjusted cost base has the meaning assigned by paragraph 54(a) of the Act.  Additional information on computing the adjusted cost base of identical properties may be found in Interpretation Bulletin IT-387R2.

Shares issued at a discount under the DRIP

The entire amount of the cash dividend would be a taxable dividend that would be includable in computing the income of the shareholder pursuant to paragraph 12(1)(j) of the Act.  If the shareholder is an individual, he would be required to "gross-up" the dividend by one- quarter of the actual dividend declared and paid.  If all common shareholders of the corporation are given the right (i.e. the opportunity) to participate in the DRIP, the provisions of paragraph 15(1)(c) of the Act would apply, because all holders of common shares of the corporation would have received a right to buy additional shares thereof.  In this regard, it may be that certain non-resident shareholders may be barred from subscribing for shares of the corporation because of restrictions in Canadian law or because the corporation did not comply with the securities regulation in the country where the non-residents reside.  It is also possible that residents of a province of Canada may also be barred from acquiring additional shares due to similar reasons.  In such cases, the Department still considers paragraph 15(1)(c) to apply provided that rights to acquire additional shares of the corporation are in fact issued to the shareholders affected by the restrictions or non-compliance referred to herein and such shareholders are entitled to sell such rights. This topic, together with others of general interest, is discussed in Interpretation Bulletin IT116R2 referred to below.

If a discount is given to those shareholders who participate in the DRIP, in circumstances where the exception in paragraph 15(1)(c) of the Act does not apply, it is the Department's practice not to apply subsection 15(1) of the Act to include the amount of the discount in computing the income of the shareholder provided that the discount given does not exceed 5% of the fair market value of a common share of the corporation immediately before the issue of the Discounted Shares, i.e. the Discounted Shares are issued at 95% of their fair market value.  If the discount exceeds 5%, then the entire discount would constitute a benefit that would be includable in computing the income of the shareholder pursuant to the provisions of subsection 15(1) of the Act.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.  For your general information, we attach a copy of Interpretation Bulletin IT-116R2, which discusses other aspects of the Departments's views on the topic of rights to buy additional shares.

We regret the delay in responding to your letter.  This was due to the heavy workload at this office over the past few months.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch