1993 Internal T.I. 9302597 F - Identical Properties - Share Option Benefit

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.

April 26, 1993

Attention:  Ken Kavanat, Audit Review

Identical Properties Section 7 Benefit

This is in reply to your memorandum of January 28, 1993 concerning the interaction between the "identical properties" rule in subsection 47(1) of the Income Tax Act (the "Act") and the amount to be added under paragraph 53(1)(j) of the Act in computing the adjusted cost base of a property.

The situation on which you wish us to express our opinion is one where an individual

(a)     acquired 10 identical shares after 1971 at an average cost of $10,

(b)     exercises an option to acquire an additional share at an option price of $1 at a time that the shares have a fair market value of $200, thus triggering a section 7 benefit of $199, and

(c)     sells the 11th share for $200 (the earlier acquired 10 shares cannot be sold as they are in escrow).

For the purposes of determining the gain or loss on the sale of the 11th share, you ask if the amount to be added under paragraph 53(1)(j) of the Act (i.e., the section 7 benefit of $199 referred to in (b) above) is to be added before or after making the computation in subsection 47(1) of the Act.

Our Comments:

We have been asked to assume that only the 11th share is sold and our comments in 1 below are based on that assumption. Note, however, that in 2 below, we consider it reasonable to assume otherwise.

1.     The computation under subsection 47(1) is made as of the time an identical property is acquired, and establishes a deemed cost of the identical property for the purposes of computing at a later time the adjusted cost base ("ACB") of the property. Subsection 53(1) of the Act provides that in computing the ACB of a property certain amounts are to be added to the cost of the property.

It is thus our view that the deemed cost under subsection 47(1) of the 11th share is computed using its actual cost (i.e., $1). This results in a deemed cost of $9.18 for the 11th share (i.e., $101 divided by 11). In determining the ACB of the 11th share at the time of its disposition, the paragraph 53(1)(j) amount is then added to the subsection 47(1) deemed cost of the share. This results in an ACB of $208.18 for the 11th share and a capital loss of $8.18 on the disposition of that share for $200.

The above view is reflected in the comments in paragraphs 7 and 8 of Interpretation Bulletin IT-78. As stated in paragraph 7, the average cost of the identical property is established and, as stated in paragraph 8, any adjustment under section 53 is made to that cost in computing the ACB of the property.

2.     Another issue, though, is whether the taxpayer has in fact disposed of the 11th share. The argument made in support of this is that the other 10 shares are subject to an escrow arrangement that prevents their sale. We note, however, that the Department's position as explained in paragraph 6 of IT-387R2 is that shares which are subject to an escrow agreement so as to prevent the owner thereof from dealing in them are considered to be identical property with shares that are of the same class and kind which are not so restricted. We note further that the representative has apparently not objected to the 11 shares being considered identical properties; rather, he has focused on the interaction of subsections 47(1) and 53(1).

Where properties are identical and a person disposes of only some of those properties, it is not obvious which specific properties are being disposed of. In paragraph 9 of IT-448, it is stated that "a shareholder's interest in a corporation consists of a bundle of rights and privileges attached to the shares".

A share certificate is merely evidence of a share and is not the share itself. Thus, the fact that the taxpayer can identify a specific share "certificate" that was disposed of is insufficient in our view to identify the "share" that was sold where there were identical shares owned by the taxpayer at that time.

In considering the reasonableness of this approach, variations of the present scenario were considered. For instance,

(a)     if the taxpayer had acquired a 12th share at fmv of $200 prior to the time he disposed of the 11th share, subsection 47(1) would have operated to average the paragraph 53(1)(j) adjustment over the cost of all 12 shares (resulting in an average cost of $41,67; i.e., 101 + 199 + 200 divided by 12).

On disposition of a share (which, the taxpayer would argue would be the 11th or the 12th share), its ACB would also be only $41.67. The taxpayer would thus not realize in the current year the full benefit of the paragraph 53(1)(j) adjustment, or

(b)     if the taxpayer had 11 shares and sold all 11 shares at the same time, the total ACB of the shares disposed of would include the full amount of the paragraph 53(1)(j) adjustment.

In conclusion, we feel that the interpretation which best reflects the interaction of subsections 47(1) and 53(1) in the present scenario is that the taxpayer has sold 1/11 of the share that has an ACB of $208.18 and 10/11 of a share which has an ACB of $9.18, yielding an aggregate ACB of property sold of $27.27.

for DirectorFinancial Industries DivisionRulings Directorate