15 April 1994 Internal T.I. 9405247 - EMPLOYEE STOCK OPTION 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Disposition of CCPC SHARES subject to 7 benefit on bankruptcy

Position TAKEN:

Disposed and reacquired at nil when corporation is bankrupt; disposed again on dissolution

Reasons FOR POSITION TAKEN:

50(1); 54(c)

						April 15, 1994

	Ottawa District Office		Head Office
	Client Assistance			Rulings Directorate
D. Duff
	Attention: G. Olbert		(613) 957-8953

						7-940524

Employee Stock Option Plan

This is in reply to your question about the benefits under an employee stock option plan.

The amount of the benefit is determined pursuant to paragraph 7(1)(a) of the Act and equals the amount by which the value of the shares at the time of acquisition exceeds the total of the cost of the shares and the cost, if any, of the right to acquire them. If, at the time of entering into the agreement, the corporation agreeing to sell its shares is a Canadian Controlled Private Corporation ("CCPC"), and immediately after the agreement the employee and the CCPC were dealing at arm's length, pursuant to subsection 7(1.1) of the Act, the benefit is deemed to have been received in the year the employee disposes of the shares. The amount of the benefit is still determined at the time of acquisition, it is only the time of reporting that gets deferred to the year of disposition. Also, it is not relevant that the employee remain employed with the corporation for these provisions to apply.

In our opinion, the disposition would occur when the shares are cancelled, however, there are other issues to consider. In the year during which the corporation has become bankrupt, subsection 50(1) of the Act deems the shareholder to have disposed of the share for nil proceeds and to have reacquired it at a cost of nil. It should be noted that this deemed disposition is only for the purposes of determining capital gains and losses, and is not for all purposes of the Act. In your situation, if the shareholder paid something for the shares, she will have a loss, which, since the corporation was a CCPC, should be a business investment loss as defined in paragraph 39(1)(c) of the Act.

In the year the corporation is dissolved and the shares are cancelled there would be a final disposition of the shares. Paragraph 54(c) of the Act defines a disposition of property to include an event by which a share is cancelled. Although this definition is only for the purposes of determining capital gains it is our position that there would also be a disposition for the purposes of section 7 of the Act. At this point the benefit determined pursuant to subsection 7(1) would be included in income pursuant to subsection 7(1.1) of the Act. Also, pursuant to paragraph 53(1)(j) of the Act this benefit will be added to the adjusted cost base of the shares. Consequently at this time there would be another loss since, presumably, the proceeds of disposition would be nil. Again this loss would likely qualify as a business investment loss.

Finally, paragraph 110(1)(d.1) of the Act entitles the taxpayer to a deduction equal to 25% of the deemed benefit provided the shares are held for 2 years and the other conditions therein are met. For the purpose of determining whether the 2 year holding period was met, the date of disposition would be the date of dissolution of the corporation. If the taxpayer is not entitled to the deduction pursuant to 110(1)(d.1), she may be entitled to the deduction under 110(1)(d).

for Director
Financial Industries Divisions
Rulings Directorate