16 June 1994 External T.I. 9415575 - DEDUCTION FOR FORFEITURE UNDER STOCK OPTION

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:

Tax relief for employee taxed for stock option benefit which benefit is related to a share that is later forfeited.

Position TAKEN:

Clarified answer in previous opinion letter 940975 that deduction under 8(12) is available in certain circumstances.

Reasons FOR POSITION TAKEN:

Previous letter did not consider 8(12).

XXXXXXXXXX		941557

Attention: XXXXXXXXXX

June 16, 1994

Dear Sirs:

Re: Forfeitures Under Stock Option Plans

This is further to our letter of May 3, 1994, in which we responded to your facsimile transmission of April 18, 1994, concerning the above-noted topic. We wish to revise our answer concerning the tax relief available when an employee forfeits rights to a share for which the employee has already reported a taxable benefit.

Subsection 8(12) of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act") provides a deduction for an employee who forfeits rights to a share in certain circumstances. The deduction is available if the employee is deemed to have disposed of the share held by a trust pursuant to subsection 7(2) of the Act. The trust must have disposed of the share to the corporation that issued the share as a result of the employee failing to meet the conditions necessary for title to the share to vest in the employee. Furthermore, the corporation must acquire the share from the trust or redeem or cancel it for an amount no greater than the price paid to acquire the share from the corporation.

If the foregoing conditions are satisfied, the employee may, in the year of forfeiture, deduct the excess of the amount of the benefit deemed to have been received by the taxpayer under subsection 7(1) in respect of the share over the amount, if any, deducted under paragraph 110(1)(d) or (d.1) of the Act in respect of that benefit. Where a deduction is available under subsection 8(12), that subsection deems any gain or loss from the disposition of the share to be nil and provides that section 84 does not apply to deem a dividend to have been received in respect of the disposition.

Should an employee not meet one or more of the conditions listed in paragraphs 8(12)(a) through (d) of the Act and thus be unable to claim the deduction, the tax consequences outlined on page 2 of our letter of May 4, 1994, will still apply.

We regret that our previous reply was not complete and trust the foregoing comments, although not binding on the Department, clarify the tax consequences on the forfeiture of such shares.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate