23 March 1995 External T.I. 9500405 - STOCK 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.

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:

	Whether 7(1.5) applies to a transfer of shares 	under 85(1)?

Whether 7(1.3) applies to a transfer under 85(1)?

Position TAKEN:

	There is no disposition if the requirements under 	7(1.5) are satisfied.  There is a disposition where 	corporations deals at arms length.

No where there is no disposition pursuant to 7(1.5).

Reasons FOR POSITION TAKEN:

Provisions of the Act.

		5-950040
XXXXXXXXXX	Robert Gagnon

Attention: XXXXXXXXXX

March 23, 1995

Dear Sirs:

Re: Disposition of Shares Acquired Through a Stock Purchase Plan

This is in reply to your letter of February 6, 1995 wherein you requested a technical interpretation concerning the disposition of shares acquired through an employee stock purchase plan.

Section 7 of the Income Tax Act ("Act") does not apply solely to shares issued by a corporation to its employees under a stock option agreement. Subsections 7(1) and 7(1.1) of the Act are applicable where a Canadian-controlled private corporation ("CPCC") enters into an agreement with an employee under which the CPCC agrees to issue shares at a specific date for an amount less than the value of the shares and the employee agrees to purchase the said shares.

There is no disposition for the purposes of section 7 and paragraph 110(1)(d.1) of the Act where an individual disposes of shares of a CPCC, that were acquired under an agreement referred to in subsection 7(1.1), to a holding corporation with which the CPCC does not deal at arm's length immediately after the disposition, and receives no consideration for the disposition other than shares of the holding corporation whose total value (immediately after the disposition) does not exceed the total value (immediately before the disposition) of the shares disposed of.

However, there is a disposition of shares for the purposes of paragraph 7(1)(a) and subsection 7(1.1) of the Act where an individual transfers his shares of a CPCC acquired under circumstances outlined in subsection 7(1.1) to his holding corporation with which the CPCC deals at arm's length immediately after the transfer, even though an election is made under subsection 85(1) of the Act.

The rules referred to in subsection 7(1.5) of the Act applies solely for the purposes of section 7 and paragraph 110(1)(d.1) of the Act. Subsection 7(1.3) applies solely for the purpose of subsection 7(1.1) of the Act. It is our view that, if pursuant to subsection 85(1) of the Act, the elected amount is greater than the exchanged shares adjusted cost base ("ACB"), this does not affect the operation of subsection 7(1.5) of the Act. Accordingly, an individual could elect to create a capital gain in order to benefit from the capital gains exemption for qualified small business corporation shares.

We have assumed that the situation four in your letter refers to the election provided in subsection 110.6(19) as proposed in Bill C-59. It is our view that section 47 applies to determine the ACB of all identical shares of a CPCC (acquired after 1971) owned by an individual if the cost of one of these shares is increased pursuant to proposed subparagraph 110.6(19)(a)(ii).

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch