5 July 1996 External T.I. 9621975 - STOCK OPTION TRANSFER TO RRSP

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:

Clarification of comments in file 950344

Position TAKEN:

Reiterated comments

Reasons FOR POSITION TAKEN:

Routine.

XXXXXXXXXX		5-962197

July 5, 1996

Dear XXXXXXXXXX:

Re: Exercise of Section 7 Stock Option by a Registered Retirement Savings Plan (RRSP)

This is in reply to your facsimile transmission of June 18, 1996, in which you refer to the Department's comments on the above-noted matter as reported in Window on Canadian Taxation #3596. You referred to the example provided in that item and asked the following questions:

1.Is the benefit taxed to the taxpayer limited to the RRSP deduction received on the transfer to the RRSP - i.e. $7.00?

2.Where the option is exercised when the share value is $15.00 does the taxpayer get taxed on the extra $5.00 of appreciation?

3.Can a taxpayer transfer an option with an exercise price and a fair market value of $1.00 to his RRSP and have all future gains accrue to the RRSP without the allocation of a benefit to him on exercise of the option by the RRSP? and

4.What value would be attributable to the transferred option where fair market value equalled the exercise price at the time of the transfer?

The example provided was as follows:

An employee receives, for no consideration, an option to acquire shares at a price of $3 per share, $3 being the fair market value of the shares at the time the option is granted. In a subsequent taxation year when the fair market value of a share has increased to $10 the employee contributes the option to an RRSP of which the employee is the annuitant. The RRSP subsequently sells the shares when the fair market value per share is $10; and eventually the annuitant, the beneficiary or the annuitant's estate receives property out of the RRSP in the form of periodic annuity income or a lump sum.

Our answers to your questions are as follow:

1.The benefit taxed to the individual under paragraph 7(1)(c) of the Income Tax Act (the "Act") is not limited to the deduction available to the taxpayer under subsection 146(5) of the Act on transfer of the option to the RRSP. The benefit and the deduction are two distinct amounts.

In the example it is presumed that the fair market value of the option at the time of its transfer is equal to $7.00. Therefore, upon the contribution of the option to the RRSP, the annuitant is entitled to a tax deduction under subsection 146(5) of the Act in the amount of $7. The benefit under paragraph 7(1)(c) of the Act is calculated on the exercise of the option by the RRSP and is equal to the excess of the value of the share at the time it is acquired by the RRSP ($10) minus the total of the amount paid by the RRSP trust for the share ($3) and the price paid for the option (nil).

2.If the option is exercised when the share is worth $15.00, the benefit the taxpayer is taxed on under paragraph 7(1)(c) of the Act is the excess of the value of the share when acquired ($15) over the total of the amount paid by the RRSP trust for the share ($3) and the price paid for the option (nil). The benefit would therefore be $12.00.

3.No. As explained above, the benefit under paragraph 7(1)(c) of the Act is calculated at the time the option is exercised by the RRSP and is equal to the excess of the value of the share at the time it is acquired by the RRSP minus the total of the amount paid by the RRSP trust for the share and the price paid for the option.

4.The value attributable to the transferred option would be the fair market value of the option at the time of its transfer to the RRSP.

Yours truly,

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