12 June 1997 External T.I. 9714185 - FLOW-THROUGH SHARES, STOCK OPTIONS

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:

Where a flow-through share is acquired under an employee stock option, would 53(1)(j) apply to add the employment benefit to the adjusted cost base of the share?

Position: Yes

Reasons:

Subsection 66.3(3) only applies to deem the cost of the share to be nil and adjustments to the cost under section 53 would continue to apply.

	                  	971418
XXXXXXXXXX	                  M.P. Sarazin

Attention: XXXXXXXXXX

June 12, 1997

Dear Sirs:

Re: Employee Stock Option and Flow-Through Share

This is in reply to your letter dated May 20, 1997, wherein you requested our comments with respect to the application of subsection 66.3(3) of the Income Tax Act (the "Act") in the computation of the adjusted cost base of a share acquired by an employee under a stock option.

You are of the view that the provisions of subsection 66.3(3) of the Act should only reduce the amount paid to acquire the share under the employee stock option to nil and the additions to the cost required under subsection 53(1) of the Act in determining the adjusted cost base of the share should not be affected by subsection 66.3(3). Otherwise, the employee would be taxed on the employment benefit under section 7(1)(a) on the acquisition of the share and then the same employment benefit would be taxed as a capital gain on the disposition of the share if the employment benefit is not added to the adjusted cost base in accordance with paragraph 53(1)(j) of the Act.

Comments

The expression "adjusted cost base" is defined in section 54 of the Act and it means the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53 of the Act. The preamble of subsection 53(1) of the Act states "in computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to the taxpayer such of the following amounts...". Consequently, the cost to the taxpayer of the property is only the starting point in the computation of the adjusted cost base of the property to the taxpayer. Since the provisions of subsection 66.3(3) only provide that the cost of the share to the taxpayer is nil, we are of the view that the adjustments to the cost base which are required under section 53 of the Act would still be added and deducted from the deemed cost of nil in arriving at the adjusted cost base of the share. However, we note that paragraph (d) of the definition of "adjusted cost base" provides that the adjusted cost base cannot be less than nil.

Where an employee acquires a flow-through share under a stock option and the provisions of subsection 66.3(3) apply to reduce the cost of the share to nil, the employment benefit included in the employee's income under section 7 of the Act would be added to the deemed cost of nil of the flow-through share in arriving at its adjusted cost base for purposes of the Act.

We trust the above comments will be of assistance to you.

Yours truly,

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