21 July 1998 External T.I. 9813575 - DAMAGES FOR LOSS OF STOCK OPTION ON TERM OF EMPL

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 an amount received in settlement of the loss of stock options which expired upon the termination of employment may be treated as a capital gain

Position: no

Reasons:

potentially taxable under 7(1)(b) or 56(1)(a)(ii) -however if the options expired without being exercised, the amount will be a retiring allowance and not a section 7 benefit

XXXXXXXXXX 981357
A. Humenuk
Attention: XXXXXXXXXX

July 21, 1998

Dear Sir:

Re: Settlement in respect of Termination of Employment and Loss of Stock Options

This is in reply to your letter of May 25, 1998, concerning the taxation of an amount received by an employee in respect of the employee’s loss of entitlement to stock options as a result of the termination of the employee’s employment.

Please note that enquiries relating to a specific taxpayer involving a completed transaction fall within the responsibility of the local tax service office. Accordingly, to the extent that you require assistance in determining the tax treatment with respect to a specific situation, all relevant facts and documentation should be submitted to your local office for their views in the matter. However, we can provide you with the following general comments which are not binding on the Department.

Generally, an amount received in respect of a loss of employment, whether or not received as, on account of, or in lieu of damages, is taxable as a retiring allowance under subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act"). An amount received as compensation for the disposition of an employee stock option is taxable as employment income under paragraph 7(1)(b) of the Act, whether received before or after the termination of employment. Paragraphs 18 and 19 of Interpretation Bulletin IT-113R4, Benefits to Employees - Stock Options, explain the circumstances under which an individual may deduct 1/4 of the amount of the employment benefit from income, effectively reducing the net amount subject to tax to the amount which would have been included in income as a taxable capital gain, if the stock option had not been granted by reason of the individual’s employment (e.g. if the individual had purchased the stock option through a stock exchange).

It is a question of fact as to whether an amount such as that described in your letter, is received as consideration for the disposition of the individual’s stock option rights, or as damages for the individual’s loss of employment. If, under the terms of a particular stock option agreement, the stock options held by an employee expire upon the termination of employment, any amount received in respect of the loss of employment, including amounts received for the loss of the stock option benefit, would be included in income as a retiring allowance under subparagraph 56(1)(a)(ii) of the Act.

This is similar to the finding in the case of McKay v. M.N.R. (90 DTC 1926), in which the Court found that the amount received by Mr. McKay in lieu of stock options was taxable under paragraph 6(1)(a) of the Act, since his entitlement to stock options had ceased upon the termination of his employment and he had not exercised his options prior to that termination. Given that the definition of “retiring allowance” was amended for 1988 and subsequent taxation years to clarify that an amount received as damages for the loss of employment is taxable under subparagraph 56(1)(a)(ii) of the Act, it is our view that an amount received after 1987 in circumstances similar that of Mr. McKay, including an amount for the loss of the employee stock option benefit, is taxable as a retiring allowance under subparagraph 56(1)(a)(ii) of the Act.

We trust that these comments will clarify our position in this matter.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch