3 May 1994 External T.I. 9409755 - TAX ADJUSTMENT 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:

Whether forfeiture of shares held in trust for an
employee results in a tax deduction or credit with
respect to a taxable benefit included in the employee's
income in the year the share was acquired by a

subsection 7(2) trust.

Position TAKEN:

No deduction or credit, but may result in capital loss
in accordance with 53(1)(j) and 54(c)(ii)(A) in the year

of forfeiture.

Reasons FOR POSITION TAKEN:

Interpretation of the provisions.

XXXXXXXXXX 940975

Attention: XXXXXXXXXX

May 3, 1994

Dear Sirs:

Re: Section 7 Stock Option Plans

This is in reply to your facsimile transmission of April 18, 1994, in which you ask for our comments concerning the two
following items:

1. Confirmation that section 7 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") deems an employee benefit to occur whenever a trustee holds a share for an employee, even if the employee's entitlement is not vested.

2. If an employee forfeits rights to a share held in trust for which he has already reported a taxable benefit, is there any way to reclaim the tax paid on the benefit forfeited?

In our view, subsection 7(2) deems an employee to have acquired a share at the time a trustee commences to hold it for the
employee, whether the share is held for the employee absolutely, on condition or is otherwise subject to the fulfilment of some future contingency. Therefore, an employee will be taxed in accordance with paragraph 7(1)(a) of the Act even though the employee may still be subject to forfeiture with respect to any interest in the shares being so held by the trustee. The adjusted cost base of the share as provided by paragraph 53(1)(j) of the Act will include the amount of the benefit deemed received under paragraph 7(1)(a).

If an employee is taxed pursuant to paragraph 7(1)(a) with respect to the interest held under the subsection 7(2) trust and
then forfeits rights to that share held in the trust, the interest in the share will be considered to have been disposed of
in accordance with clause 54(c)(ii)(A) of the Act for proceeds equal to nil. This could result in a capital loss in the year the employee's rights to the share are forfeited.

Although the foregoing comments are an expression of opinion only and are not binding on the Department, we trust they are helpful.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate