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 annuitant subject to double taxation and entitled to subsection 4(4) protection where section 7 stock option contributed to RRSP trust, shares acquired by RRSP trust, and property distributed out of RRSP to annuitant, beneficiary or estate.
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
Subsection 4(4) applies only where taxpayer is being taxed on the same amount of income from a particular source; in this case taxpayer is taxed on income from employment or office (paragraph 7(1)(c)) and then later is taxed on income from the RRSP (under 146(8) and 56(1)(h)). Not the same source. Furthermore, if amount received by annuitant's beneficiary or estate, or by annuitant's spouse out of the spouse's RRSP in circumstances where 146(8.3) doesn't apply, subsection 4(4) doesn't apply.
XXXXXXXXXX 950344
Attention: XXXXXXXXXX
April 28, 1995
Dear Sirs:
Re: Exercise of Section 7 Stock Option by a Registered Retirement Savings Plan (RRSP)
This is in reply to your facsimile transmission of February 7, 1995, in which you refer to the above-noted matter and the possible application of subsection 4(4) of the Income Tax Act (the "Act"). You are concerned that where an employee has contributed a stock option to the employee's RRSP there is the possibility of double taxation, once when the employee is taxed under paragraph 7(1)(c) of the Act at the time the RRSP acquires the shares under the option, and again when the recipient is taxed on property received out of the RRSP in accordance with subsection 146(8) and paragraph 56(1)(h) of the Act. Your concern applies equally to options contributed into registered retirement income funds and our comments extend thereto with the necessary changes.
To clarify by example, 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.
On the assumption that the stock option is a "qualified investment" for the RRSP at the time it is transferred to and held by the RRSP, in our view the tax consequences are the following:
1.Upon contribution into the RRSP, the annuitant is entitled to a tax deduction under subsection 146(5) of the Act in the amount of $7 per share.
2.Upon exercise of the option, the annuitant is taxed under paragraph 7(1)(c) on the amount of $7 per share, this being the excess of the value of the share when acquired ($10) over the total of the amount paid by the RRSP trust for the share ($3) and the price paid for the option (nil).
If the conditions in paragraph 110(1)(d) of the Act are met, the annuitant is entitled to a deduction in an amount equal to 1/4 of the subsection 7(1) deemed benefit ($1.75 per share).
3.The adjusted cost base of the share to the RRSP trust is equal to the price paid ($3) plus, as set out in paragraph 53(1)(j) of the Act, the benefit deemed by section 7 to have been received by the annuitant ($7). Since the RRSP trust is exempt from taxation pursuant to subsection 146(4) of the Act, there are no tax consequences with respect to the trust at the time of the RRSP trust's sale of the shares for $10 per share.
4.Finally, when the RRSP distributes its property (either periodically, upon maturity, to the annuitant or spouse, or in a lump sum) the recipient will be taxed on the fair market value of the shares at the time of payment out in accordance with subsection 146(8) and paragraph 56(1)(h) of the Act. This will, as you point out, include an amount representing the growth on the shares from the date the employee acquired the option to the date the RRSP trust exercised the option, an amount which has already been taxed under paragraph 7(1)(c), albeit with a reduction for the paragraph 110(1)(d) deduction.
Subsection 4(4) of the Act applies to prevent the inclusion, directly or indirectly, in a taxpayer's income of an amount for a taxation year where that amount has been included, either directly or indirectly, in computing the taxpayer's income for the taxation year or any preceding taxation year or in computing the taxpayer's income for a taxation year or any preceding taxation year from a particular source.
In our view, the deemed benefit under section 7 of the Act results in an inclusion of income from an office or employment, while the amount included in income under subsection 146(8) and paragraph 56(1)(h) derives from a source distinct from the taxpayer's office or employment. Thus, there is no double taxation of the same amount in the annuitant's hands.
With respect to an amount received by the annuitant's beneficiary or estate, subsection 4(4) of the Act refers to an amount included in the "taxpayer's" income, whether directly or indirectly; even if the source of the income were the same, the inclusion of an amount in the income of the beneficiary or estate is not precluded by this provision since it is neither a direct nor indirect inclusion in the annuitant's income. For the same reason, if the option, shares or property substituted for the shares is transferred to a spouse's RRSP under paragraph 146(16)(b) of the Act, or the employee contributes the stock option to a spousal RRSP and payment out occurs under circumstances in which subsection 146(8.3) of the Act does not attribute the income to the employee, subsection 4(4) would not apply on payment from the RRSP to the spouse, the spouse's estate, or a beneficiary who is not the employee.
Although the foregoing comments are not binding on the Department, we trust they assist.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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