16 November 2004 External T.I. 2004-0101221E5 - Employee Stock Purchase Plan

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.

Principal Issues: Whether the deduction available under paragraph 110(1)(d) of the Act applies where the Employee Stock Option Plan provides for the share to be acquired for an amount equal to its fair market value less a specific discount?

Position: No.

Reasons: The deduction under division 110(1)(d)(ii)(A) of the Act will only be available to a taxpayer where the actual exercise price of the share is equal to or greater than the fair market value for the share at the time the option was granted.

								2004-010122
XXXXXXXXXX 							Michelle Desrosiers,
						  		Notary, M.Fisc.
November 16, 2004

Dear XXXXXXXXXX:

Re : Employee Stock Purchase Plan (ESPP)

This is in response to your letter of November 2, 2004 wherein you requested our opinion on the application of subparagraph 110(1)(d)(ii) of the Income Tax Act (the Act) where the ESPP provides that the purchase price at which each share of stock may be acquired shall not be less than 85% of the lesser of the fair market value of a share on the offering date or the fair market value of the share on the purchase date.

More specifically, you ask whether the 50% deduction under paragraph 110(1)(d) of the Act would be available in the situation where the fair market value of the share on the offering date is $20, the purchase price of the purchase date is $17 (85% of $20) and the fair market value of the share on the purchase date is $30. In this example, the employee would pay $17 for a share.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. However, we are prepared to provide the following general comments, which may be of assistance.

The Canada Revenue Agency's general views regarding ESPP are contained in Interpretation Bulletin IT-113R4, "Benefits to Employees - Stock Options." In particular we draw your attention to paragraph 18 in IT-113R4, which contains a discussion regarding the eligibility for the deduction under paragraph 110(1)(d) of the Act. This bulletin is available from your local tax services office or on the Internet at: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

Subparagraph 110(1)(d)(ii) of the Act provides that a deduction will not be available where the amount payable for the share is less than the amount by which the fair market value of the share at the time the agreement was made exceeds the amount paid to acquire the right to acquire the share. Consequently, the deduction under this subparagraph is only available where the actual exercise price is equal to or greater than the fair market value of the share at the time the option was granted.

In the above scenario, the deduction would be denied because the purchase price is lower than the fair market value of the share on the offering date.

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

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate