Principal Questions: 1) Whether an amount retained by the corporation from the agreed price is included in the value of the consideration for the disposition pursuant to subparagraph 7(1)(b)(i) if the payment of the retained amount could be reduced due to a lawsuit?
2) If the value of the consideration in paragraph 7(1)(b) includes the retained amount and results in a benefit for an employee in the year of the disposition of the stock option, can the employee request an amendment of his/her income tax return for the year of the disposition if the employee does not receive the full retained amount in a subsequent year?
Position: 1) Yes.
2) No.
Reasons: 1) The expression "value of the consideration for the disposition" is broadly interpreted to include an amount which has not been received by an employee in the year of the disposition of the stock option.
2) The initial assessment during the year of disposition of the stock option by the employee is correct in law.
2015-062303 XXXXXXXXXX Lucie Allaire, LL.B, CPA, CGA, D. Fisc.
June 16, 2016
Dear Sir,
Subject: Application of paragraph 7(1)(b)
This letter is in response to your email of December 11, 2015 in which you requested our view as to the meaning of "value of the consideration for the disposition" in paragraph 7(1)(b) of the Income Tax Act ("Act") where a corporation cancels the stock options of its employees.
Unless otherwise stated, all statutory references are references to the provisions of the Act.
In this regard, you described the situation where employees hold stock options on the shares of their employer ("the Corporation"), with which they deal at arm’s length. In the course of the acquisition of shares in the capital of the Corporation, it cancels stock options of certain employees for an amount corresponding to the value of shares in its capital. However, as the final determination of the per share purchase price depends on the outcome of litigation to which the Corporation is party, part of the agreed amount is retained.
You indicated that employees disposed of their stock options under the stock options agreement under paragraph 7(1)(b) and that subsection 7(1.7) does not apply.
Your Questions
You queried whether, in the situation described, the retained amount must be included in the value of the consideration for the disposition of the stock options pursuant to paragraph 7(1)(b).
In the case where the value of the consideration for the disposition includes the retained amount, you wish to know if an employee can request an amendment of the employee’s tax return for the year of disposition of the stock options if, in a subsequent year, the retained amount is not paid to the employee.
Our Comments
This technical interpretation provides general comments about the provisions of the Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 7(1)(b) applies to an employee who has transferred or otherwise disposed of rights under the agreement in respect of securities to a person with whom the employee was dealing at arm's length. The benefit that the employee is deemed to have received because of the employee’s employment in the taxation year in which the employee made the disposition is equal to the amount, if any, by which the value of the consideration for the disposition exceeds the amount, if any, paid by the employee to acquire those rights.
The question of whether the retained amount constitutes the value of a portion of the consideration within the meaning of paragraph 7(1)(b) can only be determined by taking into account all relevant facts and documents relating to a particular situation. In this case, the agreement between the Corporation and each of its employees and the documents governing the stock option plan would need to be examined.
However, we are of the view that the term "value of the consideration for the disposition" under paragraph 7(1)(b) includes a receivable from the employer. Therefore, in the situation described, if the agreed price for the options includes the amount retained at the moment of the disposition of the stock options subject to a possible future reduction, the retained amount would be a part of the value of the consideration for the disposition under paragraph 7(1)(b).
Furthermore, if the employees have received a benefit described in paragraph 7(1)(b) which has been correctly treated as taxable in the year of disposition of the stock options, the employees would not be able to amend their declared income for that year.
We trust that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch