Principal Issues: [TaxInterpretations translation] In a context where subsection 47(3) is not applicable, how can the application of subsections 47(1) and 7(1.3) be combined?
Position: General comments regarding the application of subsection 47(1) and subsection 7(1.3)
Reasons: Text of the Act; previous positions
Financial Strategies and Instruments Roundtable, 7 October 2011
2011 APFF Conference
Question 2: Shares purchased by options and cost calculation
At the 2010 Financial Strategies and Financial Instruments Roundtable, the CRA responded to the question of whether a taxpayer could use the average cost of securities that were acquired through stock options and subsequently donated to a registered charity within 30 days of the exercise (footnote 1). The CRA indicated that subsection 7(1.3) applied to determine the order of disposition for those securities, but an election could be made under subsection 7(1.31) to use the last in, first out (LIFO) method.
Further questions arise from that answer. Take the case of a taxpayer who holds securities acquired on the market and securities acquired through stock options under subsection 7(1) and that are not subject to a tax deferral. The individual then acquires a specific number of the same securities pursuant to stock options to which paragraph 7(1) applies. Subsequently, the individual makes a donation to a charity of the same number of securities that had just been acquired. The individual does not elect pursuant to subsection 7(1.31) to use the LIFO method.
Subsection 7(1.3) provides for a specific order of disposition of the securities, namely, first in, first out (FIFO), for securities not subject to deferral or donated securities for which a deduction was obtained under paragraph 110(1)(d.01) (respecting the exemption for gain on donated securities).
However, the application of subsection 7(1.3) to particular shares may result in a deduction for donated securities under paragraph 110(1)(d.01) no longer being possible precisely because of applying the FIFO method. The shares of a public corporation, acquired under an option, that are donated thus become shares that generate no deduction, and are not subject to a tax-deferral (and theoretically they would not be subject to subsection 7(1.3)).
The method of calculating the cost that would apply in this case remains to be determined.
Subsection 7(1.3) applies to securities that are identical property, and presumes that they are disposed of in accordance with the FIFO method for the purposes of subsection c of Part I of the Act, i.e., for capital gains computation purposes.
Subsection 47(1) provides instead for the average cost method and has general application in computing the capital gain for a taxpayer's property that is identical property.
Question to the CRA
Does the application of subsection 47(1) take subsection 7(1.3) into account?
CRA Response
Subject to subsection 7(1.31), subsection 7(1.3) provides that a taxpayer is deemed to dispose of securities that are identical properties in the order in which they were acquired. That subsection applies, in particular, for the purposes of subsections 7(1.1) and 7(8), paragraph 110(1)(d.01) and subdivision c of Division B of Part I of the Act. Paragraph 7(1.3)(a) provides that if a taxpayer who holds securities acquired in the circumstances described in subsections 7(1.1) and 7(8) ("deferred securities") acquires identical securities that are not subject to deferral (footnote 2), such new securities are deemed to have been acquired immediately before the most recent acquisition of deferred securities. Thus, a taxpayer holding securities that are both subject to and not subject to deferral is deemed to have first disposed of the non-deferred securities.
Subsection 47(1) provides a specific method for determining the adjusted cost base ("ACB") of identical properties in the circumstances it describes. Briefly, this is the average cost method. However, where a security is a deferred security or if it is a security to which subsection 7(1.31) applies, subsection 47(3) deems the security, for the purpose of the identical property rule under subsection 47(1), not to be identical to any other security owned by the taxpayer. As a result, the ACB of each deferred security or security to which paragraph 7(1.31) applies and the capital gain or loss resulting from its disposition will be calculated without reference to the ACB of any other security held by the taxpayer.
In a situation where a taxpayer disposes of a security by making a charitable gift and the security has not been identified as provided in subsection 7(1.31), the taxpayer must determine what security the taxpayer has disposed of by virtue of subsection 7(1.3). Since subsection 7(1.3) applies for the purposes of subdivision c of Division B of Part I of the Act, if the disposed of security is not a deferred security, subsection 47(1) applies to determine the ACB subject to any applicable adjustments pursuant to paragraph 53(1)(j).
Catherine Ayotte
(613) 957-8962
2011-039942
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 “Financial Strategies and Instruments Roundtable”, 2010 Conference, Montreal, Association de planification fiscale et financière, question 3.
2 Non-deferred securities mean all identical securities acquired by virtue of a security purchase option covered in section 7 and that are not deferred securities or identical securities acquired on the market.