On December 1, an employee advised his broker of his intention to exercise his 5,000 employee options and to monetize them. On the same day, the broker short sold 5,000 shares at the market value $20 per share. When the short sale settled on December 5, the broker paid $100,000 to the public-corporation employer as the $75,000 subscription price for those shares (their market value was $20.75 per share), and as $25,000 to the employee (($20 - $15) x 5,000 options) less source deductions.
The employer calculated a taxable benefit of $28,750 pursuant to s. 7(1)(b) (the market value of the issued shares of $20.75, less the exercise price).
Does CRA agree with the above taxable benefit computation and, if so, can the employee take a capital loss of $0.75 per share? CRA responded:
The situation you submitted to us does not allow us to clearly identify the legal relationships between the various parties involved and, as a result, the tax consequences related to that series of transactions. A detailed analysis of all contracts and agreements is necessary to determine whether the employee has acquired securities under the agreement and comes within paragraph 7(1)(a) or if he has instead transferred his rights under the agreement and is then subject to paragraph 7(1)(b). The CRA is, however, prepared to consider that issue as part of an advance income tax rulings request … .