Principal Issues: Can a taxpayer benefit from both the deduction of paragraph 110(1)(d.01) and paragraph 110(1)(d.1)?
Position: No
Reasons: The requirements of subparagraphs 110(1)(d.01)(iii) and 110(1)(d.1) are incompatible.
Financial Strategies and Financial Instruments Roundtable, 7 October 2011
2011 APFF Conference
Question 4 - Gift of shares derived from options received from a private corporation
Where a private corporation issues stock options to its employees, which are "in the money" at the time of issuance, and the corporation subsequently becomes a public corporation, employees may exercise their options, but may only use the deduction under paragraph 110(1)(d.1) if the option was "in the money" at the time of its grant, and provided that the shares are held for two years under the condition provided for in subparagraph (ii) of the same paragraph.
It appears that the gift of such a share does not allow the employee to also benefit from the additional deduction provided in paragraph 110(1)(d.01) since the gift of shares must occur within 30 days of the exercise, a condition that seems incompatible with the minimum holding period of two years.
Question to the CRA
Does the CRA agree that the deduction in paragraph 110(1)(d.1) is incompatible with the deduction provided in a case of a gift under paragraph 110(1)(d.01)?
CRA Response
In order to qualify for the deduction under paragraph 110(1)(d.01), the following conditions must be satisfied. First, subparagraph 110(1)(d.01)(i) states that the security must be a security described in subparagraph 38(a.1)(i), which includes inter alia a share that is listed on a designated stock exchange. Second, subparagraph 110(1)(d.01)(iii) provides that the gift must be made in the year and on or before the day that is 30 days after the day on which the taxpayer acquired the security. Finally, subparagraph 110(1)(d.01)(iv) provides that it must be possible to deduct an amount under paragraph 110(1)(d) in respect of the acquisition of the security.
In brief, paragraph 110(1)(d) permits the deduction of one half of the value of the benefit that is deemed by subsection 7(1) to have been received by the taxpayer. To qualify for that deduction, certain conditions must be satisfied. Among other things, clause 110(1)(d)(i)(A) requires the share to be a prescribed share (footnote 1) at the time of its sale or issue. In addition, clause 110(1)(d)(ii)(A) requires that the amount payable by the taxpayer to acquire the security under an agreement is not less than the amount by which the fair market value of the security at the time the agreement was made exceeds the amount, if any, paid by the taxpayer to acquire the right to acquire the security. Where a taxpayer fails to comply with any of the conditions set out in paragraph 110(1)(d), the taxpayer may not deduct an amount under that paragraph in respect of the acquisition of the share. As a result, the taxpayer will not be able to claim the deduction under paragraph 110(1)(d.01) because the taxpayer will not satisfy the condition in subparagraph 110(1)(d.01)( iv). That seems to be the case in the situation described.
A taxpayer who wishes to benefit from the deduction provided in paragraph 110(1)(d.1) must inter alia hold the securities referred to in paragraph 7(1)(a) and subsection 7(1.1) for a minimum period of two years. However, where a taxpayer is not entitled to the deduction under paragraph 110(1)(d.1) only because the taxpayer has disposed of the securities within the two-year period, the taxpayer may still be entitled to the deduction under paragraph 110(1)(d) if the conditions listed in that paragraph are satisfied. In the latter situation, the taxpayer may be entitled to a deduction under paragraph 110(1)(d.01) if the taxpayer satisfies all the other conditions listed in that paragraph.
In conclusion, we are of the view that a taxpayer who is only eligible for the deduction under paragraph 110(1)(d.1) will not be eligible for the deduction listed in paragraph 110(1)(d.01) because it will be impossible for the taxpayer to satisfy both the requirement of subparagraph 110(1)(d.01)(iii) and that of subparagraph 110(1)(d.1)(ii).
Catherine Ayotte
(613) 957-8962
October 7, 2011
2011-040795
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See 6204 of the Income Tax Regulations, C.R.C. 1978, c. 945 and as amended.