Under a stock option plan of Corporation A, Canadian-controlled private corporation, employees received options to purchase Class A shares of Corporation A, and under a second plan, Corporation A issued Class C shares to a resident trust (Trust A) to which s. 7(6) applied and with the trust indenture providing that the shares will subsequently be sold to employees of Corporation A pursuant to a stock option plan established by Corporation A. The employees then exercised their options and acquired the Class A shares from Corporation A and the Class C shares from Trust A that they were permitted to acquire under their stock options, with Corporation A issuing to each employee a single share certificate for all Class A shares issued to the employee, and another certificate for all such Class C shares.
Corporation A then effected a pro rata cash distribution of paid-up capital of its Class A and Class C shares.
On the same day, the employees sold their Class A and Class C shares to Corporation B (which became the parent of Corporation A) for a U.S.-dollar purchase price, of which a specified portion was paid in Corporation C shares (the parent of Corporation B) as stated consideration for a specific number of Corporation A shares determined in accordance with the sale Agreement, and the balance was paid in cash. Corporation A intends to report on each employee's T4 slip a benefit based on a s. 7 amount for the cash sale (and with Part I tax being withheld and remitted accordingly), but not regarding the share exchange portion, which it treated as coming within s. 7(1.5). The disclosure to the employees indicated that the adjusted cost base of their shares was increased not only by this immediate s. 7 benefit, but also by the stock option benefit regarding the exchange which had been deferred under s. 7(1.5).
In agreeing with the taxpayers that the s. 7(1.5) rollover was available (given that “for the purposes of paragraph 7(1.5)(b), the employees received "no consideration …other than securities" as consideration for the Corporation A shares exchanged, the Directorate stated:
[T]he Agreement … is sufficiently explicit to conclude that each employee can clearly identify which shares were exchanged for cash and which were exchanged for shares of Corporation C. The fact that each employee holds only one certificate, for all of the shares owned by the employee, is not a determinative factor … .
[T[he reduction in paid-up capital cannot be considered to be an amount received as consideration for the disposition of the Corporation A shares even though that transaction was part of the series of transactions involving the sale of those shares.