Employees of a Canadian-controlled private corporation then exercised their options to acquire shares of their employer (Corporation A), and then sold such 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).
After agreeing with the taxpayers that the s. 7(1.5) rollover was available regarding the share exchange, the Directorate also stated its agreement with this ACB calculation, stating:
Paragraph 53(1)(j) adds to the ACB of the shares that each employee acquired under a stock option the amount of the benefit that the employee is deemed by subsection 7(1) to have received in respect of the acquisition of the shares. In addition, in the case of a security issued after February 27, 2000, paragraph 53(1)(j) allows the amount of the benefit that is deferred from being recognized in the employee's income under subsection 7(1.1) to be added to the ACB.