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, 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). The non-resident employees filed s. 116 certificate applications respecting their disposition of all their shares of Corporation A, rather than only those exchanged for cash.
After agreeing with the taxpayers that the s. 7(1.5) rollover was available regarding the share exchange, and before agreeing with the above ACB calculation, the Directorate also stated its agreement with the s. 116 applications covering all the Corporation A shares that the non-resident employees disposed of, stating:
Subsection 7(1.5), which provides that there is no disposition of the shares when all its conditions are satisfied, applies only for the purposes of section 7 and paragraphs 110(1)(d) to (d.1). Thus, for the purposes of section 116, all shares disposed of must be considered, not just those disposed of for cash consideration.