Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Should FMV of shares be discounted for purposes of subsection 7(1)?
Position: Question of Fact
Reasons: This is a question of valuation outside of IT Rulings' expertise and should be referred to the valuations unit.
November 25, 2002
MONTREAL TSO HEADQUARTERS Income Tax Rulings Attention: François Guillet Directorate Renée Shields (613) 948-5273
2002-017113
XXXXXXXXXX (the "Taxpayer") - Stock Option Benefit
This is in response to your facsimile of October 29, 2002 regarding the employee stock option benefit income inclusion reported for the Taxpayer.
The Taxpayer exercised an option to purchase shares of his employer at $XXXXXXXXXX per share. At the time he acquired the shares, they were trading on the Toronto Stock Exchange at $XXXXXXXXXX per share. The shares came with a provision prohibiting their sale for a period of one year. The Taxpayer's employer used the $XXXXXXXXXX fair market value to calculate the income inclusion required by subsection 7(1) of the Income Tax Act (the "Act"). The Taxpayer's representative asserts that the value should have been discounted in light of the trading restriction.
Paragraph 9 of Information Bulletin IT-113R4 "Benefits to Employees - Stock Options" indicates that if an employee acquires shares pursuant to a stock option agreement, the provisions of which prohibit transfer of the shares for a period of time, the employee is considered to have "acquired" the shares within the meaning of section 7 of the Act. However, the value of the shares is considered to be the fair market value of identical shares at the time of acquisition that have no trading restriction less an appropriate discount in respect of the restriction.
Where a share is subject to a trading restriction, the proper discount, if any, depends upon the particular facts of a case. The proper discount depends wholly upon the particular shares and a number of factors such as the trading record of the shares. Accordingly, there is no standard discount rate. You may wish to consult with your valuations unit for assistance in this regard.
In our opinion the enactment of subsection 7(8) of the Act shortly after the Taxpayer exercised his stock option would likely have no bearing on the issue of whether a discount should apply and if so, its quantum.
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Mickey Sarazin, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch