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:
1 Follow-up letter on review of option value decrease issue. (See Ministerial Correspondence 2002-014424 et al)
2. Related question on order of sale of identical shares.
Position:
1. Indicated it is still under review by Finance.
2. Explained ordering provisions.
Reasons:
1. Issue is still under review.
2. To clarify law.
Signed on March 3, 2003
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Elinor Caplan, Minister of National Revenue, has asked me to reply to your letter of January 11, 2003, concerning the taxation of employee stock option plans. I am also replying to your correspondence received on January 23, 2003, addressed to me.
In your correspondence, you outline a situation involving the exercising of stock options, the continued holding of the stock acquired and a subsequent decline in stock price. Under existing income tax legislation, this situation gives rise to two tax consequences: an employment benefit at the time the stock option is exercised equal to the fair market value of the stock at that time in excess of its purchase price, although the taxation of this benefit may be deferred; and the holding of an investment in shares that, generally, would give rise to a capital gain or loss when the stock is ultimately sold.
In my previous correspondence, I indicated that the tax consequences in such situations were under consideration by the Department of Finance, and that there had been no decision on whether there would be any changes to the legislation. The Department of Finance has not completed its review and it is that department's responsibility to recommend legislative changes to the Income Tax Act. Once their review is completed, we will advise you of their decision.
You indicate that you may become currently taxable on the initial stock option benefit if you exercise and sell other stock option shares. We do not have enough information to confirm that this is the tax treatment required under the Income Tax Act, and it may be possible to continue to defer the initial stock option benefit in such circumstances. Should you wish to examine this in greater detail, I invite you to contact Mr. Wayne Harding by calling 0-613-957-9769 collect.
I trust that my comments will be helpful.
Yours sincerely,
Bill McCloskey Assistant Commissioner Policy and Legislation Branch
Wayne Harding
957-9769
February 11, 2003
2003-018376