Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Does a former CCPC have to report the stock option taxable benefits of former employees when the new corporation may not know when the former employee has disposed of the shares.
Position: Yes
Reasons: When stock options that originally met the provisions of subsection 7(1.1) have been exchanged pursuant to subsection 7(1.4), the options will continue to meet 7(1.1) and the benefit will be taxable in the year that the shares are disposed of. It is the responsibility of the corporation to report the benefits on the employee or former employee's T4.
April 10, 2000
SCARBOROUGH TSO HEADQUARTERS Financial Industries Attention: Cynthia Snea Division Mary Pat Baldwin (613) 957-2087
2000-000605
T-4 Reporting for stock Options
This is in reply to your facsimile of February 3, 2000 in which you request information on the reporting requirements of an employer with respect to stock options that have been issued and are subject to subsection 7(1.1) of the Income Tax Act (the "Act").
Subsection 7(1.1) of the Act modifies the timing of the income inclusion under paragraph 7(1)(a) of the Act where a Canadian-controlled private corporation ("CCPC") agrees to sell or issue shares of the capital stock of either the corporation or a CCPC with which it does not deal at arm's length, to an employee who was dealing at arm's length with these corporations immediately after the agreement was made. Pursuant to subsection 7(1.1) of the Act, the timing of the income inclusion of the benefit is deferred from the year the employee exercises the stock option until the year in which the employee disposes of the shares.
As noted in the Employers' Guide to Payroll Deductions Taxable Benefit 98-99 (at 2.23) the stock option benefit is a taxable benefit and must be reported on a T4 slip. Accordingly, when a stock option has been issued by a CCPC the employee is required to include the benefit in income for the year he/she disposes of the shares and the CCPC is required to report the taxable benefit on the employee's T4 for that year.
The situation presented in your letter is one where the employee exchanges options in the CCPC for options in a non-resident corporation with which the CCPC does not deal at arm's length. In our opinion, as long as the original options met the requirements of subsection 7(1.1) of the Act at the time those options were granted, and the exchange meets the requirements of subsection 7(1.4) of the Act, the employee will continue to be subject to the provisions of subsection 7(1.1) of the Act.
Consequently, the CCPC is required to report the taxable benefit of the employee or former employee in the year that the shares of the corporation, that are subject to the provisions of subsection 7(1.1), are disposed of. It is the responsibility of the CCPC to ensure that all employment benefits are reported for the year on a timely basis.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. 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 LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made to Mrs. Jackie Page at 613-994-2898. A severed copy will be sent to you for delivery to the client.
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch