Principal Issues: [TaxInterpretations translation] Does the donation of the proceeds of disposition of an employee stock option meet the criteria of subsection 110(2.1) where there is cashless exercise?
Position: No
Reasons: The wording of 110(2.1)
Financial Strategies and Financial Instruments Roundtable-- 2010 APFF Conference
Question 2
Donation of the proceeds of sale of shares acquired on option exercise
CRA and Finance
Paragraph 110(1)(d.01) together with subsection 110(2.1) allow for a deduction for a gift where options are exercised, the shares are sold and the proceeds of the sale are donated to a charity within 30 days of the exercise.
There may still be a delay between the time of the exercise and the donation, which could be to the detriment of the charity.
To protect the value of the gift, some investors consider short selling the same number of shares as those exercised on the same day as the exercise of the options, and donating the proceeds of the short sale to the charity. The short position is closed when the shares are received following the exercise of the options.
Question to the CRA
Would the CRA agree that the donation of the proceeds of the short sale allows the gift to qualify by virtue of paragraph 110(1)(d.01) and subsection 110(2.1)?
CRA Response
Subsection 110(2.1) sets out the conditions necessary for a taxpayer to claim a deduction for a gift by virtue of paragraph 110(1)(d.01) in respect of the proceeds of disposition of a security evidencing an employee option.
Among those conditions, the taxpayer must, when exercising the option, direct a broker or dealer appointed or approved by the particular qualifying person referred to in that paragraph to immediately dispose of the security and pay all or a portion of the proceeds of disposition of the security to a qualified donee.
In the situation described in the statement of the question, the CRA is of the view that those two conditions are not satisfied. Consequently, the taxpayer could not benefit from the provisions of subsection 110(1)(d.01) and subsection 110(2.1.
Catherine Ayotte
(613) 957-8962
October 8, 2010
2010-037048.