Principal Issues: Could the paragraph 110(1)(d.01) deduction apply to a benefit deemed to have been received under paragraph 7(1)(e)?
Position: No.
Reasons: Paragraph 110(1)(d.01) only refers to a benefit deemed to have been received under paragraph 7(1)(a).
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, OCTOBER 7, 2020
2020 APFF CONFERENCE
Question 6
Stock options on death and donation of acquired securities by the estate or beneficiary
Where an employee acquires securities under an agreement referred to in subsection 7(1), paragraph 7(1)(a) deems the employee to have received, because of the employee's employment and in the taxation year in which the securities were acquired, a benefit equal to the amount, if any, by which the value of the securities at the time they were acquired exceeds the total of the amount paid by the employee to acquire the securities and the amount paid by the employee for the right to acquire the securities. Under paragraph 110(1)(d), the employee may be entitled to a deduction equal to one-half of the deemed benefit received, provided certain conditions are satisfied. If, in addition, the securities acquired are securities described in subparagraph 38(a.1)(i) and the employee donates them to a qualified donee in the year and no more than 30 days after the day on which the employee acquired the securities, the employee may be entitled to an additional deduction under subsection 110(1)(d.01 ), which is generally one-half of the deemed benefit received, subject to a decline in value of the securities between the time of acquisition and the time of donation.
Furthermore, where a deceased employee was, immediately before the death, the owner of a right to acquire securities under an agreement referred to in subsection 7(1), paragraph 7(1)(e) deems the employee to have been received, in the taxation year in which the employee died and because of the employee’s employment, a benefit equal to the amount, if any, by which the value of the right immediately after the death exceeds the amount paid by the employee to acquire the right. Under clause 110(1)(d)(i)(B), the deceased employee may nonetheless be entitled to the one-half deduction for the deemed benefit under paragraph 110(1)(d) in the final return if, for example, the deceased employee's graduated rate estate acquires the securities under the agreement and all other conditions of paragraph 110(1)(d) are satisfied. Paragraph 110(1)(d.01) does not appear to be applicable to this situation, however, since it refers to the benefit deemed to have been received under paragraph 7(1)(a), but not to the benefit deemed to have been received under paragraph 7(1)(e).
Question to the CRA
Can the deduction provided for in paragraph 110(1)(d.01) be applied against a benefit deemed to have been received by a deceased employee under paragraph 7(1)(e) in a situation where, following the death, any of the persons referred to in clause 110(1)(d)(i)(B) acquires the securities under the agreement, if those securities are securities described in subparagraph 38(a.1)(i) and that person donates them to a qualified donee during the year and no later than the 30th day following the day on which that person acquired the securities?
CRA Response
Section 7 applies where a particular qualifying person has agreed to sell or issue securities of the particular qualifying person, or of a qualifying person with which the particular qualifying person does not deal at arm’s length, to one of its employees or of of a qualifying person with which it does not deal at arm’s length (footnote 1).
Where the employee acquires securities under such an agreement, paragraph 7(1)(a) applies so that the employee is deemed to have received, because of the employee’s employment and in the taxation year in which the employee acquired the securities, a benefit equal to the amount, if any, by which the value of the securities at the time they were acquired exceeds the total of the amount paid by the employee to acquire the securities and the amount paid by the employee to acquire the right to acquire the securities (footnote 2) .
Paragraphs 7(1)(b) to (d.1) also provide that an employee who disposes of, rather than acquires, the employee’s rights in respect of securities is also deemed to have received a benefit, provided certain additional conditions are satisfied. Generally, paragraphs 7(1)(b), (b.1), (d) and (d.1) apply where the employee or a person with whom the employee does not deal at arm's length receives consideration for the employee's rights to the securities. The employee is then generally deemed to have received a benefit equal to the amount, if any, by which the value of the consideration exceeds the amount paid by the employee to acquire the rights disposed of. Paragraph 7(1)(c) applies instead where a person, in whom the employee's rights under the agreement vest, acquires the securities under the agreement. The deemed benefit received by the employee in such a case is the amount, if any, by which the value of the securities at the time the other person acquired them exceeds the total of the amount the other person paid to acquire the securities and the amount the employee paid to acquire the right to acquire the securities.
Paragraph 7(1)(e) applies where an employee who owns a right to acquire securities dies. The employee is then deemed to have received, because of the employee’s employment and in the taxation year in which the employee died, a benefit which, in such a case, is equal to the amount, if any, by which the value of the right immediately after the death exceeds the amount paid by the employee to acquire the right.
Paragraph 110(1)(d) (footnote 3) allows a deduction in computing a taxpayer's taxable income if certain conditions are satisfied. The deduction is one-half of the value of the benefit deemed by subsection 7(1) to have been received by the taxpayer in respect of a security under an agreement referred to in that subsection. Because of subsection 110(1.1), the deduction under paragraph 110(1)(d) may reduce the benefit deemed to be received by an employee by virtue of any of paragraphs 7(1)(a) to 7(1)(e) where all conditions are satisfied.
By virtue of paragraph 110(1)(d.01), a taxpayer who disposes of a security acquired in the year under an agreement referred to in subsection 7(1) may also deduct one-half of the benefit deemed to have been received by the taxpayer from employment under paragraph 7(1)(a) in respect of the acquisition of the security, if the taxpayer disposes of the security by way of a gift to a qualified donee and certain conditions are satisfied (footnote 4).
Paragraph 110(1)(d.01) does not apply where a taxpayer who wishes to claim the deduction is deemed to have received a benefit under any paragraph of subsection 7(1) other than paragraph (a). Indeed, the preamble to paragraph 110(1)(d.01) refers only to a benefit deemed to have been received under paragraph 7(1)(a).
In addition, the preamble to paragraph 110(1)(d.01) requires, in particular, that the taxpayer who wishes to claim the deduction, must dispose of the security acquired under an agreement referred to in subsection 7(1) by making a gift of the security to a qualified donee within the time limit set out in subparagraph 110(1)(d.01)(iii). That condition cannot be satisfied where it is a person other than the employee deemed to have received a benefit by virtue of subsection 7(1) who acquires the securities and disposes of them by way of gift to a qualified donee.
Consequently, the deduction provided for in paragraph 110(1)(d.01) is not applicable in respect of a benefit deemed to have been received by a deceased employee by virtue of paragraph 7(1)(e).
Michel Ostiguy
(514) 496-1890
October 7, 2020
2020-085163.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 A "qualifying person" is defined in subsection 7(7) as a corporation or a mutual fund trust. A "security" is defined in the same subsection as a share of the capital stock of a corporation or a unit of a mutual fund trust.
2 Subsection 7(1.1), where it applies, changes the time at which an employee is deemed to have received a benefit under paragraph 7(1)(a).
3 A deduction is also available by virtue of paragraph 110(1)(d.1), under certain conditions, where a benefit is deemed to be received under paragraph 7(1)(a) by virtue of subsection 7(1.1). The deduction under paragraph 110(1)(d.01) will not apply, however, if the taxpayer cannot deduct an amount under paragraph 110(1)(d) in respect of the acquisition of a security (subparagraph 110(1)(d.01)(iv)).
4 An adjustment is made where the value of the security at the time the taxpayer disposes of it is less than the value of the security at the time the taxpayer acquired it.