| December 12, 1989 | |
| SUDBURY DISTRICT OFFICE | HEAD OFFICE |
| J. McNeely | Financial Industries Division |
| Chief of Audit | W.C. Harding |
| (613) 957-8953 | |
| Attention: L. Schlaepfer | |
| Audit Division | 7-4545 |
Subject: Employee Stock Options exercised Subsequent to taxpayers death
This is in reply to your memorandum of November 24, 1989 wherein you requested an opinion as to the proper assessment of employee stock options held by an employee at the time of his death and exercised by his estate subsequent thereto.
1. We confirm that no amount is included in the final tax return of the deceased employee by virtue of subsection 70(5) of the Income Tax Act (the "Act"), where the unexercised stock option passes to the Estate, because the option is not a capital property.
2. We confirm that no amount is included in the income of either the deceased or the estate in consequence of the application of subsection 70(2) of the Act as an employee stock option is not a "right or thing" within the meaning of the subsection. A stock option is a right to purchase a share at a specified price. It is not a right to an amount which would have been included in income on the exercise or disposition of the right. In contrast, a crop standing a the time of death is an inventory the amount of which would ultimately be brought to account in computing income.
3. We confirm that paragraph 69(1)(c) of the Act is applicable such that the adjusted cost base of the right to the estate is the fair market value of the right at the time of death.
4. We note that on exercise of the option, paragraph 49(3)(a) of the Act will apply to include the fair market value of the option (its ACB to the estate) in computing the adjusted cost base of the shares so acquired.
5. We confirm that subsection 7(1)(c) of the Act will not be applicable to include any amount in the income of either the Deceased or the Estate. The subsection provides that the excess value of the shares acquired through the exercise of the option over the cost of those shares will be included in the income of the Employee in the year in which the shares are acquired. Since the employee is deceased in that year, there is no means by which the provision can be applied 21(1)(b)
for DirectorFinancial Industries Division Rulings Directorate