| December 21, 1990 | |
| Audit Programs Directorate | Rulings Directorate |
| Audit Application Division | S.J. Tevlin |
| 957-2118 | |
| Attention: K. Warren | |
| Director | 902488 |
SUBJECT: Employee Share Purchase Plan
Further to your telephone conversation of November 29, 1990, with Mr. David Holtz, we are attaching a letter from 24(1) in which they request Revenue Canada's assessing policy in regard to a fact situation involving the issue and exercise of employee stock options and the subsequent disposition of shares acquired under the option agreement.
With respect to the technical interpretation of the law as at pertains to the fact situation, we offer the following comments.
It is our opinion that for purposes of determining the adjusted cost base of each share, including both the initial shares issued and those shares issued under the stock option plan, the identical property rules in subsection 47(1) of the Income Tax Act (the "Act") will apply for the purpose of determining the adjusted cost base upon any subsequent disposition of those shares.
With respect to the calculation of an employee benefit pursuant to subsection 7(1.1) of the Act, subsection 7(1.3) of the Act deems identical properties to have been disposed of in the order they were acquire. Therefore there an employee owns shares acquired both pursuant to a stock option agreement and acquired otherwise, that employee will, upon the disposition of any of those shares, be deemed by subsection 7(1.3) to have disposed of his shares on a first-in-first-out basis.
The following example demonstrates the interaction of these two provisions.
Employee acquires 500 shares on September 1, 1990 @ $10/share pursuant to a public offering.
Employee acquires 125 shares on September 10, 1990 @ .01/share under a stock option plan.
Section 47 - Adjusted cost base ("ACB") per share will be:
| 500 @ $10 | $5000. | ||
| 125 @ $.01 | 1.25 | ||
| 5001.15 - 625 = | $8.002/share | ||
| Employee sells on November 1/91 500 @ $13 - | Proceeds | $6500 | |
| ACB | 4001 | ||
| Gain | $ 2499 | ||
| Employee sells on January 1/92 125 @ $13 - | Proceeds | $1625 | |
| ACB | (1000.25) | ||
| S.7(1.1) Benefit | (1248.75) | ||
| Loss | ($624) | ||
| Benefit | $1248.75 |
The result is that the treatment of the shares as identical properties for purposes of calculating the adjusted cost base causes an "early" realization of a capital gain of $999 ($2499 instead of $1500) in 1991 and a subsequent capital loss of $624 in 1992. The subsection 7(1.1) benefit is calculated in the year in which the shares acquired under the stock option plan are deemed sold pursuant to subsection 7(1.3) (i.e. 1992).
If you have any further questions regarding our comments please contact S. Tevlin at 957-2118.
DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch