12 January 1990 Income Tax Severed Letter AC74437 - Stock Option, Stock Option Deduction, Capital Gains

To:  Halifax District Office     From:  Business and General
     Audit Review                          Division
                                        J.D. Jones
     Kevin McGuigan                     (613) 957-2104

Subject:  Stock Option, Stock Option Deduction
          and Capital Gains Deduction

This is in reply to your memorandum of October 18, 1989, and further to our telephone conversation (McGuigan/Jones) of November 1, 1989, wherein you requested our opinion on the application of a stock option deduction and the capital gains exemption in the following situation.

24(1)

It is your view that the taxpayer should be taxed as follows:

24(1)

It is your view that paragraph 110(1)(d.1) of the Act and subsection 110.6(2.1) of the Act does not apply as the taxpayer is deemed to have disposed of the first block of shares on May 4, 1988, in accordance with subsection 7(1.3) of the Act and, accordingly, the shares referred to in paragraph 110(1)(d.1) and subsection 110.6(2.1) of the Act were not held for a two year period.

Our Comments

We are in agreement with your view that the deductions available pursuant to paragraph 110(1)(d.1) of the Act in respect of both blocks of shares is not available to the taxpayer as subsection 7(1.3) of the Act deems the taxpayer to have disposed of his first block of shares on May 4, 1988, and as such has not met the two year holding period referred to in subparagraph 110(1)(d.1)(ii) of the Act. The second block of shares purchased on May 4, 1988, and disposed of in November of 1988 also do not meet this condition.

It is our view, however, that the taxpayer would be entitled to the capital gains deduction with respect to both blocks of shares pursuant to subsection 110.6(2.1) of the Act provided the shares otherwise qualify due to the following factors:

(1) As both blocks of shares were treasury shares issued prior to June 14, 1988, the restriction on the definition of "qualified small business corporation share" found in subsection 110.6(14) of the Act is not applicable with respect to the issuance of these shares.

(2) The shares meet the requirement in paragraph (b) of the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act of not having been owned by anyone other than the individual throughout the 24 months immediately preceding the determination time as the shares were previously unissued treasury shares.

for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. Mr. R. Roy 11th Floor 123 Slater Street