18 January 1990 Income Tax Severed Letter AC744967 - Employee Stock Options Exercised After Employee's Death

January 18, 1990

FROM - Business and General Division A. Humenuk 957-2135

TO - Source Deductions Division L.P. Mancino, Director J.C. Wilson

SUBJECT:  Employee Stock Options Exercised
          After the Death of an Employee

We are responding to your memorandum of November 7, 1989,
concerning     24(1)     .

In her October 27, 1989 letter to you.
         24(1)

Subsection 70(2) of the Act generally operates to include in income for the final return of a taxpayer, any amount which, if realized, would have been included in the taxpayer's income. However in our view, employee stock options are not covered by this subsection because an employee stock option is a right to purchase stock rather than a right to an amount of money which would have been included in the employee's income if it had been realized. Subsection 70(5) of the Act creates a deemed disposition of all capital property held as of the date of death; however, as stated in paragraph 17 of the Interpretation Bulletin IT-113R3 , employee stock options are not capital property. Consequently, it is our view that there are no tax consequences to the deceased employee in respect of the unexercised employee stock options upon his death.

The tax implications to the taxpayer's estate are based on paragraph 69(1)(c) of the Act. Where an estate acquires property by way of bequest or inheritance, it is deemed to acquire the property at the fair market value at the time it so acquired it. Provided that the shares so acquired are capital property to the estate, the estate would add the deemed cost of the option to the adjusted cost base of the shares for the purposes of computing the capital gain on the ultimate disposition of the shares.

The Department of Finance has been made aware of this apparent deficiency in the law.

We trust this information will assist you in responding to 24(1) .

B.W. Dath Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch