An employee who acquired 10 common shares of the employer, a public corporation, on capital account, was also issued, for no consideration (other than services rendered), 10 restricted stock units (RSUs) of the employer under an agreement to which s. 7(1) applied. When the 10 RSUs vest, the employee is issued 10 common shares of the employer (the “RSU Shares”) with a fair market value of $10 per share. Immediately thereafter, the employer directs a broker to dispose of 5 RSU Shares, and the $50 proceeds are utilized by the employer to satisfy its withholding tax obligation.
CRA stated:
[U]nder paragraph 7(1)(a), the employee is deemed to have received a taxable benefit of $100 at the time the employee acquires the RSU Shares. This amount is added to the ACB to the employee of the RSU Shares pursuant to paragraph 53(1)(j). Since the employee already owned common shares that are identical to the RSU Shares, the employee’s ACB of the previously acquired shares and the RSU Shares has to be averaged unless subsection 47(3) deems these shares not to be identical.
…[S]ubsection 47(3) will deem the RSU Shares not to be identical to the previously acquired shares if subsection 7(1.31) applies to the RSU Shares. Therefore, provided the conditions of subsection 7(1.31) are met, the ACB to the employee of the 5 RSU Shares sold to cover the withholding tax obligation will be $10 per share, and consequently, no capital gain will arise on the disposition.