Principal Issues: What are the tax consequences where an employee dies and the employee held unexercised stock options at the time of the employee's death?
Position: The FMV of the stock option immediately after the employee's death is deemed to be received in the year of death.
Reasons: Application of paragraph 7(1)(e) of the Act.
STEP CRA Roundtable June 2014
QUESTION 16- Stock Options at Death
Paragraph 7(1)(e) provides that where an employee has died and the employee held unexercised stock options prior to their death, a benefit equal to the value of the stock options immediately after death minus any amount paid to acquire the options, is deemed to be received by the employee in the year of death. Since the benefit is deemed to arise based on the value immediately before death, if these rights are unvested, such that after death they disappear, but before death they would have a value (ignoring a discount which might arise if death could be foreseen), what is the result that is obtained? Is it permissible to take the position that the unexercised and unvested stock option right, is disposed of by the taxpayer's legal representative, such that a loss carryback can result under the election contained in subsection 164(6.1), or is this provision inapplicable because the taxpayer's estate never obtains the unvested stock option right (it was extinguished at death), and therefore the estate never acquired it and cannot dispose of it?
CRA Reply
Paragraph 7(1)(e) provides that where an employee has died and the employee owned unexercised stock options prior to their death, the employee is deemed to have received an employment benefit in the year of death. The employment benefit is equal to the value of the stock options immediately after death less any amount paid by the employee to acquire the options. Where the terms of the owned unexercised stock option provide that the stock options are automatically cancelled in the event of the employee's death, the value of the options immediately after death, and the paragraph 7(1)(e) benefit, will be nil. If the employee stock options are not vested prior to the employee's death, the employee would not own unexercised stock options prior to their death and paragraph 7(1)(e) would not apply.
Where an employee owns unexercised stock options prior to their death and the terms of the stock option provide that the deceased's estate may exercise the stock option during a limited period after the employee's death, the provisions of subsection 164(6.1) may apply. Subsection 164(6.1) is intended to provide relief where a stock option is exercised, expires, or is otherwise disposed of within the first taxation year of the deceased taxpayer's estate and the value of the stock option has declined since the employee's death, such that the benefit realized by the deceased's estate is less than the benefit deemed by paragraph 7(1)(e) to have been received by the deceased taxpayer. If the legal representative of the deceased elects in prescribed manner, an amount is deemed to be a loss from employment of the deceased taxpayer for the year of death. The amount of the loss is determined under paragraph 164(6.1)(a).
Gary Allen
2014-052301