A, who is the sole shareholder of Holdco and also holds low-cost shares of PublicCo, will exercise his option to acquire 100,000 shares of PublicCo (giving rise to a s. 7(1)(a) benefit). Of the 100,000 shares acquired, 35,000 will be donated to a qualified done (the “Donation”), and then 65,000 will be disposed of to Holdco (the “Transfer”). Assuming that its other conditions are satisfied, would the conditions of s. 7(1.31.)(a) be satisfied for both the Donation and Transfer?
CRA indicated that the s. 7(1.31) rules does not apply to avoid basis averaging if the executive (A), immediately after exercise, disposes of the acquired shares in two tranches, i.e., here, the Donation and the Transfer. The second disposition (the Transfer) is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition under the Donation) following the exercise - and conversely, if the Transfer occurred before the Donation.