10 May 1995 Internal T.I. 9510190 - EMPLOYEE STOCK OPTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether 110(1)(d) applies where a benefit in computed under 7(1)(e)

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

The rights are transferred to the estate under a testamentary document. Consequently, it is a benefit in respect of the transfer or other disposition of the rights. See 164(6.1)

Revenue Canada Round Table
Tax Executive Institute Conference
May 7-10, 1995

Question 24

EMPLOYEE STOCK OPTIONS

Subsection 7(1)(e) of the Income Tax Act (the "Act") deems an employee to receive, in the year of death, a benefit from employment equal to the value of the unexercised stock option rights after the death which exceeds the amount (if any) paid by the employee to acquire the rights.

1.Does the employer have to issue a T4 in the year of death computing the 7(1)(e) benefit or is it the responsibility of the deceased's estate to compute the 7(1)(e) benefit?

2.Will the deceased be eligible to a 110(1)(d) deduction in the year of death?

3.As a result of the 7(1)(e) income inclusion in the year of death, what section of the Act provides an increase in the adjusted cost base ("ACB") of the unexercised stock option rights to the estate of the deceased?

4.Does the unexercised stock option rights become capital property to the estate of the deceased giving rise to a capital gain or loss in the future (with the exception of a 164(6.1) adjustment in the 1st year of the estate)?

Department's Position

1.Paragraph 7(1)(e) of the Act applies to an employee who holds options under an employee stock option plan at the date of death. A benefit in the year in which he dies equal to the difference between the fair market value of the option immediately before the employee's death and any amount paid by the employee to acquire the options will be included in the employee's income pursuant to that paragraph. It is the Department's position that the employer has to issue a T4 in the year of death computing the benefit under 7(1)(e).

2.Paragraph 110(1)(d) of the Act provides that when applicable, a deduction of 1/4 of the value of the benefit deemed to have been received by the taxpayer under subsection 7(1) will be allowed. It is our opinion that a deduction under paragraph 110(1)(d) of the Act may be claimed against a benefit included in income under paragraph 7(1)(e).

3.Where an estate acquires property by way of bequest or inheritance, it is deemed to acquire the property at fair market value at the time it so acquires it pursuant to paragraph 69(1)(c) of the Act. Provided that the shares acquired upon the exercise of the option are capital property to the estate, subparagraph 49(3)(b)(ii) of the Act will include the adjusted cost base of the option at the time of exercise.

4.Whether the unexercised stock option rights become capital property to the estate of the deceased is a question of fact.

Author: G. Martineau
File: 951019
Date: April 1995