Ali Pejman, CA - Institute of Chartered Accountants of BC

Employment Tax Traps & Opportunities
Tips
for dispositions that occur after February
27 th , 2000. The Budget also proposes
to increase the deduction under paragraphs
110(1)(d) and (d.1) from ¼ to 1/3 of
the share option benefit, to keep the
treatment of share options consistent
with that of capital gains.
The result of these changes is an
income inclusion of 2/3 of the value of
the benefit on eligible options in the
year the shares are actually disposed.
With proper planning, and due regard to
fluctuations in market prices for their
shares, employees may be able to defer
the income inclusion of the option
benefits until later years, or years where
their other sources of income are
limited. This may allow employees to
defer and reduce their taxes by using
lower rates of tax and tax credits, and
optimize their earned income for the
purposes of computing their RRSP
contribution room.
Partial Dispositions of Identical
Properties:
Some employees who have share
options may also own shares of their
employer from purchases in the
market or participation in employee
share purchase plans. The Act contains
rules that affect the computation of
the ACB of identical properties, such as
shares of a corporation. The ACB of
identical properties is averaged over
all the identical properties, and no
specific identification of lots, and
corresponding allocation of ACB, is
allowed where the Grantor of the
option was not a CCPC at the time the
option was granted.
In the past, the disposition of a
portion of the shares held would be
considered as a prorata disposition of
all identical properties held. Where an
employee acquires additional securities
of the Grantor under a share
option plan, the paragraph 53(1)(j)
increase in the ACB in respect of the
share option benefit is, upon disposition
of any of the identical properties,
effectively averaged over the cost of
all the identical properties. Because an
employee may hold a number of
identical properties (other shares of
the Grantor) with a lower adjusted
cost base, a significant capital gain
could result from the application of
this position. The CCRA has recently
stated, in Income Tax Technical News
No. 19, that
where it would seem obvious to conclude
that the particular securities acquired under a
Section 7 option are in fact the securities that
are being disposed of by the employee, we have
concluded that the current legislation permits
an employee to instead identify the securities
acquired under the option as those being
disposed of. In order to support specific
identification, the employee would have to show
the correlation between the particular acquisition
and disposition of securities.
This change to the administrative
policy means that employees who hold
shares acquired outside the option plan
can, with a modicum of planning, sell
shares at the exercise and avoid any
dilution of the increase in the cost base
in their shares as a consequence of the
Section 7 benefit.
It will be interesting to see how the
Department of Finance considers the
identical properties question when
drafting the law on the $100,00 deferral.
Many employees will have options
that exceed the $100,000 threshold, and
will therefore require two “pools” of
shares exercised, one that includes a
53(1)(j) bump as a result of the Section 7
benefit, and one that does not.
Conclusion:
The recent changes illustrate the
Department of Finance’s recognition of
the key role that share options play in
attracting and retaining the skilled
work force that Canada needs to move
into the future successfully. The
taxation of share options is one of the
few areas where Canada is becoming
competitive with the United States,
largely as a result of the 2000 Budget
measures, and share options will
continue to be an important method of
compensation for the employees of
new ventures and established businesses
in Canada.
26 Beyond Numbers / September 2000