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 <strong>of</strong> the share option benefit, to keep the treatment <strong>of</strong> share options consistent with that <strong>of</strong> capital gains. The result <strong>of</strong> these changes is an income inclusion <strong>of</strong> 2/3 <strong>of</strong> the value <strong>of</strong> 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 <strong>of</strong> the option benefits until later years, or years where their other sources <strong>of</strong> income are limited. This may allow employees to defer and reduce their taxes by using lower rates <strong>of</strong> tax and tax credits, and optimize their earned income for the purposes <strong>of</strong> computing their RRSP contribution room. Partial Dispositions <strong>of</strong> Identical Properties: Some employees who have share options may also own shares <strong>of</strong> their employer from purchases in the market or participation in employee share purchase plans. The Act contains rules that affect the computation <strong>of</strong> the ACB <strong>of</strong> identical properties, such as shares <strong>of</strong> a corporation. The ACB <strong>of</strong> identical properties is averaged over all the identical properties, and no specific identification <strong>of</strong> lots, and corresponding allocation <strong>of</strong> ACB, is allowed where the Grantor <strong>of</strong> the option was not a CCPC at the time the option was granted. In the past, the disposition <strong>of</strong> a portion <strong>of</strong> the shares held would be considered as a prorata disposition <strong>of</strong> all identical properties held. Where an employee acquires additional securities <strong>of</strong> the Grantor under a share option plan, the paragraph 53(1)(j) increase in the ACB in respect <strong>of</strong> the share option benefit is, upon disposition <strong>of</strong> any <strong>of</strong> the identical properties, effectively averaged over the cost <strong>of</strong> all the identical properties. Because an employee may hold a number <strong>of</strong> identical properties (other shares <strong>of</strong> the Grantor) with a lower adjusted cost base, a significant capital gain could result from the application <strong>of</strong> 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 <strong>of</strong> 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 <strong>of</strong>. In order to support specific identification, the employee would have to show the correlation between the particular acquisition and disposition <strong>of</strong> securities. This change to the administrative policy means that employees who hold shares acquired outside the option plan can, with a modicum <strong>of</strong> planning, sell shares at the exercise and avoid any dilution <strong>of</strong> the increase in the cost base in their shares as a consequence <strong>of</strong> the Section 7 benefit. It will be interesting to see how the Department <strong>of</strong> 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” <strong>of</strong> shares exercised, one that includes a 53(1)(j) bump as a result <strong>of</strong> the Section 7 benefit, and one that does not. Conclusion: The recent changes illustrate the Department <strong>of</strong> Finance’s recognition <strong>of</strong> 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 <strong>of</strong> share options is one <strong>of</strong> the few areas where Canada is becoming competitive with the United States, largely as a result <strong>of</strong> the 2000 Budget measures, and share options will continue to be an important method <strong>of</strong> compensation for the employees <strong>of</strong> new ventures and established businesses in Canada. 26 Beyond Numbers / September 2000
Employment Opportunities September 2000 / Beyond Numbers 27
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