9 May 2002 Internal T.I. 2002-0118887 - STOCK OPTIONS

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 CCRA.

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

Principal Issues:

For purposes of calculating the value of the taxable benefit under subsection 7(1), when is a share considered to have been acquired, on the record date or the date the shares are delivered?

Position: Shares are considered to be acquired on the date the shares are delivered.

Reasons: All attributes of ownership are not acquired until the date the shares are delivered.

			May 9, 2002

	TORONTO WEST TSO 	HEADQUARTERS
			Income Tax Rulings
	Attention:  Jagtar Plaha	  Directorate
G. Kauppinen
(613) 957-8971

			2002-011888

Stock Options

This is in reply to your facsimile of January 17, 2002 requesting our comments regarding stock options exercised by a taxpayer.

You ask which is the proper date to use as the time that a share is considered to have been acquired, the date of record or the date that the shares are delivered to the purchaser.

You also ask our comments regarding the situation wherein an employee exercises a stock option and at the same time instructs his or her broker to sell the shares on the market immediately. The actual transactions are as follows:

1. The employee notifies the corporation in writing that he or she wishes to exercise the stock options.

2. On the same notification that the employee sends to the corporation, the employee authorizes his or her broker to sell the shares obtained upon the exercise of the options and to pay the corporation the exercise price for the shares.

3. The broker immediately sells shares of the corporation on the open market. This, however, is a so-called "short sale" because the corporation has not, and will not, actually issue shares from treasury to the broker (the agent of the employee) until it is paid the exercise price by the broker.

4. The broker therefore sells the shares on the trade date, obtains cash, and then, generally, a few days later, pays the corporation the exercise price on the employee's behalf and receives, from the corporation on the "settlement date", shares from treasury (which will cover the broker's position in respect of the shares that it sold "short" a few days earlier).

Our Comments

We refer you to Interpretation Bulletin IT-133 dated, November 30, 1973, entitled Stock Exchange Transactions - Date of Disposition of Share ("IT-133"). To summarize the comments therein, which still reflect the position of the Canada Customs and Revenue Agency, for transactions after 1974, a share traded on a stock exchange will usually be considered to have been disposed of or acquired for income tax purposes on the "settlement date", the date on or before which the vendor is required to deliver the share certificates and the purchaser is required to make payment thereof. If a broker pays the vendor before the settlement date, this will be considered an advance only and the transaction will not be considered to be completed until the shares are delivered to the purchaser. However, please note paragraph 6 of IT-133 which states:

In those cases where arrangements are made between vendor, purchaser and their brokers for a further delay prior to delivery and payment, the disposition and acquisition will be at a date subsequent to "settlement date", namely the date on which delivery and payment are effected.

Accordingly, the date that the shares are delivered to the purchaser will generally be the date that the transaction is recognized for purposes of the Act.

Where the sale is completed on the same day that the trade goes through the exchange, there is both a delivery of, and a payment for, the share certificates on the same day of the contract for sale, i.e., on the trade date. In effect, the trade date and the settlement date are one and the same in such a transaction. Note that this is not the same as a "short sale" by the employee's broker discussed in the next paragraph below.

In the situation where the broker "short sells" shares before actually receiving shares from the corporation on the exercise of the stock option, it is our view that, for purposes of paragraph 7(1)(a) of the Act, the employee has not "acquired" shares until the broker, as agent of the employee, has received those shares from the corporation. This will be on the "settlement" day, that is, the day that the broker has paid the corporation and acquired the shares. The fact that the broker "short sells" other shares on the open market on the day that the employee notifies the company that he or she wishes to exercise the options is irrelevant for purposes of determining when the employee "acquires" the share for purposes of the Act. It is only on the date that the broker pays for and acquires shares from the corporation, as agent for the employee, that the employee will recognize a benefit for income tax purposes under paragraph 7(1)(a) of the Act. This day will be the "settlement" day, not the earlier day when the broker, as agent of the employee, has short sold other shares to obtain cash to pay to the corporation the exercise price for the stock options.

If a deduction under paragraph 110(1)(d) of the Act is available to the taxpayer who is deemed to have received a benefit under subsection 7(1) of the Act, the rate to be used for the deduction will be 1/4 of the benefit if the shares are determined to have been acquired before February 28, 2000; 1/3 of the benefit if the shares are determined to have been acquired after February 27, 2000 and before October 18, 2000; and 1/2 of the benefit if the shares are determined to have been acquired after October 17, 2000. The rate to be used will be the rate in effect on the settlement date.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

We trust our comments will be of assistance to you.

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch