2015-0605971E5 Paragraph 110(1)(d.01) deduction

Principal Issues: 1) Would a taxpayer be entitled to the deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1) if he directed the approved broker or dealer to dispose of his shares which were acquired under an employee stock option agreement and donated the proceeds personally instead of directing the broker or dealer to do so? 2) Does the word “immediately” in the phrase “immediately dispose of” in the context of subsection 110(2.1) refer to both the disposition of the securities and the donation of the proceeds? 3) If the taxpayer is entitled to a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1), is the taxpayer required to file an election under subsection 7(1.31)?

Position: 1) No. 2) Yes, the word “immediately” in that phrase refers to both the disposition of the securities and the donation of the proceeds. 3) Depends on the circumstances.

Reasons: The wording of subsections 110(2.1) and 7(1.31).

Author: Johnstone, Alexander
Section: ITA 7(1), 7(1.31), 110(1)(d.01), 110(2.1)

XXXXXXXXXX                                                                                                                             2015-060597
                                                                                                                                                     Alex Johnstone
                                                                                                                                                     (613) 410-9134
December 6, 2016

Dear XXXXXXXXXX:

Re:  Paragraph 110(1)(d.01) deduction

This is in reply to your email of August 28, 2015 concerning the application of subsections 110(2.1) and 7(1.31) to a situation where a taxpayer is entitled to claim the deduction under paragraph 110(1)(d.01). We apologize for the delay in our response.

Specifically, you asked us whether the taxpayer would still be entitled to the deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1) if he directed the approved broker or dealer to dispose of his shares that were acquired pursuant to an employee stock option agreement and donated the proceeds to a qualified donee personally instead of directing the broker or dealer to do so. Also, you are seeking our views on the meaning of the word “immediately” in the phrase “immediately dispose of” in the context of subsection 110(2.1). Finally, you enquired as to whether a taxpayer would be required to file an election under subsection 7(1.31) if the taxpayer was entitled to a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1).

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Generally, subsection 7(1) provides that an employee who acquires a security under an employee stock option agreement is deemed to have received an employment benefit equal to the value of the security (less any amount paid by the employee to acquire the security, if applicable). When certain conditions are met, paragraph 110(1)(d.01) allows a taxpayer to deduct from income a portion of the employment benefit that the taxpayer is deemed by subsection 7(1) to have received if the taxpayer makes a gift of a security acquired under an employee stock option agreement to a qualified donee.

By virtue of subsection 110(2.1), the deduction under paragraph 110(1)(d.01) is also available where a taxpayer, in exercising the option to acquire a security, directs a broker or dealer who is appointed or approved by the grantor of the option to immediately dispose of the security and pay all or a portion of the proceeds of the disposition to a qualified donee. The amount of the deduction must be prorated to reflect the portion of the proceeds that are donated.

In response to your first question, if the broker or dealer pays the proceeds of disposition directly to the taxpayer who then donates all or some of the proceeds, it is our view that the requirements of subsection 110(2.1) are not met and thus a deduction under paragraph 110(1)(d.01) would not be available.

You also asked whether the word “immediately” in the phrase “to immediately dispose of the security and pay all or a portion of the proceeds” in subsection 110(2.1) refers to both the disposition of the security and the donation of the proceeds, or can the donation be made at a later date but within the limits set out in subparagraph 110(1)(d.01)(iii). In our view, the phrase should be interpreted in the context of subsection 110(2.1) such that the word “immediately” refers to both the disposition of the security and the payment of the proceeds to the qualified donee.

Your final question concerns subsection 7(1.31) which applies when a taxpayer disposes of a security acquired under an employee stock option agreement that is identical to other securities owned by the taxpayer. Under subsection 7(1.31), when a taxpayer acquires a particular security under such an agreement and has disposed of a security that is identical to the particular security no later than 30 days after acquisition of the particular security and provided certain conditions are met, the particular security is deemed to be the security disposed of. One such condition is that the taxpayer designates the particular security as the security so disposed of in the taxpayer's return of income for the year in which the disposition occurs.

Depending on the circumstances, the designation provided by subsection 7(1.31) may be necessary to permit a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1). For example, assume a scenario where, before the exercise of an employee stock option, a taxpayer holds identical securities to those acquired under the option. If, in exercising the option, the taxpayer directs the disposition of the acquired securities and the donation of the proceeds as provided for in subsection 110(2.1), the taxpayer can designate the acquired securities as the securities disposed of in order to claim a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1). Absent the designation under subsection 7(1.31), subsection 7(1.3) would generally apply to deem identical properties to be disposed of in the order in which they were acquired.

We hope that these comments will be of assistance.

Yours truly,

Jenie Leigh
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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