2021-0886441E5 Restricted Stock Unit Plan – Adjusted Cost Base
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.
Principal Issues: How to calculate the adjusted cost base to an employee, and the corresponding capital gain resulting from a partial disposition, of shares acquired on the settlement of vested restricted stock units where the employee already owns identical shares.
Position: It depends on whether the conditions of subsection 7(1.31) are met. If the conditions are not met, then the adjusted cost base to the employee of the shares will be averaged.
Reasons: Subsection 47(1) and 47(3).
Section: Subsection 5(1), paragraph 6(1)(a), section 7, subsection 7(1.3), subsection 7(1.31), subsection 40(1), paragraph 40(2)(g), subsection 47(1), subsection 47(3), paragraph 53(1)(f)
September 12, 2022
RE: Restricted Stock Units (“RSUs”) Plan
We are writing in response to your email of March 24, 2021, wherein you requested clarification on how to calculate the adjusted cost base (“ACB”) to an employee, and the corresponding capital gain resulting from a partial disposition, of shares acquired on the settlement of vested restricted stock units (“RSUs”) where the employee already owns identical shares.
You provided the following hypothetical example :
* an employee acquires 10 common shares of their employer, a public corporation, for $5 per share and holds the shares on capital account;
* the employee is granted 10 RSUs of the employer under an agreement to which subsection 7(1) applies;
* the employee provides no consideration for the RSUs other than services rendered;
* upon vesting, the employee has a right to receive for each RSU one common share of the employer from treasury;
* at the time the 10 RSUs vest the employee is issued 10 common shares from the capital stock of the employer (the “RSU Shares”) with a fair market value of $10 per share;
* immediately after issuing the RSU Shares, the employer directs a broker to dispose of 5 RSU Shares, and the $50 proceeds are utilized by the employer to satisfy its withholding tax obligation; and
* the RSU Shares and the previously owned common shares are identical property.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) (footnote 1) 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
When a benefit is deemed by paragraph 7(1)(a) to have been received by an employee on the acquisition of shares, the amount of the benefit is added to the ACB to the employee of the shares at the time the shares are acquired pursuant to paragraph 53(1)(j). Where an employee already owns shares that are identical to the shares acquired, the general rule under subsection 47(1) is that the ACB to the employee of the shares must be averaged by dividing the total cost of all identical shares owned by the employee by the number of such shares. However, pursuant to subsection 47(3), securities to which subsection 7(1.31) applies are deemed not to be identical to other securities owned by the employee such that the cost-averaging rule in subsection 47(1) does not apply.
Subsection 7(1.31) applies if the following conditions are met:
* the particular security is acquired under an agreement described in subsection 7(1);
* an identical security is disposed of within 30 days after the acquisition of the particular security;
* no other identical securities are acquired or disposed of by the employee after the acquisition of the particular security and before the disposition;
* the employee designates in the employee’s return of income filed for the year in which the disposition occurs that the particular security is the security subject to the disposition; and
* the employee has not designated the particular security in connection with the disposition of any other security.
If subsection 7(1.31) applies, an employee is permitted to designate the most recently acquired securities as the securities deemed disposed.
In the example provided, under paragraph 7(1)(a), the employee is deemed to have received a taxable benefit of $100 at the time the employee acquires the RSU Shares. This amount is added to the ACB to the employee of the RSU Shares pursuant to paragraph 53(1)(j). Since the employee already owned common shares that are identical to the RSU Shares, the employee’s ACB of the previously acquired shares and the RSU Shares has to be averaged unless subsection 47(3) deems these shares not to be identical.
As mentioned above, subsection 47(3) will deem the RSU Shares not to be identical to the previously acquired shares if subsection 7(1.31) applies to the RSU Shares. Therefore, provided the conditions of subsection 7(1.31) are met, the ACB to the employee of the 5 RSU Shares sold to cover the withholding tax obligation will be $10 per share, and consequently, no capital gain will arise on the disposition. If the conditions are not met, then the ACB to the employee of the shares will be averaged to $7.50 per share, and the employee will realize a capital gain of $2.50 per share on the disposition of the 5 RSU Shares.
We trust our comments will be of assistance.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise stated, all statutory references herein are to the Act.
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