Federal Appeal


Tax

Income tax

Employment income

Taxpayer required to report cost of securities using exchange rate on date options exercised

Taxpayer exercised stock options at profit and was deemed to have received employment benefit in taxation years in which they were exercised. Taxpayer exercised option via broker-assisted transaction with effect that shares were delivered to broker and immediately sold on taxpayer’s instructions. For 2010 and 2012 taxation years, taxpayer calculated cost base with reference to Canada/US exchange rate in effect on date options were granted and proceeds of sale on basis of exchange rate in effect on date of exercise. Minister of National Revenue reassessed taxpayer on basis that he was required to report cost of securities acquired and converted into Canadian dollars using exchange rate on date stock options were exercised. Tax Court judge dismissed taxpayer’s appeal and found that under s. 7(1) of Income Tax Act, employment benefits received by taxpayer in US dollars were to be calculated by converting Canadian dollar value of exercise price and fair market value of shares at time of exercise, using exchange rate in effect on date options were exercised. Taxpayer appealed. Appeal dismissed. Judge did not make error in law in upholding Minister’s reassessments and correctly applied relevant legal principles and case law. Tax implications for exercise of stock options, including conversion of foreign denominated amounts, were triggered on their exercise date. No taxable transaction occurred when stock options were granted to taxpayer since he did not acquire taxable benefit at that time. Taxable transactions occurred when taxpayer exercised his stock options in 2010 and 2012. Only when taxpayer exercised stock options was he required under s. 261(2)(b) of Act to calculate his reportable benefits by converting exercise price, along with fair market value of shares at time he exercised his options, using exchange rate applicable on date of exercise.

Ferlaino v. R. (2017), 2017 CarswellNat 2235, 2017 FCA 105, A.F. Scott J.A., Boivin J.A., and de Montogny J.A. (F.C.A.); affirmed (2016), 2016 CarswellNat 1389, 2016 CarswellNat 5249, 2016 TCC 105, 2016 CCI 105, Guy R. Smith J. (T.C.C. [Informal Procedure]).

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