Ferlaino v. R. - TCC: Exchange gain on stock options determined on exercise date, not date of grant

Ferlaino v. R. - TCC:  Exchange gain on stock options determined on exercise date, not date of grant

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/143869/index.do

Ferliano v. The Queen  (April 28, 2016 – 2016 TCC 105, Smith J.).

Précis:  This case turned on a very narrow point.  Mr. Ferliano received a grant of stock options denominated in US dollars in 2000 and 2002.  He exercised those options in 2010 and 2012.  He measured his gain from employment based on the US dollar conversion rate in effect at the date of the grant of the options.  CRA reassessed based on the conversion rate in effect at the date of the exercise of the options.  The Tax Court agreed with CRA’s position and dismissed the appeal.  There was no order as to costs since this was an informal procedure appeal.

Decision:    The facts of this case were not complex:

[12]        On December 1, 2000, he received an award letter from UTC confirming the grant of 1000 stock options at an exercise price of $35.25 US dollars per share and on February 4, 2002, he received a second letter confirming the grant of 500 stock options with an exercise price of $33.495 US dollars per share.

[13]        As explained by the Appellant during his testimony, one of the advantages of receiving stock options was that the exercise price was locked-in from the date of the grant for a period of up to ten years but he was not required to advance any capital at any time. He viewed this as the equivalent of an interest-free loan.

[18]        On April 26, 2010, the Appellant completed a cashless exercise of 1000 stock options, acquiring UTC shares at $35.25 US dollars per share and immediately selling them at $75.75 US dollars per share.

[19]        On January 25, 2012, he completed a cashless exercise of 500 stock options, acquiring UTC shares at $33.495 US dollars per share and immediately disposing of them in the open market at $78.60 US dollars per share. 

[25]        In both instances, he calculated his cost base with reference to the Canada/US exchange rate in effect on the date the stock options were granted and his proceeds of sale on the basis of the Canada/US exchange rate in effect on the date of exercise. The Minister reassessed the Appellant for both the 2010 and 2012 taxation years on the basis that he was required to report the actual cost of the securities acquired and converted into Canadian dollars using the Canada/US exchange rate in effect on the date the stock options were exercised.

[26]        The Minister took the position that the appropriate Canada/US exchange rate on April 26, 2010 was 0.9984, resulting in employment income of $40,435, and the Appellant was reassessed accordingly.

[27]        The Minister also took the position that the appropriate Canada/US exchange rate on January 25, 2012 was 0.9956, resulting in employment income of $22,451, and the Appellant was reassessed accordingly.

The Tax Court agreed with the position put forward by CRA:

[84]        The Appellant points out that the Canada/US exchange rate in effect when the debenture was issued was applied in Agnico even though the conversion to common shares took place at a later date (in 2005) and suggests that this supports his position that the appropriate time to determine the cost base of the stock options is on the date that they were granted.

[85]        I find that this decision does not assist the Appellant since Agnico had actually received $1,000 US per debenture in February 2002, whereas in this instance, the Appellant received the stock options as part of an incentive plan, without advancing any monetary consideration whatsoever. 

[86]        It is clear that there will be situations where the “particular amount” described in paragraph 261(2)(b) will have arisen at some point in time that predates the actual taxation year when the taxpayer is required to determine his “Canadian tax results”. But that is no different from the principle established in Gaynor, supra, that the adjusted cost base of a capital property must be tracked in Canadian dollars from the date of acquisition.

[87]        I conclude that “the day on which the particular amount arose” for the purposes of paragraph 261(2)(b) was when the Appellant exercised his stock options, that is, the date on which he acquired the UTC shares and simultaneously disposed of them. Since the process of a cashless exercise allowed him to complete both transactions on the same day, that determines the appropriate spot rate. 

As a result the appeal was dismissed.  There was no order as to costs since this was an informal procedure appeal.