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: Would the existence of a call option result in the application of subparagraph 251(5)(b)(i)
Position: Case by case - question of fact but in this case yes.
Reasons: The law.
XXXXXXXXXX 2005-012195
Michael Cooke
April 28, 2005
Dear XXXXXXXXXX:
Re: Paragraph 251(5)(b) - Put Options and Call Options
This is in reply to your correspondence dated March 15, 2005, wherein you requested our views on the application of subparagraph 251(5)(b)(i) of the Income Tax Act (the "Act") where put options and/or call options are involved.
In your correspondence, you indicate that a put option gives the holder the right to sell shares of a corporation and, if exercised, obligates the grantor of the option to buy the shares of the corporation. A call option, on the other hand, gives the holder the right to buy shares of a corporation, and if exercised, obligates the grantor of the option to sell the shares of the corporation. You also refer to several published CRA positions (for example, Rulings' document 2002-0133675) and certain Canadian Tax Foundation articles, and conclude, based on such information, that it appears that both a put and call option have to be in place at the same time for subparagraph 251(5)(b)(i) to apply. You question whether the existence of a call option alone would result in the application subparagraph 251(5)(b)(i).
The application of paragraph 251(5)(b) can only be determined on a case by case basis once all the facts of the particular situation are know. However, as described in paragraph 17 of IT-419R2 - Meaning of Arm's Length, dated June 8, 2004, the Canada Revenue Agency considers the wording in paragraph 251(5)(b) to be broad enough to include almost any buy-sell agreement, however, paragraph 251(5)(b) will not normally be applied solely because of:
(a) a "right of first refusal"; or
(b) a "shotgun arrangement" (i.e. an arrangement under which a shareholder offers to purchase the shares of another shareholder and the other shareholder must either accept the offer or purchase the shares owned by the offering party) contained in a shareholder agreement."
However, in other types situations, such as was the case in our document 2002-0133675, paragraph 251(5)(b) can be applied even though the right to acquire shares (or to have such shares purchased or redeemed by the issuing corporation) may be dependent on multiple contingencies.
Accordingly, in the case of a call option such as the one described above, since the holder of the option has the right to acquire shares of the corporation, it is our view that paragraph 251(5)(b) would apply such that the holder would be deemed to have the same position in relation to the control of the corporation as if such person owned the shares at that time.
We trust our comments are of assistance to you. These comments are provided in accordance with the practice and limitations outlined in paragraph 22 of Information Circular 70-6R5 issued on May 17, 2002.
Yours truly,
David Palamar
Manager
Corporate Reorganizations Section III
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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