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: Can employee stock options and warrants be contributed to a TFSA? If so, what is the amount of the contribution? What are the tax consequences of an employee stock option being contributed to a TFSA?
Position: Provided the conditions of 4900(1)(e) are satisfied, options and warrants will be qualified investments for a TFSA. Contributions of property such as options, warrants, or similar rights, must be contributed to a TFSA at the property's FMV and are subject to the TFSA holder's unused TFSA contribution room. When an employee stock option is exercised by a TFSA, the employee is deemed to have received a benefit in accordance with paragraph 7(1)(c) of the Act. If the option expires in the TFSA, no benefit will be deemed received by the employee, in accordance with section 7.
Reasons: Paragraph 4900(1)(e) of the Act. Property must be contributed at the property's FMV, which is a question of fact and an appropriate valuation method must be used in the particular circumstances. In the CRA's view, the intrinsic value of an option, warrant or similar right is not reflective of the option's, warrant's or similar right's FMV.
XXXXXXXXXX 2009-030782
G. Allen
December 1, 2009
Dear XXXXXXXXXX :
Re: Options/Warrants - Contributions to Tax-Free Savings Accounts (TFSA)
This letter is in response to your email of January 26, 2009 concerning contributing employee stock options and warrants to a TFSA.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.
Pursuant to paragraph 4900(1)(e) of the Income Tax Regulations, an option or warrant is a qualified investment for a TFSA trust if it gives the holder of the option or warrant the right to acquire, either immediately or in the future, property that is a qualified investment. In general, the property that may be acquired by the holder of the option or warrant must be a share of, a unit of, a debt issued by, or certain warrants issued by the issuer of the option or warrant and the issuer cannot be a connected person in relation to the TFSA trust.
Where property such as an employee stock option or warrant is contributed by a taxpayer, the holder of a TFSA, to a TFSA, the property must be contributed to the TFSA at its fair market value (FMV) and the contribution is subject to the holder's unused TFSA contribution room. The FMV of a particular option or warrant is a question of fact. The CRA is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV. Rather, it is the CRA's view that a valuation method that is appropriate in the particular circumstances should be used to determine the FMV of an option, warrant, or similar right.
Where a TFSA exercises an employee stock option, pursuant to paragraph 7(1)(c) of the Income Tax Act (the "Act"), the employee is deemed to have received a benefit in the taxation year that the TFSA exercises the option equal to the amount by which the value of the shares acquired under the option exceeds the total of the amount paid by the TFSA to acquire the shares and the amount, if any, paid by the employee to acquire the option. If the option is allowed to expire in the TFSA, the employee will not be deemed to have received a benefit in accordance with section 7 of the Act.
On October 16, 2009 in a Finance Canada News Release, available at: http://www.fin.gc.ca/n08/09-099-eng.asp, proposed amendments were announced to prohibit asset transfer transactions (swaps) between TFSAs and other registered and non-registered accounts. This prohibition would apply to transfers effected between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length. It is proposed that this measure apply to transactions occurring after the date of the news release. With respect to swap transactions involving TFSAs that may have occurred prior to October 17, 2009, the CRA will be examining any unusual TFSA transactions and applying the existing TFSA rules to challenge aggressive tax planning where appropriate.
We trust that our comments will be of assistance to you.
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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