21 October 1996 External T.I. 9604375 - PARTNERSHIPS AND STOCK OPTIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Will section 7 apply to stock options provided to employees of a corporate partnership by a corporate partner?

Position:

Yes

Reasons:

As a result of a XXXXXXXXXX and confirmation with the Partnership Section, we are now of the view that employees of a partnership are considered employees of the corporate partner.

									960437
XXXXXXXXXX							M.P. Sarazin

Attention: XXXXXXXXXX

October 21, 1996

Dear Sirs:

Re: Stock Option Plan and Corporate Partnership

This is in reply to your letter dated January 24, 1996, wherein you requested that we reconsider our position, as expressed in technical interpretation 932434 issued October 29, 1993, that section 7 of the Income Tax Act (the "Act") will not apply where employees of a partnership are granted stock options by a corporate partner. We apologize for the lengthy delay in responding which was attributable to our review of our position and the backlog of files held by the Department of Justice.

You are of the view that, based on common law, a partnership is not a legal entity. Consequently, the particular partners are the employers of the employees and section 7 of the Act should apply to stock options granted by the corporate partner to employees employed by the partnership.

Comments

We have reviewed the cases that you have presented and addressed the issue with the Department of Justice. As a result, we have revised our earlier position as expressed in technical interpretation 932434 to reflect the existing jurisprudence which supports a conclusion that employees of a partnership may be employed by each of the partners. Generally, employees of a partnership would be considered employees of each partner but this may not be the case where agreements between the partners specify which partners employ which employees. The determination of whether an employee is employed by each corporate partner will depend on all of the facts in each case, including any agreements between the corporate partners relating to the employment of the partnership employees. Consequently, where the facts would lead to a conclusion that an employee is employed by a particular corporate taxpayer, section 7 of the Act will apply where an employee of the partnership is granted options to acquire shares of the corporate partner.

We thank you for bringing this matter to our attention and we trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch