8 March 1999 Ruling 9833373 - STOCK OPTION, EXCHANGE, RIGHTS

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: Can we rule that an employer has offended on employee’s rights under a particular stock option agreement?

Position: No.

Reasons: Can only be determined by the courts.

XXXXXXXXXX 983337
M. P. Sarazin
March 8, 1999

Dear Sir:

Re: Advance Income Tax Ruling Requested on behalf of XXXXXXXXXX

This is in reply to your letters dated November 1, 1998 and February 20, 1999, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

In your letter dated February 20, 1999, you state that the taxpayer was employed by XXXXXXXXXX (the “Employer”) which was owned by XXXXXXXXXX (the “Parent Corporation”). As part of his compensation package, the taxpayer had been granted options to acquire shares of the Parent Corporation. In XXXXXXXXXX, the taxpayer was advised that a substantial part of the Employer’s business was being sold by the Parent Corporation to XXXXXXXXXX (the “Purchaser”) and, as a result of the sale, the employee’s had to exercise their vested stock options prior to XXXXXXXXXX. You requested the following rulings:

1. Could we rule that the sale of the business by the Parent Corporation violated the taxpayer’s contract of employment with the Employer?

2. Could we rule that the sales agreement between the Parent Corporation and the Purchaser did not include the approval of the Employer’s management?

3. Could we rule that, under common law, the Purchaser is required to assume the Parent Corporation’s position in respect of the existing stock option agreements at the time of sale?

Comments

Paragraph 2 of Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, states that an advance income tax ruling is a written statement given by the Directorate to a taxpayer stating how the Department will interpret and apply specific provisions of existing Canadian income tax law to definite proposed transactions. The review of completed transactions falls within the responsibility of Tax Services Offices. Since you have not provided us with written evidence that you are authorized to act for the client, you have not described any proposed transactions (only completed transactions are described in your letters) and you have not referred to the specific provisions of the Income Tax Act (the “Act”) that may or may not be applicable, we are only able to provide you with the following non-binding general comments which we hope will be of assistance.

We enclose a copy of Interpretation Bulletin IT-113R4 titled “Benefits to Employees- Stock Options”. The bulletin discusses the rules in the Act relating to the taxation of employment-related stock options. You will find that paragraph 1 of IT-113R4 discusses the benefit realized when a stock option is exercised and paragraphs 15 to 17 of IT-113R4 discuss the tax ramifications regarding certain exchanges of options.

We note that the Act applies in respect of the benefits arising from rights related to stock option agreements. However, the particular stock option agreement will determine the rights of both the employer and the employee in respect of the stock option, including the employee’s right to exercise, transfer or exchange the option.

Any questions relating to whether an employer has or has not satisfied its obligations under a stock option agreement, whether a stock option agreement created a fiduciary or trust relationship for the benefit of specific employees or whether the sale of a business by an employer has offended an employee’s employment rights do not relate to the application of the Act. These questions relate to common law, employment law and trust law and, as such, they can only be answered by the courts.

We trust that the above comment will be of assistance to you.

We are now closing our file and we will be returning your deposit under separate cover.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate