Exercise of employee stock options before a s. 86 spin-off transaction may entail reliance on a comfort letter

Where, prior to implementation of a spin-out, employees exercise their options to acquire common shares of the pre-spin corporation, which are then exchanged under a s. 86 reorg for new common shares and special shares (to be exchanged under the Plan of Arrangement for Spinco shares), under current law the common shares acquired on exercise would not qualify as prescribed shares (due to their imminent cancellation) – although a November 29, 2012 comfort letter issued to Ian Gamble re the Telus transaction recommends fixing this problem. A potential advantage to effecting the spin-out as a s. 84(2) PUC distribution is that an exception accommodating such distributions is already built into Reg. 6204(1)(b).

Neal Armstrong. Summary of John McClure and Brian Kearl, "Stock Options in Spinout Transactions," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 7 under Reg. 6204(1)(b).