The normal option rules do not apply to the grant and exercise of an option on a partnership interest issuance

As a result of a partnership between A and B issuing an option to C for $50, allowing C to become a partner upon a further payment of $60, the partnership realizes a capital gain under s. 49(1) of $50, which typically would be allocated equally to A and B.

Ss. 49(3) and (4) do not apply to reverse the s. 49(1) gain when the option is exercised because the partnership cannot to satisfy the condition in s. 49(4) that the granting taxpayer (in this case, the partnership) have filed a return for the previous year “as required under section 150.” Accordingly, the capital gain on issuance of the option may remain on the partners’ returns.

S. 49(3)(a) includes “in computing the vendor’s proceeds of disposition of the property, the consideration received by the vendor for the option.” However, the issuance of an interest in a partnership would not normally be regarded as a disposition by the partnership, so that it would appear that no further gain is realized in the year of exercise.

Neal Armstrong. Summary of Will House and Janes Painter, “Granting an Option to Acquire an Interest in a Partnership,” Canadian Tax Focus, Vol. 12, No. 3, August 2022, p. 8 under s. 49(3).