8 February 2005 GST/HST Ruling 52141 - Agency Relationship and Subsection 177(1)

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to stock options granted to an independent contractor.

XXXXX a copy of your client's employment contract or other documentation relating to the stock option was requested from you in order to determine the GST/HST status of the supplies. Over the intervening months, you have indicated that your client has not yet provided you with the necessary information. You have also indicated that you believe that your client remains interested in receiving a ruling on any GST/HST tax implications of the stock option transaction. We agreed to await your submissions; however, to date, no further submissions have been received. For this reason, we are issuing an interpretation in respect of these transactions.

Interpretation Requested

Based on the information provided, your client is an independent contractor working for a XXXXX company who was granted stock options and exercised those options. He is engaged in making taxable supplies to the company. Your client purchased $XXXXX in shares and sold them for $XXXXX. You have indicated that it is your understanding, based upon communications with CRA Income Tax Rulings Directorate, that the $XXXXX gain is revenue (as opposed to capital gain) and must be included on your client's statement of self-employed earnings (the spread is fully taxable under the Income Tax Act). You would like to know the GST/HST implications of the above-noted transactions.

Interpretation Given

As we have discussed, the granting of the stock option, the exercise of the stock option (stock purchase) and the sale of the shares are all supplies that may have implications under the Excise Tax Act (ETA). The tax status of the supplies depends upon the application of the ETA to the specific transactions entered into by your client.

In our view, where a person receives a stock option enabling the person to purchase shares for an amount less than the fair market value of the shares as part of the compensation paid to him or her by the corporation for taxable services provided (or to be provided) to the corporation, the CRA will consider the difference between the purchase price of the shares under the option and the fair market value of the shares at the time of the granting of the option to be additional consideration for the contractor's services to the corporation. Pursuant to sections 153 and 165 of the ETA, this amount would be subject to the application of the GST/HST.

In the event that this is the case, your client, a GST/HST registrant, will be required to collect and remit an amount of the GST/HST on this amount of "additional consideration" for taxable services supplied to the corporation. Where the stock option price of the shares was equal to the fair market value of the shares at the time the options were granted, or your client received the stock options otherwise than as additional consideration for services provided to the XXXXX company, the granting of the stock options has no GST/HST implications.

With respect to the exercise of the stock options (share purchase) and subsequent sale of the shares, it is our view that these are each supplies of a "financial service" as defined at paragraph 123(1)(d) of the ETA. Your client's purchase of shares (exercise of the stock option) and sale of shares are both exempt supplies of "financial services" pursuant to section 1 of Part VII of Schedule V to the ETA. The income earned ($XXXXX) is not subject to the GST/HST.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/02/08 — RITS 54865 — Tax Status of XXXXX [(Individual Ice Cream Sandwiches)]