30 July 1985 Income Tax Severed Letter A-1546 - [Employee Stock Option Plans]

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.

Revenue Canada Taxation Head Office

XXXX

B. Dodd (613) 993-7295

July 30, 1985

Dear Sirs:

We are writing in reply to your letter of May 27, 1985 concerning employee stock option plans which contain stock appreciation rights. We apologize for the delay in our reply.

You indicated that a stock appreciation right permits an employee, at his option, to use the appreciated value of his stock options to acquire shares from the employer corporation for no consideration other than giving up his stock options. By way of example you describe a situation in which an em- ployee has been granted an option to acquire 100 common shares at $10 each at a time when the fair market value of each share is $10. Where the fair market value of the shares increases to $20, the employee could, instead of exercising the option for 100 shares at $10 each, exercise the stock appreciation right and acquire 50 shares for no consideration other than giving up the stock option (i.e. 100 x $10 appreciation in value divided by $20 fair market value). In your view, a $1,000 benefit would arise under paragraph 7(1)(b) of the Income Tax Act, one-half of which would be deductible under paragraph 110(1)(d) of the Act, and you have requested our confirmation in this respect.

In view of the fact that this question is somewhat conceptual in nature and we have not been provided with a copy of a specific plan for examination, we arc unable to provide a definite opinion. Based on the information you have supplied, however, provided the shares are qualifying shares for the purposes of paragraph 110(1)(d) and the employee otherwise satisfies the provisions of paragraphs 7(1)(b) and 110(1)(d) of the Act, it would appear that these provisions would generally apply in the circumstances and manner which you have described.

We trust these comments will be of assistance to you.

Yours truly,

for Director Non-Corporate Rulings Division 110(1)(d) 7(1)