21 February 2000 External T.I. 1999-0008605 - Reimbursement of stock option costs

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: whether reimbursement of stock option costs constitutes a benefit conferred on a shareholder

Position: question of fact

Reasons: depends on circumstances

XXXXXXXXXX 		1999-000860

Attention: XXXXXXXXXX

February 21, 2000

Dear Sir:

Re: Benefits Conferred on a Non-Resident Shareholder

This is in reply to your letter dated August 27, 1999, wherein you requested our views on the application of subsection 15(1) and paragraphs 246(1)(a) and 212(1)(a) of the Income Tax Act (the "Act") to the following hypothetical situation.

You describe a situation where a non-resident corporation ("Parentco") issues stock options to the employees of its Canadian subsidiary ("Cansub"). The option price is set at an amount which is not less than the fair market value of the shares of Parentco at the time the options are granted. When the stock options are exercised, Parentco records the difference between the option price and the fair market value of the shares on the date on which the options are exercised as an expense (the "Expense Portion"). Cansub then reimburses Parentco for the Expense Portion. For Canadian income tax purposes, Cansub does not deduct the Expense Portion in computing its income.

You have asked that we confirm the following:

(a) that the reimbursement of the Expense Portion by Cansub to Parentco would not be considered a benefit conferred by Cansub on Parentco pursuant to subsection 15(1) such that it would be an amount which is deemed to have been paid by Cansub to Parentco as a dividend by virtue of paragraph 214(3)(a) of the Act;

(b) that the reimbursement of the Expense Portion by Cansub to Parentco would not be considered a benefit conferred by Cansub on Parentco pursuant to paragraph 246(1)(b) of the Act; and

(c) that the reimbursement of the Expense Portion by Cansub to Parentco would not be considered a management or administration fee for the purposes of paragraph 212(1)(a) of the Act.

In your letter, you have outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request for an advance income tax ruling cannot be considered when the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following general comments which we hope will be of assistance to you.

Whether in a particular situation a benefit has been conferred by a corporation on a person who is a shareholder thereof would be a question of fact which can only be determined following a review of all of the facts of a given situation. In general, we would agree with your view that a reimbursement by a corporation of business related expenses incurred by a shareholder on behalf of the corporation would not constitute a benefit conferred on the shareholder where the reimbursement does not exceed the actual costs incurred by the shareholder in an arm's length transaction. The fact, however, that the amount paid by a corporation to reimburse its shareholder for such business related expenses does not exceed the fair market value thereof is not, in and by itself, indicative that a benefit has not been conferred on the shareholder. Consider, for example, the situation where the fair market value of the share at the time the stock option is exercised is $25.00 and the option price is $15.00. In anticipation of settling the stock options, the non-resident parent has acquired an inventory of its own shares at a cost of $20.00. The agreement between the subsidiary and the non-resident parent provides that the subsidiary will reimburse the parent's cost of acquiring the shares to honour the stock options granted to the subsidiary's employees. In such circumstances, if the subsidiary were to reimburse the non-resident parent for the difference between the fair market value of the option and the option price (i.e. $25.00 - 15.00 = $10.00), we believe that a benefit will have been conferred on the non-resident parent since the subsidiary is only obligated to reimburse the difference between the non-resident parent's cost of acquiring the shares and the exercise price (i.e. $20.00 - 15.00=$5.00).

With respect to subsection 212(4), in general, we would agree with your view that a reimbursement by a corporation of business related expenses incurred by a shareholder on behalf of the corporation would not, pursuant to paragraph 212(4)(b) of the Act, constitute a management or administration fee for the purposes of paragraph 212(1)(a) where the reimbursement does not exceed the actual costs incurred by the shareholder in an arm's length transaction.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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