14 July 2000 External T.I. 1999-0010485 - Convertible Bonds owned at time of emigration

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: What are the Canadian income tax implications under paragraph 128.1(4)(b) of the Act where an emigrating individual owns rights to acquire shares of a Canadian corporation (employer) under the terms of a debt agreement.

Position: No deemed disposition under subparagraph 128.1(4)(b)(iii) on emigration.

Reasons: The law.

XXXXXXXXXX 		1999-001048

Attention: XXXXXXXXXX

July 14, 2000

Dear Sirs:

Re: Convertible Bonds Owned at the Time of Emigration

This is in reply to your letter of June 4, 1999 wherein you requested our opinion on the income tax consequences under paragraph 128.1(4)(b) of the Income Tax Act ("the Act") in a situation that is briefly restated as follows.

A Canadian corporation ("Canco") issued bonds to its employees on an arm's length basis as part of an employee share incentive plan. The terms of these bonds give the employees the right to exchange the bonds for a fixed number of shares of Canco that is determined at the time the bonds are issued. Only eligible employees of Canco can purchase these bonds and they can not otherwise be sold, assigned, traded, hypothecated or alienated by such holders. If the bonds are not exchanged for shares of Canco before maturity the principal amount owing by Canco will be paid to the particular holder at that time.

In your letter you indicate that one of Canco's employees may be transferred to one of its foreign affiliates and if this occurs the transferred employee will likely cease to be a resident of Canada for income tax purposes. It is your view that the transferred employee would not be deemed under paragraph 128.1(4)(b) of the Act to have disposed of his/her Canco bonds at the time he/she ceases to be a Canadian resident. This is because the exception to the deemed disposition rules in subparagraph 128.1(4)(b)(vi) of the Act should apply since the bonds give the employee the right to acquire shares of the capital stock of Canco where section 7 would apply if the employee disposed of such right to an arm's length person. You ask that we confirm that the above described Canadian income tax implications to the departing employee are correct.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Notwithstanding the above we can provide the following general comments.

Recent draft legislation (see Notice of Means and Ways Motion dated June 5, 2000) proposes to amend section 128.1 (including subparagraph 128.1(4)(b) of the Act) for changes in residence that generally occur after October 1, 1996. Under these proposals, rights to acquire shares that are currently described in subparagraph 128.1(4)(b)(vi) will continue to be excluded from the deemed disposition rules on emigration under proposed subparagraph 128.1(4)(b)(iv) of the Act as an "excluded right or interest". Share purchase rights will represent an "excluded right or interest" within the meaning of proposed paragraph 128.1(10)(c) of the Act if such rights represent a right of the individual under an agreement referred to in subsection 7(1) or (1.1) of the Act.

Where rights to acquire shares of a corporation are received by an individual in respect of, in the course of, or by virtue of, the individual's employment with the corporation, the fact that such rights are granted under the terms of a debt agreement does not, in and by itself, prevent such rights from being described in subsection 7(1) or 7(1.1) of the Act. Where the share purchase rights can not be traded separately from the particular debt instrument under which they were issued, it is our view that the particular debt instrument would represent an excluded right or interest" within the meaning of proposed paragraph 128.1(10)(c) of the Act.

Our comments are provided in accordance with the practice described 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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