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 stock options issued to independent contractors are taxed when exercised, or when granted?
Position: Question of fact. If option is granted because of supplier/customer relationship, benefit is taxable as business income when granted under section 9. If option is later exercised or expires because of this same relationship, any additional gain or a loss is also taxed in accordance with section 9.
Reasons: Each situation will have to be reviewed to determine if the options are granted and/or exercised because of a supplier/customer relationship.
XXXXXXXXXX 1999-001391
S. E. Thomson
Attention: XXXXXXXXXX
May 3, 2000
Dear XXXXXXXXXX:
Re: Stock Options for Independent Contractors
This is in reply to your letter of December 7, 1999 in which you ask for our opinion on the tax treatment of stock options granted to an independent contractor who distributes products of a Canadian corporation.
We are unable to definitively reply to such queries except in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. We nevertheless offer the following general comments, which may or may not apply to your situation. As such, these comments are not binding on the Canada Customs and Revenue Agency.
It is a question of fact whether the corporation and the independent contractor are in a supplier/customer relationship or in an employee/employer relationship. Where the options are granted as a result of the supplier/customer relationship, the independent contractor will be required to include in computing its income from business in the year the options are granted the fair market value of the options at the time the options are granted less any amount paid for the options. As set out in paragraph 3 of IT-96R6 Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units, the fair market value of the option is the greater of:
- the trading value of the rights received; and
- the amount by which the fair market value of the shares subject to the option at the time of the option's distribution exceeds the exercise price provided in the option.
If the options are exercised by virtue of the supplier/customer relationship, the independent contractor will be required to include in computing its income from business in the year the options are exercised, the difference between the fair market value of the shares at the time the shares are acquired and the aggregate of the amounts paid for the shares and included in income at the time the options were granted.
Where these amounts have been included in income by the independent contractor and shares are acquired, the adjusted cost base of the shares will be computed pursuant to subsection 52(1) of the Act.
Where the options expire by virtue of the supplier/customer relationship, and no shares are acquired, the independent contractor may deduct in computing its income from business in the year the options expire, the cost of the options previously included in income.
We trust the foregoing comments are of assistance.
Yours truly,
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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