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:
a) Whether our policy in 9216695 continues to be our current position? In that document, we said that stock options must vest while a corporation is a CCPC in order to get subsection 7(1.1) treatment?
b) What constitutes a "fundamental change in the terms of an option agreement", which will trigger a disposition of rights under 7(1)(b)?
Position:
a) No
b) Question of fact and applicable contract law
Reasons:
a) Our position was reversed in document 9728505. Subsection 7(1.1) requires that the corporation be a CCPC at the time that the agreement to issue shares was entered into. The satisfaction of all conditions of the agreement may not be required in order to receive subsection 7(1.1) treatment.
b) Fundamental change can only be confirmed after review of the applicable law, the documents and surrounding facts.
XXXXXXXXXX 1999-001409
S. E. Thomson
Attention: XXXXXXXXXX
February 8, 2000
Dear XXXXXXXXXX:
Re: Vesting of CCPC Stock Options / Amendment to Option Agreement
This is in reply to your letter of December 2, 1999, and subsequent telephone conversations (Thomson/XXXXXXXXXX) in which you ask for our technical interpretation on various scenarios regarding the vesting of CCPC stock options and the amending of option agreements.
Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request involves a transaction or series of transactions contemplated by a specific taxpayer. We refer you to Information Circular 70-6R3 "Advance Income Tax Rulings", which is available at our website at http://www.ccra-adrc.gc.ca. An advance income tax ruling is a written statement given by the Directorate to a taxpayer stating how the Canada Customs and Revenue Agency (CCRA) will interpret and apply specific provisions of existing income tax law to a definite transaction or transactions which the taxpayer is contemplating. The ruling is binding on the CCRA, subject to qualifications as described in IC 70-6R3. However, we do offer the following general comments which are not binding on the CCRA.
Vesting of CCPC Stock Options
With regard to the vesting of CCPC options, you refer to our opinion letter of July 28, 1992 (E9216695), and ask for the legislative or judicial authority for our position in that letter. We point out that this was reversed in our letter dated February 27, 1998 (E9728505). We believe you have a copy of the second letter.
Pursuant to subsection 7(1.1) of the Income Tax Act (the "Act"), where a Canadian controlled private corporation (a "CCPC") has agreed to sell or issue its shares to an employee of the CCPC, a benefit equal to the value of the securities, less the amount paid by the employee, will be included in the income of the employee in the year in which the employee disposes of the CCPC shares. The existence of an agreement is a question of fact.
As we have stated in IT-113R4, Benefits to Employees - Stock Options at paragraph 14, subsection 7(1.1) will apply even though the corporation has ceased to be a CCPC prior to the issuance of the shares pursuant to the agreement.
Where the employee can exercise his rights under the agreement only after the completion of certain conditions (such as a reasonable employment period) and it happens that the CCPC ceases to qualify as a CCPC before the condition is satisfied, our view is that satisfaction of the condition does not impact on the application of CCPC treatment under subsection 7(1.1) of the Act, provided that the requirements of subsection 7(1.1) are otherwise met.
Amending of Option Agreements
Any "fundamental" change in an employee stock option agreement is considered to constitute the creation of a new stock option agreement, and thus causes a disposition of the employee's rights under the old stock option. This may result in a benefit to be included in the employee's employment income pursuant to paragraph 7(1)(b) of the Act.
Whether or not a change in the terms of an existing stock option agreement is "fundamental" is a question of fact that can only be determined after a review of the applicable law, the agreement and all relevant facts. Guidance on this issue may be found in Technical News 14 "Changes in terms of securities" which may be found at our internet site at http://www.ccra-adrc.gc.ca/E/pub/tp/it014et/it014e.txt.html. Although this article deals specifically with changes in the terms of debt obligations, the principles may be applied to changes in the terms of stock option agreements. As a general rule, it is the law of the applicable jurisdiction which must be applied to determine if a change in the terms of the stock option agreement results in a disposition. See also Amirault v. MNR 90 DTC 1330 (TCC) and Wiebe and Bastien v. The Queen 87 DTC 5068 (FCA).
We trust we have been of assistance.
Yours truly,
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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