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: 1) Will the disposition of a SAR in exchange for shares result in the deferral of the recognition of the employment income from the SAR because of section 7 of the Act? 2) Will the provisions of subsection 248(28) apply where a share redemption results in the application of subsection 7(1.1) and subsection 84(3) of the Act?
Position: 1)Yes. 2) Yes.
Reasons: 1)The income inclusion from the exercising of a SAR right would normally be employment income in the year the right is exercised. Where the SAR right is exercised and the employer satisfies its obligations by issuing shares, the provisions of section 7 would apply. 2) Even though a document 5-5135 concluded that former subsection 4(4) would not apply to the share redemption, the different wording used in subsection 248(28) which replaced subsection 4(4) in the Act would support its application to avoid the deemed dividend when there is a stock option benefit resulting on the share redemption.
XXXXXXXXXX 2000-001687
M. P. Sarazin
Attention: XXXXXXXXXX
August 10, 2000
Dear Sirs:
Re: Stock Appreciation Rights
This is in response to your letter of March 27, 2000, concerning the application of the Income Tax Act (the "Act") to the disposition by an employee of his or her stock appreciation rights ("SAR") in a Canadian-controlled private corporation ("CCPC") in exchange for preferred shares of the CCPC.
Confirmation of the tax consequences associated with completed transactions are provided by the relevant tax services office. Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, please refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of information circulars and interpretation bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.
Where an employee exercises his or her SAR right and the property received by the employee is shares of the CCPC, the provisions of section 7 of the Act would apply to the issuance of the shares by the employer corporation. The Agency's general views with respect to stock options are found in Interpretation Bulletin IT-113R4, Benefits to Employees - Stock Options. The provisions of subsection 7(1.1) of the Act would apply and paragraph 7(1)(a) of the Act would deem a benefit to have been received by the employee by virtue of his or her employment, in the taxation year in which he or she disposed of the shares, equal to the value of those shares at the time he or she acquired them.
Where an employee has income from employment under paragraph 7(1)(a) related to the disposition, by virtue of subsection 7(1.1), of shares and a deemed dividend under subsection 84(3) of the Act related to the redemption of shares in the same or a different year, we are of the view that subsection 248(28) of the Act will apply so that there will be no income inclusion under subsection 84(3) of the same amount as a deemed dividend resulting on the redemption of shares.
We trust the above comments will be helpful.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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