19 June 2000 Internal T.I. 2000-0027787 - OPTIONS, ROLLOVER

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: Can a benefit under section 7 of the Act be deferred under proposed subsection 85.1(5)?

Position: No.

Reasons Where section 7 options (entitling employee to shares of foreign parent company) are disposed of for foreign shares, proposed subsection 85.1(5) does not apply. Where section 7 options exercised and the foreign shares are then exchanged for other foreign shares, subsection 85.1(5) would apply but section 7 benefit would still be included in income at time of exercise of options.

		June 19, 2000

	INDIVIDUAL RETURNS & PAYMENTS	HEADQUARTERS
	  PROCESSING DIRECTORATE	M.P. Sarazin
	Elaine Collins, Director	824-5441

	Attention: Sheila Barnard
		2000-002778

Proposed Subsection 85.1(5) and Stock Option Benefits

We are writing to you in response to your facsimile of May 24, 2000, wherein you requested our confirmation that proposed subsection 85.1(5) does not apply to defer the recognition of any benefits under section 7 of the Income Tax Act (the "Act").

XXXXXXXXXX (the "Individual") was employed by the Canadian subsidiary (the "Employer") of a U.S. public company (the "Parent Company"). From XXXXXXXXXX, the Individual was granted various options to acquire shares of the Parent Company. In XXXXXXXXXX, the Parent Company merged with another corporation. On the date of the merger, the merged corporation issued shares of its capital stock to the Individual in exchange for his stock option rights. The shares of the merged corporation received by the Individual had a fair market value equal to the fair market value of the stock options held by the Individual. The Employer reported the stock option benefit under section 7 of the Act and the eligible deduction under paragraph 110(1)(d) of the Act on the Individual's XXXXXXXXXX T4.

The Individual has requested that you apply the provisions of proposed subsection 85.1(5) to allow him to defer the recognition of the capital gain realized on the disposition of the stock options. You are of the view that proposed subsection 85.1(5) does not apply to defer the recognition of benefits under section 7 of the Act.

Comments

We agree with your conclusion.

The purpose of proposed subsection 85.1(5) is to provide a tax-deferred rollover for shareholders who exchange shares of a foreign corporation for shares of another foreign corporation where certain conditions are satisfied. Where proposed subsection 85.1(5) applies, a taxpayer is deemed to have disposed of the foreign shares for proceeds of disposition equal to their adjusted cost base and to have acquired the new foreign shares at a cost equal to the adjusted cost base of the exchanged shares.

Since the Individual disposed of options (not foreign shares) to acquire foreign shares, the provisions of proposed subsection 85.1(5) would not apply to the exchange of the options for the shares of the merged corporation. The Individual has to include the taxable benefit realized on the disposition of the options and reported by the Employer on his T4 in his income. Under paragraph 53(1)(j) of the Act, the adjusted cost base of the shares of the merged corporation received by the Individual would include the Individual's taxable benefit under section 7 of the Act.

If the Individual argues that he received the shares of the Parent Company in exchange for his options and the shares of the Parent Company were exchanged for the shares of the merged corporation, we would conclude that proposed subsection 85.1(5) would apply to the exchange of shares. However, the Individual would have the same taxable benefit under paragraph 7(1)(a) of the Act included in his income and the benefit would be added to the adjusted cost base of the shares of the Parent Company acquired under the stock options. The adjusted cost base of the shares of the Parent Company acquired by the Individual would become the adjusted cost base of the shares of the merged corporation received by the Individual as a result of the exchange. We note that the Individual would be in the exact same position under either scenario.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613)994-2898. A copy will be sent to you for delivery to the client.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate