31 August 2000 External T.I. 2000-0030695 - Employer cash-out right, 7(1)(a)

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) Under an agreement an employer has the right to issue shares to an employee or pay cash equivalent to the share appreciation - is there an agreement to issue shares as contemplated by section 7? 2) Will section 7 of the Act apply where cash is paid by the employer under such an agreement? 3) Will section 7 apply to a cash payout on termination of the plan?

Position: 1) Yes. 2) No 3) Question of fact.

Reasons: 1) Agreement to issue shares exists . 2) The employer has not agreed to sell or issue securities so section 7 can't apply. 3) The terms of the agreement and the previous application of the Act to the agreement would determine whether section 7 would apply.

XXXXXXXXXX 						2000-003069
M. P. Sarazin
Attention: XXXXXXXXXX 

August 30, 2000

Dear Sirs:

Re: Employee Stock Option Plan

This is in response to your letter of June 7, 2000, concerning the application of section 7 of the Income Tax Act (the "Act") to an employer's agreement to issue securities to an employee where the agreement gives the employer the right to pay the appreciation in the value of the particular securities in cash.

Comments

Where an agreement between an employer and an employee provides the employer with the right to issue securities to the employee or the right to payout the increase in the fair market value of the securities or the fair market value of the securities in cash, the Agency would look at the right exercised by the employer in determining whether section 7 of the Act would apply.

As noted in paragraph 1 of Interpretation Bulletin IT-113R4, subsection 7(1) of the Act applies when a corporation has agreed to sell or issue shares of that corporation or shares of another corporation with which it does not deal at arm's length to an employee of either the particular corporation or of any corporation with which it does not deal at arm's length. Where the employer corporation exercises its right to issue shares under an agreement, section 7 would apply to the agreement in respect of the particular transaction.

The determination of whether a cash payout on the termination of a particular securities option plan that includes an employer right to issue shares or pay the fair market value in cash would result in the application of section 7 or section 5 or 6 of the Act would require a review of all of the facts. This is confirmed by the Agency's comments in paragraph 11 of IT-113R4 (Benefits to Employees - Stock Options). Where it is determined that the cash payout results in the application of paragraph 7(1)(b) of the Act, the cash payout will not be subjected to paragraph 7(3)(b) of the Act. Similarly, any cash payout that is included in the employee's income under section 5 or 6 of the Act will not be subjected to paragraph 7(3)(b) of the Act.

We trust that the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate