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 a deduction for the cash paid to an employee who elects to receive cash instead of shares under a section 7 stock option plan be denied to an employer by 7(3)? 2. Will a deduction for the cost of the acquisition of the shares of a U.S. parent by a Canadian subsidiary for sales to its employees under a stock option plan be denied by 7(3)?
Position: 1. No. 2. Yes.
Reasons: 1. No shares are sold or issued under the stock option plan where the employee elects to take cash instead of shares. 2. The words of 7(3) are clearly applicable.
XXXXXXXXXX 2000-004820
G. Kauppinen
Attention: XXXXXXXXXX
November 9, 2000
Dear Sirs:
Re: Stock Options
This is in reply to your letter dated September 21, 2000 wherein you requested our opinion on the above-noted subject.
Specifically, you ask our view as to the applicability of section 7 of the Income Tax Act ("Act") to a stock option plan where the employees have the option of requesting, instead of shares, cash equal to the difference between the fair market value of the shares at the date the options were granted and the fair market value of the shares at the date the options are exercised. You also ask whether subsection 7(3) of the Act would apply to deny the deduction to the employer where the cash option is taken by an employee.
In addition, if the options are in respect of the shares of a Canadian corporation's U.S. parent, which shares the Canadian corporation acquires on the open market to sell to an employee who chooses to receive shares instead of cash upon the exercise of his or her options, you ask whether the cost of the acquisition of the shares would be deductible by the Canadian corporation and not be denied by section 7(3) of the Act?
As stated in Technical News No. 7, dated February 21, 1996, where it is the employee (and not the employer) who has the option to choose cash instead of shares, section 7 will apply whether shares or cash are chosen. Specifically, paragraph 7(1)(b) will apply where the employee chooses to dispose of his or her rights under the plan for cash. Subsection 7(3) will not apply to deny the deduction to the employer for the cash payment because no securities have been sold or issued when the cash option is exercised.
In response to your last question, it is our position that subsection 7(3) of the Act will apply to deny the deduction to the Canadian corporation of the cost of acquisition of shares of its U.S. parent on the open market for sale to its employees under the stock option plan.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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