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. Can subsection 7(1.5) apply to an exchange of shares where the proceeds includes a right (usually a "Put") that has a nominal value?
2. Can the value of the right be ignored when determining if the conditions of subsection 7(1.5) have been met?
Position:
1 Only if the right is an integral term of the share such that it does not constitute a receipt of anything other than a share.
2. No.
Reasons:
Subsection 7(1.5) requirements as currently written are specific and must be met. The October 2000 budget requested input on possible changes to the rules for share for share exchanges but did not otherwise propose any changes.
XXXXXXXXXX 2001-007144
W. C. Harding
March 20, 2001
Dear XXXXXXXXXX:
Re: Exchange of shares acquired under an Employee Stock Option Plan
This is in reply to your letter of February 23, 2001, in which you asked for a technical interpretation in respect of the application of subsection 7(1.5) of the Income Tax Act (the "Act").
It appears that your request for an opinion may involve specific taxpayers and actual completed or proposed transactions. The responsibility for determining the tax consequences arising from completed transactions rests with the tax services offices. The appropriate tax services office may, upon disclosure of all of the relevant facts, be able to assist you in clarifying the tax consequences pertaining thereto. On the other hand, written confirmation of the tax implications of proposed transactions may be provided by this Directorate where the transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R4 Advance Income Tax Rulings, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of information circulars and interpretation bulletins may be obtained on the Internet at http://www.ccra-adrc.gc.ca/menu/EmenuKKB.html.
While we cannot comment directly on your situation, we are able to provide you with the following general comments.
As you noted in your letter, paragraph 7(1.5)(b) of the Act provides that a taxpayer may not receive any consideration for the exchanged shares other than new shares as described in the paragraph. Accordingly, if a taxpayer receives any rights that are provided in addition to the shares received, the provisions of subsection 7(1.5) cannot apply.
It should be noted that rights that are provided within the terms of the shares received will not generally be considered to constitute additional consideration. However, we would expect that these inherent rights would have to be considered in determining the value of the shares themselves. Accordingly, the value of these inherent rights would have to be taken into account when determining if the provisions of paragraph 7(1.5)(c) are satisfied.
As you noted in your letter, the Economic Statement and Budget Update 2000, issued in October 2000, indicated that the government intends to develop a rule in respect of cross border share for share exchanges, in consultation with the private sector. Accordingly, you may wish to provide your comments with respect to exchangeable shares to the Department of Finance for their consideration.
We trust this explanation will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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