29 June 2001 External T.I. 2001-0072955 - STOCK OPTIONS

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. Does our pre-budget 2000 position regarding identical shares acquired from a public corporation extend to shares acquired from a CCPC? 2. Under the new deferral rules, there will be two pools for stock option benefits, the "non- deferred pool" and "the "deferred pool". Is there another pool created when options are exercised on shares acquired while a company was a CCPC (i.e. before it became public)?

Position: 1. No. 2. No.

Reasons: 1. Existing subsection 7(1.3) prevents the extension of the position to CCPCs.

2. The shares acquired on the exercise of options granted while a corporation was a CCPC will be part of the "deferred pool" as will options granted and exercised after the corporation became public and the shares issued were the subject of a 7(10) election. If both types of options are exercised at the same time, new paragraph 7(1.3)(b) will deem the shares acquired on the exercise of options acquired while the corporation was a CCPC to have been acquired first. Otherwise, the shares will be deemed to be disposed of in the order in which they were acquired, regardless of the status of the corporation at the time the options were granted.

XXXXXXXXXX 2001-007295
G. Kauppinen
June 29, 2001

Dear XXXXXXXXXX:

Re: Stock Options - Order of Disposition of Identical Shares

This is in reply to your facsimile transmission dated February 15, 2001 regarding dispositions of identical shares acquired on the exercise of stock options.

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 70-6R4 dated January 29, 2001, issued by the CCRA. 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.

Both of your specific questions assume that a taxpayer holds shares on the exercise of options which were acquired while the company was a Canadian Controlled Private Corporation ("CCPC") and shares acquired on the exercise of options which were acquired after the CCPC became a public corporation.

All section references are to the Income Tax Act.

Question 1

Does our position regarding the immediate disposition of shares acquired on the exercise of a stock option, where identical shares are already owned by the taxpayer, extend to situations where the shares acquired as a result of the exercise of options were issued when the corporation was a CCPC?

Our Comments

We would first note that new subsection 7(1.31) (which applies to securities acquired, but not disposed of, before February 28, 2000 and to securities acquired after February 27, 2000) applies to all securities acquired under an agreement referred to in subsection 7(1). This includes shares acquired on the exercise of options issued by a CCPC. Consequently, such shares may be designated under paragraph 7(1.31)(b) and will be deemed, pursuant to subsection 7(1.3), as being disposed of before any other identical shares held by the taxpayer.

However, the position in Technical News No. 19, issued June 16, 2000, was based upon the law as it read at that time, and subsection 7(1.3) prevented the application of that position to shares of a CCPC.

Question 2

Under the new ordering provisions proposed in the February 2000 Budget, which became law on June 14, 2001, there will be two pools of identical shares established, the "deferral pool" and the "non-deferral pool". You ask whether a third pool is created (the "CCPC pool") where a taxpayer holds shares acquired on the exercise of options issued while the corporation was a CCPC and, if there are three pools, what is the order of the disposition of identical shares?

Our Comments

In your scenario, the "CCPC pool" is part of the "deferral pool". New subsection 7(1.3) of the Act provides that a taxpayer will be deemed to have disposed of all identical shares in the order in which they were acquired. Paragraph 7(1.3)(a) basically provides that identical securities which are shares acquired on the exercise of options acquired while a company was public and which have an elected deferral pursuant to subsection 7(10) and 7(8) (the "subsection 7(8) shares") and shares acquired on the exercise of options granted while the corporation was a CCPC (the "subsection 7(1.1) shares") (collectively the "deferral shares") are deemed to have been acquired after any other (non-deferral) shares held by the taxpayer. The non-deferral shares will be deemed to have been disposed of first in all cases.

In respect of the deferral pool, where some of the shares were acquired from the exercise of options granted while the corporation was a CCPC and some were acquired on the exercise of options granted after the corporation became a public corporation, the shares will be deemed to be disposed of in the order that they were acquired. This will depend upon which options are exercised first. For instance, if the subsection 7(8) shares were acquired before the options granted while the corporation was a CCPC were exercised to acquire the subsection 7(1.1) shares, then the subsection 7(8) shares will be deemed to have been disposed of first.

If all options are exercised at the same time for shares held in the deferral pool, i.e., the subsection 7(1.1) shares and the subsection 7(8) shares, then new paragraph 7(1.3)(b) will deem the shares to have been acquired in the order in which the agreements were made (i.e., the options were granted). Accordingly, in a typical scenario, the shares acquired on the exercise of the options acquired while the corporation was a CCPC (i.e., the subsection 7(1.1) shares) will be deemed to have been acquired before the shares acquired on the exercise of the options granted after the corporation became public (i.e. the subsection 7(8) shares).

We trust our comments 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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