27 November 2001 External T.I. 2001-0086875 - STOCK OPTION BENEFIT PAID IN SHARES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

An employee is entitled to exercise a stock option. Rather than pay the exercise price, the employee asks instead to be paid the value of a stock option benefit in shares. Will that prevent the shares from qualifying as "prescribed shares" as set out in section 6204 of the Regulations?

Position: Possibly

Reasons: We cannot say with certainty without examining the relevant documents.

XXXXXXXXXX 		2001-008687
S. E. Thomson
November 27, 2001

Dear XXXXXXXXXX:

Re: Stock option benefit paid in shares

This is in reply to your letter of June 1, 2001 in which you ask for our technical interpretation in the following scenario.

An employee is entitled to buy 10 shares of his employer for $10 per share, which was the fair market value of the shares on the date on which the option was granted. The shares have a current market value of $20 each. Rather than paying $100 to the employer to acquire 10 shares, the employee instead asks to be issued only 5 shares, worth a total of $100. You ask if, in this scenario, we will consider that the employee was able to cause the shares to be redeemed or cancelled by the employer, thereby disqualifying the shares from being "prescribed shares" as set out in section 6204 of the Income Tax Regulations (the "Regulations").

You state that this scenario is similar to the U.S. "certification method", where an employee can acquire additional shares under a stock option plan by "certifying" that he holds existing shares. Rather than surrender the existing shares to pay the exercise price, the employee is instead issued a lesser number of shares, equal in value to the stock option benefit. You understand that, in our document E1999-0014495, we stated that the "certification method" does not result in a redemption or cancellation for purposes of section 6204 of the Regulations.

OUR COMMENTS

Although you have asked for our technical interpretation, it appears that your question relates to an actual situation. As set out in Information Circular IC 70-6R4 Advance Income Tax Rulings, we are precluded from commenting on such a situation where the transaction has been completed or is ongoing. Where the transaction is proposed, we would be pleased to respond to your query if submitted in the context of an advance income tax ruling request.

Please note that in the document you have referred to above, we did not state that the "certification method" would not result in a redemption or cancellation for purposes of section 6204 of the Regulations. In fact, we stated that the exchange of existing shares may constitute a redemption, acquisition or cancellation of the shares by the corporation for the purposes of paragraph 6204(b) of the Regulations. We stated that without knowing the actual terms of the "certification" process, we cannot state whether or not there would be a disposition of any shares for purposes of the Income Tax Act.

You also asked us about the certification method in your February 22, 2001 request (our file number 2001-007148). In that letter, we stated that we are not prepared to speculate on situations where shares would or would not be prescribed shares. Whether the terms of the plan as described at the beginning of this letter require that shares be surrendered to pay the exercise price would have to be determined by an examination of the plan and the surrounding circumstances. Accordingly, we are not prepared to deal further with this situation other than in the context of an advance income tax ruling request.

We trust that we have been of some assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate