6 March 2002 External T.I. 2001-0096795 - REPRICING OF STOCK OPTION

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:

Will the offer by the employer to cancel outstanding stock options for a promise to grant new options to the employee at a date that is least six months and one day after the cancellation of the old option be a disposition for purpose of subsection 7(1.4).

Position: Question of fact whether a disposition has occurred.

Reasons:

A determination can only be made after a thorough review of all agreements.

XXXXXXXXXX 						2001-009679
M. P. Baldwin, CA
March 6, 2002 

Dear XXXXXXXXXX:

Re: Repricing of Stock Options

This is in reply to your facsimile of August 13, 2001 requesting a technical interpretation of the Canadian tax implications of a repricing transaction for employees of a company in Canada who have been granted stock options in the company's U.S. parent. In particular, the U.S. parent offers to cancel the outstanding options for a promise to grant new options to the employees at a date that is at least six months and one day after the cancellation of the old options. The date of the new grant is either predetermined in advance or will occur before a certain date but at least after the six months and a day period. There is a binding agreement between the U.S. parent and the employee whereby the U.S. parent agrees to grant new options in the prescribed delay. This agreement contains certain rights and conditions and in most cases the terms and conditions of the new options will be similar to the terms and conditions that applied to the old options.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

Subsection 7(1.4) of the Income Tax Act (the "Act") will only apply where certain conditions are satisfied. One of the conditions is that a taxpayer must dispose of rights under a stock option agreement referred to in subsection 7(1) or 7(1.1) of the Act. Accordingly, to resolve whether subsection 7(1.4) of the Act applies, one would have to determine whether a repricing transaction and agreement would constitute a disposition of rights under the stock option agreement.

The determination of whether a change to a particular stock option would constitute a disposition of rights is a question of fact that can only be determined after a thorough analysis and review of the relevant stock option and repricing agreements. Consequently, we cannot comment on whether the particular repricing agreement would be a disposition of rights to which subsection 7(1.4) of the Act would apply, nor can we comment on any resulting tax consequences until we have reviewed the particular agreements in the context of an advance income tax ruling.

However, we would like to refer you to a comfort letter issued by the Department of Finance on July 13, 2001, that included the following comments: "As you know, we are prepared to recommend that the Act be amended to ensure that an employee is not disqualified from claiming the stock option deduction because of a reduction in the option exercise price to an amount below the value of the underlying share when the option was granted, provided the reduction could have been accomplished by way of an exchange of options to which subsection 7(1.4) of the Act would have applied. The effect of the amendment would be to allow paragraph 110(1)(d) to apply as though there had, in fact, been such an exchange of options. By requiring that the hypothetical option exchange satisfy the conditions of subsection 7(1.4), this relief would be limited to those situations in which the reduction in the exercise price provides no immediate increase in the net benefit associated with the option. We will recommend that this amendment, if adopted, apply to reductions in exercise price occurring after 1998."

A question at the APFF-2001 Conference in October 2001 was posed concerning the application of paragraph 110(1)(d) of the Act. Both the Canada Customs and Revenue Agency ("CCRA") and the Department of Finance responded to the question and, as CCRA's response was based on Finance's comments, we suggest you contact the Department of Finance for their response. However, CCRA's response was: "As noted by the Department of Finance, it is prepared to recommend that subparagraph 110(1)(d)(iii) of the Act be amended. Meanwhile, the CCRA will not make any reassessments based on the current wording of this subparagraph before the changes in question are published and adopted except in situations of abuse. We invite taxpayers who could benefit from the deduction in the current or amended subparagraph 110(1)(d)(iii) to contact their tax services office to claim this deduction."

We trust that the above comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate