18 December 2002 External T.I. 2002-0151795 - Options and Taxable Canadian Property

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: Whether an option to acquire 5% of the shares of a corporation constitutes taxable Canadian property if the holder of the option already owns 20% of the shares of the corporation?

Position: No.

Reasons

XXXXXXXXXX 2002-015179
S. Leung
December 18, 2002

Dear XXXXXXXXXX:

Re: Options to Acquire Shares and "Taxable Canadian Property"

We are writing in reply to your letter of July 11, 2002, in which you requested our opinion as to whether an option to acquire shares of a corporation listed on a prescribed stock exchange would constitute taxable Canadian property (within the meaning assigned by subsection 248(1) of the Income Tax Act (the "Act")) where the option gives the holder a right to acquire less than 25% of the shares of the corporation and the holder already owns some of those shares.

You provided the following example in your letter. A taxpayer who owns directly 20% of the shares of a corporation listed on a prescribed stock exchange has an option to acquire an additional 5% of those shares. No persons with whom the taxpayer does not deal at arm's length own any shares of the corporation or options in respect thereof.

It is your view that in the above example neither the option nor the shares held by the taxpayer constitute taxable Canadian property. It is your view that with the repeal of subsection 115(3) of the Act, there is no longer a provision that deems a particular property, such as that described in paragraph (f) of the definition of "taxable Canadian property" in subsection 248(1) of the Act, to include an option in respect of that property. Instead, paragraph (l) of the definition of "taxable Canadian property" now treats an option in respect of a property described in paragraphs (a) to (k) of the definition to be itself a separate category of taxable Canadian property.

Our Comments

We agree with your analysis. If the taxpayer holds less than 25% of the shares of a corporation described in paragraph (f) of the definition of "taxable Canadian property" in subsection 248(1) of the Act and none of the other shares of the corporation are owned by a person or persons with whom the taxpayer does not deal at arm's length, neither the shares nor the option would constitute taxable Canadian property. However, where the taxpayer or persons with whom the taxpayer does not deal at arm's length owns 25% or more of any class of the shares of a corporation, both the shares and any options to acquire additional shares would constitute taxable Canadian property.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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