11 March 2003 External T.I. 2002-0169815 - EMPLOYEE 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 CCRA.

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

Principal Issues:

Various questions regarding the applicability of subsection 7(1.1)

Position: Question of Fact

Reasons: General comments provided.

2002-016981
XXXXXXXXXX Renée Shields
(613) 948-5273
March 11, 2003

Dear XXXXXXXXXX:

Re: Employee Stock Options

This is in response to your letter of October 16, 2002 inquiring about the applicability of subsection 7(1.1) of the Income Tax Act (the "Act") in a particular fact situation.

The scenario described in your correspondence involves a Canadian controlled private corporation ("CCPC") granting a stock option in a foreign corporation through a clause contained an offer of employment.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Since the situation described in your letter relates to completed transactions, your inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CCRA's general views regarding employee stock options are contained in Interpretation Bulletin IT-113R4, "Benefits to Employees - Stock Options." The discussion of subsection 7(1.1) of the Act and CCPC employee stock options begins at paragraph 13 of IT-113R4. [CCRA1]Pursuant to subsection 7(1.1) of the Act, where a CCPC employer has agreed to sell or issue its shares, or those of a non-arm's length CCPC, to an arm's length employee, a benefit equal to the value of the securities at the time the securities were acquired by the employee, less the amount paid by the employee to acquire the shares and to acquire the options, will be included in the income of the employee in the year in which the employee disposes of the CCPC shares.

The determination of whether an offer of employment would constitute an agreement to issue securities is a question of fact that can only be determined after a review of all of the relevant facts. However, where a CCPC employer never provides its employees with options to acquire its securities, subsection 7(1.1) of the Act would not apply where the employees are granted options to acquire shares of a foreign corporation that is related to the CCPC employer. In this case, the general provisions of subsection 7(1) of the Act would apply to the granting of the options.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
[CCRA1] E1999-001409