14 May 2004 External T.I. 2003-0054581E5 - Stock Option for Independent Contractors

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.

Principal Issues: What is the tax treatment of stock options granted to a taxpayer who is engaged as an independent contractor?

Position: At the time the options are granted, the taxpayer may have to include an amount as business income pursuant to subsection 9(1) of the Act. At the time the options are exercised, it may have an other inclusion in the business income.

Reasons: Application of subsection 9(1). The determination of whether an amount is a business income is a question of fact.

XXXXXXXXXX 								2003-005458
						Michel Lambert
May 14, 2004

Dear XXXXXXXXXX,

Re: Stock Options for Independant Contractors

This is in reply to your E-mail of December 29, 2003 in which you ask for our opinion on the tax treatment of stock options granted to a taxpayer who is engaged as a consultant to a company. The taxpayer is an independent contractor and he reports his income from the company as self-employed income. Specifically, you ask what are the income tax consequences of exercising options by the taxpayer.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments.

Where an option is granted to a self-employed consultant as payment for his or her consulting services, the fair market value of the option on the grant date less any amount paid for the option will generally be included in the consultant's business income, pursuant to subsection 9(1) of the Income Tax Act (the "Act"). The determination of the fair market value of the option on the grant date is a question of fact.

When the option is exercised, the incremental value realized on the acquisition of the shares through the exercise of the stock option (generally the excess of the fair market value of the underlying share on the exercise date over the aggregate of the exercise price and the value included in the income at the grant date) will have to be included in the consultant's income. The determination of whether any incremental value realized on the exercise of the stock option represents business income or a capital gain can only be made after consideration of all the relevant facts and circumstances.

Where the facts indicate that the incremental value represents part of the consideration received by the taxpayer for his or her consulting fees, we are of the opinion that the incremental value should be treated as business income for purposes of the Act.

Where the option is held as a capital property, the adjusted cost base (the ACB) of the option should be added to the cost of the share acquired as capital property. The ACB of the option includes the amount included in the income at the time it was granted and the amount paid to acquire the option as the case may be. At the time of the share disposition, the taxpayer may realize a capital gain or loss as a result of the disposition.

You have also requested our views regarding the GST impact where an independent contractor receives stock options. This question should be addressed to the Excise and GST/HST Rulings Directorate. Therefore, we have transferred a copy of your request to that Directorate. You will receive their comments separately.

We trust the foregoing comments are of assistance.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch