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: Will paragraph 7(3)(b) of the Act deny an employer a deduction where, under a stock option plan, an employee elects to be paid cash in lieu of exercising the right to acquire shares under the stock option; the employee is paid and receives cash and the employee uses the cash proceeds to acquire shares of the employer that are different from the shares that could have been acquired under the stock option?
Reasons: The shares that result in a "benefit being conferred on the employee" for purposes of 7(3)(b) must be the same shares that result in the "benefit under or because of the agreement" in 7(3)(a). Paragraph 7(3)(b) only applies to the shares that can be acquired under the stock option.
March 18, 2004
CALGARY TSO HEADQUARTERS
Abu Dandia G. Allen
Large Case Files (613) 952-9853
XXXXXXXXXX - Employee Stock Option Plan
This is further to our file 2003-004992 and is in reply to the additional documentation and information you faxed on January 7 and 20, 2004 and provided in various e-mails (Dandia/Allen), wherein you requested our opinion regarding certain issues concerning the Employee Stock Option Plan of XXXXXXXXXX (the "Plan").
1. A board resolution on XXXXXXXXXX amended the Plan to permit optionees the right to elect to receive cash, subject to XXXXXXXXXX right to decline, in lieu of exercising their right to acquire shares under the stock option (the "Put Right").
2. The board resolution also amended the Plan to allow optionees to subscribe for common shares that are different from the shares that could have been acquired under the stock option. The common shares that the optionee can acquire with the proceeds from the exercise of the Put Right are flow-through shares.
3. In XXXXXXXXXX , employees exercised the Put Right that resulted in XXXXXXXXXX making cash payments of $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX. These amounts were deducted on the XXXXXXXXXX and XXXXXXXXXX T2s of XXXXXXXXXX.
4. As per your e-mail sent January 20, 2004, in 1999 the company issued cheques to XXXXXXXXXX employees, totalling $XXXXXXXXXX, as a result of the employees exercising the Put Right. The employees wrote personal cheques, totalling $XXXXXXXXXX, to the company on the same day. The company issued flow-through shares with a fair market value of $XXXXXXXXXX to the XXXXXXXXXX employees within XXXXXXXXXX days of the cash payments being made to the employees.
5. As per your February 11, 2004 e-mail, the company did not withhold tax on the $XXXXXXXXXX cash payments that were made to the XXXXXXXXXX employees.
6. As a result of the above transactions, the employees included $XXXXXXXXXX in income, claimed paragraph 110(1)(d) deductions of $XXXXXXXXXX and Canadian Exploration Expense deductions of $XXXXXXXXXX in XXXXXXXXXX. The company claimed an expense deduction of $XXXXXXXXXX on their XXXXXXXXXX T2S(1).
We have reiterated below most of our comments from 2003-004992 but the penultimate paragraph in that memo is revised herein due to the additional information provided.
Paragraph 11 of IT-113R4 and Income Tax Technical News #7 discuss the tax consequences of an employee receiving a cash payment in lieu of exercising the employee's right to acquire shares under a stock option agreement. Where the employee has the right to elect to receive cash in lieu of receiving shares under a stock option agreement, paragraph 7(1)(b) of the Income Tax Act (the "Act") will deem a benefit to have been received in the taxation year in which the employee disposes of the employee's right to acquire shares under the stock option agreement.
The cash benefit is received by the employee by virtue of the employee's employment and is therefore taxable under either subsection 5(1) or paragraph 6(1)(a) of the Act in the year received. The employee may be entitled to a deduction under paragraph 110(1)(d) of the Act, provided the conditions in that paragraph are satisfied, and paragraph 7(3)(b) of the Act will not apply to deny the employer a deduction for the cash payment made to the employee.
Although the election by the employee to receive cash in lieu of receiving shares under the stock option agreement is subject to the right of XXXXXXXXXX to decline to pay cash, XXXXXXXXXX, in our opinion, the employee still has the right to elect to receive cash and our position in paragraph 11 of IT-113R4 will apply (document 2000-0063133).
XXXXXXXXXX, we have come to the conclusion that we cannot rely on paragraph 7(3)(b) of the Act to deny the employer a deduction in the above circumstances.
We also have consulted with the Trust Accounts Division and we have been informed that where an arrangement exists between an employer and an employee that permits the employee to acquire flow-through shares with the cash proceeds received from electing to receive cash in lieu of shares under a stock option agreement, no tax is required to be withheld.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version by phoning (613) 957-2137. The severed copy will be sent to you for delivery to the client.
Roberta Albert, CA
Income Tax Rulings Directorate
Policy and Planning Branch
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