22 July 2005 External T.I. 2005-0111741E5 - Withholding Tax on Exercise of a Warrant

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: Whether, for the purposes of subsection 116(5), there is an acquisition of a taxable Canadian property on the exercise of a warrant to acquire shares?

Position: No.

Reasons: On exercise of a warrant to acquire shares, the rights represented by the warrant merely disappear. There is a disposition of a property by the holder of the warrant but there is no corresponding acquisition of property by a purchaser.

XXXXXXXXXX 								2005-011174
	Marc Edelson, LL.B.
(613) 957-2123
July 22, 2005

Dear XXXXXXXXXX:

Re: Withholding Tax on Exercise of Warrants

We are writing in reply to your facsimile letter of January 14, 2005 wherein you requested our opinion regarding the application of subsection 116(5) of the Income Tax Act (Canada) (all further statutory references in this letter are to the Act unless otherwise stated) in a particular situation.

Your question concerns non-resident persons who hold and exercise warrants that are options to acquire common shares of a corporation resident in Canada ("Canco"). The common shares are not listed for trading on a prescribed stock exchange and are "taxable Canadian property" within the meaning of paragraph (d) of the definition of that term in subsection 248(1). The warrants also represent "taxable Canadian property" pursuant to paragraph (l) of the definition of that term in subsection 248(1). You have requested our confirmation that subsection 116(5) will not apply to require a withholding of tax by Canco in the event that the conditions set forth in paragraphs 116(5)(a) and (b) are not satisfied in respect of the exercise of the warrants by a non-resident person.

Our Comments

Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.

With respect to warrants that are options to acquire shares of a private corporation, even though we are of the view that the exercise of the warrant is a disposition of taxable Canadian property by a non-resident of Canada and that generally section 116 would apply, it does not appear that the issuer of the warrant will be a purchaser for the purposes of subsection 116(5). This is because the warrant, being an option, would not exist immediately after it was exercised. Accordingly, it is our view that subsection 116(5) will not apply to require a withholding or remittance of tax by the issuer of the warrants in the event that the conditions set forth in paragraphs 116(5)(a) and (b) are not satisfied in respect of the exercise of warrants by a non-resident person.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch