12 October 2007 External T.I. 2007-0251101E5 - employee stock option- prescribed shares

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: are specific shares prescribed shares for the purposes of paragraph 110(1)(d)?

Position: No reply could be provided.

Reasons: This would be a question of fact and insufficient information was provided to make any determinations.

XXXXXXXXXX 							2007-025110
W. C. Harding
								613-957-8953
October 12, 2007

Dear XXXXXXXXXX:

Re: Paragraph 110(1)(d) and Prescribed Shares

This is in reply to your letter received in our offices on September 5, 2007, wherein you requested our view on the application of paragraph 110(1)(d) of the Income Tax Act (the "Act") in a situation where a non-Canadian, private corporation offers to acquire stock option rights and shares acquired under stock options that were issued by the corporation to employees of its Canadian subsidiary.

In your letter you outlined what appears to be an actual existing situation or proposal. 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature and are not binding on the Canada Revenue Agency (CRA).

In order for a taxpayer to get a deduction under the provisions of paragraph 110(1)(d) of the Act in respect of an employee stock option benefit that has been included in the taxpayer's income pursuant to subsection 7(1) of the Act, any shares that may be acquired under the option must be prescribed shares at the time they are acquired or, if the option is disposed of, at the time the option is disposed of. Shares are prescribed shares under subsection 6204(1) of the Income Tax Regulations (the "Regulations").

The provisions of paragraph 6204(1)(b) of the Regulations provide that the corporation that issued the share or a specified person in relation to the corporation cannot reasonably be expected to, within two years after the time the share is sold or issued, redeem, acquire or cancel the share or reduce the paid up capital in respect of the share otherwise than as a consequence of specific events as described in the provision. This would be a question of fact that may only be determined by reference to all of the facts that are relevant to a particular situation and cannot be determined solely on the basis of whether an employee may accept or reject an offer to purchase an option or share at a particular time. For example, the condition would not in general be satisfied in a situation where the offer is being made in anticipation of a takeover of the corporation by a person that is not a specified person.

We trust our comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch