31 October 2011 Internal T.I. 2011-0421911I7 - Stock options - 181.2(4) & GAAP XXXXXXXXXX

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: Does an amount on the balance sheet representing stock options issued to employees of indirect subsidiaries qualify for an investment allowance in the calculation of the issuing corporation's taxable capital pursuant to paragraph 181.2(4)(a)?

Position: Depends on GAAP.

Reasons: Provided that the balance sheet in question was prepared in accordance with GAAP and otherwise complies with the specific provisions of Part I.3, if the carrying value of shares held directly is increased by an amount representing stock options issued to employees of indirect subsidiaries, it is our view that the carrying value must be accepted for purposes of the determination of the Part I.3 liability of the corporation.

October 31, 2011

TORONTO CENTRE TSO 		HEADQUARTERS
Large File Audit			Income Tax Rulings
					   Directorate
Attention:  Caspar Verre	Sylvie Danis
					(613) 957-3496

					2011-042191

XXXXXXXXXX Part I.3 Tax

We are writing in response to your memo dated September 14, 2011 wherein you request additional guidance with respect to the application of paragraph 181.2(4)(a) of the Income Tax Act (the "Act") in connection with the audit of XXXXXXXXXX taxation year. XXXXXXXXXX has now provided a response which you have forwarded to us.

It is our understanding that the taxpayer had initially recorded an amount of $XXXXXXXXXX with respect to its stock incentive plan which was classified in the balance sheet as "XXXXXXXXXX". The stock option awards were granted to employees of XXXXXXXXXX various indirect subsidiary corporations. In our previous memo to you, we indicated that we shared your view that the stock options issued by XXXXXXXXXX did not represent ownership of shares of another corporation and as such did not entitle the taxpayer to an investment allowance.

Taxpayer's Position

The taxpayer has now provided a submission indicating that the accounting treatment of the employee stock option awards in XXXXXXXXXX financial statements as initially provided to the CRA was incorrect. The taxpayer submits that had the transaction been correctly recorded in accordance with generally accepted accounting principles ("GAAP") in the first instance, the amounts recorded by XXXXXXXXXX as Investment in Shares of a Subsidiary Corporation would have qualified as eligible investment for the purposes of determining Part I.3 tax.

As support, the taxpayer has obtained an opinion from XXXXXXXXXX dated XXXXXXXXXX in which XXXXXXXXXX states:

XXXXXXXXXX

The taxpayer has indicated that the financial statements of the taxpayer and the relevant subsidiaries will be corrected to reflect the GAAP accounting for the stock option awards.

Your view

In your memo, you indicate that you plan to propose to exclude the amount in question from the investment allowance as the taxpayer does not have direct ownership in the companies identified and therefore it does not qualify under subsection 181.2(4) of the Act.

Our Comments

Subsection 181(3) of the Act provides that, for the purposes of determining any amount under Part I.3, the amounts reflected in the balance sheet prepared in accordance with GAAP shall be used. The computation of the investment allowance for non-financial institutions is found in subsection 181.2(4) of the Act. The investment allowance is deducted from the capital of the corporation in determining the corporation's taxable capital upon which Part I.3 tax must be paid. Subsection 181.2(4) of the Act provides a listing of the items for which an investment allowance may be claimed. A corporation is entitled to an investment allowance pursuant to paragraph 181.2(4)(a) of the Act in respect of the carrying value of a share of another corporation at the end of the year.

In our view, in order to claim an amount pursuant to paragraph 181.2(4)(a) of the Act, the corporation must have direct ownership in the shares of another corporation and the carrying value of shares must be determined in accordance with GAAP. It is open to the Minister to argue that the balance sheet description of a particular item or a particular carrying value is not in fact in accordance with GAAP. However, as stated by the Court in AGC v Ford Credit Ltd. (2007 FCA 225), provided the balance sheet in question has been prepared in accordance with GAAP and otherwise complies with the specific provisions of Part I.3, that balance sheet must be accepted for the purposes of the determination of the large corporations tax liability of the corporation.

We do not purport to be experts on GAAP. The resolution to the issue at hand will depend on a conclusion as to the proper treatment under GAAP for stock option awards granted to employees of indirect subsidiaries. Given the accounting opinion obtained by the taxpayer, you may wish to consult an accounting expert to determine if your position is tenable.

We trust that these comments will be of assistance. Should your client request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for a severed copy to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Jenie Leigh
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch