7 November 2012 Internal T.I. 2012-0465701I7 - Subsection 7(1.7)

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 the provisions of subsection 7(1.7) apply where employee's hold stock options, the stock options are not exercisable in accordance with the terms of the stock option agreements and the employer pays the employees cash as consideration for the stock options held, in connection with a corporate reorganization that affects the employer's share structure?

Position: Yes, based on the facts.

Reasons: The situation described falls within the parameters of subsection 7(1.7).

November 7, 2012

Meaghan James Income Tax Rulings Directorate
Aggressive Tax Planning G. Allen
Audit Division (613) 946-3558

2012-046570

Employee Stock Options – Subsection 7(1.7)

This memorandum is in response to your October 10, 2012 email, wherein you requested our views concerning the tax consequences for employees who hold employee stock options where there is a corporate reorganization that affects the share structure of the corporate employer.

Our Comments

Based on the provisions of paragraphs XXXXXXXXXX of section XXXXXXXXXX of the Corporation’s Management Stock Option Plan (MSOP), excerpt of contained in your email, it does not appear that Optionees have the ability to dispose of the Optionees’ rights, as contemplated by paragraph 7(1)(b) of the Income Tax Act (the “Act”), in the event of a corporate reorganization that affects the Corporation’s outstanding shares. Further, it is noted that the stock options granted on XXXXXXXXXX, 2006 under the MSOP would not have been vested in XXXXXXXXXX 2010, and therefore, it would not be possible for Optionees to dispose of their stock options in accordance with paragraph 7(1)(b) of the Act (does not appear that there is provision for accelerated vesting of stock options in the MSOP in the event of a corporate reorganization).

Subsection 7(1.7) of the Act is intended to apply in situations where an employee's right to acquire securities under an employee stock option agreement cease to be exercisable in accordance with the terms of the agreement and the cessation is not otherwise considered to be a transfer or disposition of those rights by the employee, as contemplated by paragraph 7(1)(b) of the Act, e.g., in situations involving corporate reorganizations.

In general terms, subsection 7(1.7) of the Act provides, inter alia, that when an employee receives an amount because a stock option agreement ceases to be exercisable, the employee will be deemed, for purposes of paragraphs 7(1)(b) and 110(1)(d), to have disposed of rights under the stock option agreement and to have received the amount as consideration for the disposition of the rights. As a result, the employee will be deemed to have received a benefit equal to the value of the consideration received minus any amount paid by the employee to acquire the rights under the stock option agreement, and the employee will be eligible for the paragraph 110(1)(d) deduction, provided the conditions therein are satisfied.

Accordingly, based on the information provided in your email, in our view, subsection 7(1.7) of the Act would apply in the situation described in your email.

Lita Krantz CA,
Deferred Income Plans, Section II
for Director,
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch