21 December 1987 Income Tax Severed Letter 5-5077 - [Stock Option Benefits - Application of Section 7 and Paragraph 110(l)(d) of the Income Tax Act]

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.

Mary Evans (613) 957-2133

DEC 21 1987

Dear Sirs:

Re: Stock Option Benefits - Application of Section 7 and Paragraph 110(l)(d) of the Income Tax Act

This is in reply to your letter of November 11, 1987 regarding the above-noted matter.

You provided the following facts for our consideration:

1. Taxpayer is an individual who is a resident of Canada for Canadian income tax purposes.

2. The taxpayer deals at arm's length with his employer company - in accordance with section 251 of the Income Tax Act (the "Act").

3. The employer corporation is a "public corporation" as defined in paragraph 89(1)(g) of the Act.

4. The employer corporation has agreed to issue certain unissued treasury shares to the employee at certain future dates at certain pre-agreed prices. The stock option agreement, the shares involved, etc., are such that section 7 and paragraph 110(1)(d) of the Act apply both at the time of the option grant and its exercise.

More specifically:

. the issuing corporation and the employee deal with each other at arm's length.

. the option was granted after February 15, 1984.

. The amount payable by the taxpayer to acquire the shares under the agreement is equal to (not less than) the fair market value of the share: at the time the agreement was made.

. the shares involved will be prescribed shares at the time of the transaction.

5. Hypothetical financial data for purposes of the question:

 (a) Option price (fair market value of the
     shares at date option granted)               $12 per share

 (b) current fair market value                    $20 per share 

Proposal:

Employer company will purchase and cancel the option rights from employee for a consideration of $8 per share. The $8 is considered to be the fair market value of the option right. No shares will ever be issued in connection with the option agreement.

Questions:

1. Would the $8 per share equivalent be taxed in accordance with section 7 of the Act?

2. Would an amount of $4 per share be deductible in determining the employee taxpayer's taxable income in accordance with paragraph 110(1)(d) of the Act?

We advise that paragraph 7(1)(b) of the Act would apply to tax the $8 received by the employee on the disposition of his rights under the agreement.

It is also our view that an amount of $4 would not be deductible under the provisions of paragraph 110(l)(d) of the Act as presently enacted. However, if the amendment to subparagraph 110(l)(d)(ii) of the Act as proposed by Bill C-64, which received third reading by the Senate on December 16, 1987, is enacted into law substantially in the form presented, and the rights are disposed of after May 22, 1985, the effective date of the above-noted amendment, we confirm that the deduction provided under paragraph 110(1)(d) of the Act would be available to the employee.

We trust this information will be of assistance.

Yours truly,

ORIGINAL SIGNED by ORIGINAL SIGNED PAR ROBERT M. JOYCE

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch