17 February 1988 Income Tax Severed Letter 5-5180 - [Subparagraph 110(1)(d)(iii)]

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.

Revenue Canada Taxation Head Office

XXXX

R. B. Day (613) 957-2136

FEV 17 1988

We are writing in response to your letter of November 30, 1987, wherein you requested our opinion regarding the meaning of the expression "at the time the agreement was made" in subparagraph 110(1)(d)(iii) of the Income Tax Act (the "Act") as it relates to the following hypothetical situation.

(a) A Canadian company (the "Company"), whose shares are listed on the Toronto Stock Exchange ("TSE") wishes to establish an Employee Stock Option Plan (the "Plan") and grant options to its senior employees to enable them to purchase common shares of the Company under the Plan;

(b) The rules of the TSE require that every Employee Stock Option Plan be approved by the Exchange and in certain circumstances by the shareholders;

(c) The rules of the TSE permit the Company to grant options under a plan that has been approved by the directors of the Company but has not yet received the approval of the Exchange or the shareholders of the Company, provided that no shares may be issued pursuant to the exercise of an option until the approvals of the Exchange and, where applicable, the shareholders of the company have been obtained;

(d) The rules of the TSE require that the exercise price at which options may be granted may not be lower than the market price of the shares at the time the option is granted less a discount ranging from 10% to 20% depending on the value of the shares under option. Nevertheless, the proposal is not to extend a discount insofar as it is intended that the Plan comply with the fair market value requirements of subparagraph 110(1)(d)(iii) of the Act; and

(e) The Company wishes to grant options under the Plan as soon as the Plan has been approved by the board of directors of the Company. The Company will not have a shareholders meeting for some time after the date on which the directors wish to approve the Plan. However, the Company is assured that the Plan will be approved by the shareholders as the major shareholder votes a majority of the shares and has indicated that he will vote in favour of the Plan.

There is, in your view, a question as to what is the appropriate time to consider the fair market value of the optioned shares for the purposes of subparagraph 110(1)(d)(iii) of the Act where options are granted now but shareholders' approval is not obtained until a meeting is held several weeks in the future. As the Stock Exchange rules place restrictions on the price at which the options may be exercised, it would not be practicable for the directors to grant an option at a fixed exercise price without risk of noncompliance with subparagraph 110(1)(d)(iii) unless the proper interpretation is that the applicable time to look at the fair market value of the shares is the time the directors grant the option notwithstanding that the plan is subject to subsequent shareholders' approval.

It is our view that the expression "... at the time the agreement was made", as contained in subparagraph 110(1)(d)(iii) of the Act, refers to the date on which the corporation unilaterally undertakes to sell or issue the shares of its capital stock. We would, therefore, agree that, in your hypothetical situation, provided the approval by the shareholders was not a condition precedent to the issuance of the stock options, the time the agreement was made would be the time at which the option is granted by the directors of the Company. If, however, the Company was legally prohibited from issuing shares under the Plan until it was approved by the shareholders, we would not consider the agreement to have been made until that approval was obtained.

We would caution that the above comments represent an expression of opinion only, and as such are not binding upon the Department.

Yours truly,

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