15 February 1989 Income Tax Severed Letter 5-6926 -  

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.

J.D. Jones (613) 957-2104

FEB 15 1989

Dear Sirs:

Re: Employee Stock Option

This is in reply to your letter of October 25, 1988 requesting a technical interpretation with respect to the application of section 7 and paragraphs 110(1)(d) and 110(1)(d.1) of the Income Tax Act (the "Act") in circumstances which may be summarized as follows. We apologize for the delay in responding.

An individual, X, is an employee of a Canadian corporation ("Canco") with which he deals at arm's length. After February 15, 1984 Canco granted an option to X to acquire shares of Canco at a price which, at the date of the grant of the option, was at least equal to the fair market value of Canco's shares at that time. At the time the option was granted, Canco was a "Canadian-controlled private corporation" (a "CCPC") for the purposes of the Act.

X proposes to transfer a portion of his option to a corporation with which he does not deal at arm's length and as consideration for the transfer of the option, the corporation will agree that if and when the option is exercised by it, it will pay to X an amount equal to the difference between the value of the shares at the time the option is exercised and the exercise price.

Based upon the above, we will respond to your questions in the order in which they were presented.

In our view, the non-arm's length transfer of the stock option does not give rise to a tax liability to the transferor at the time of the transfer in the above situation.

At the time of the exercising of the option by the corporation, X would be required to include in his income a benefit equal to the amount by which the value of the shares at the time the corporation acquired them exceeds the amount paid to Canco by the non-arm's length corporation pursuant to paragraph 7(1)(c) of the Act.

We agree with your view that where the corporation granting the option is a CCPC, subsection 7(1.1) of the Act would apply to defer recognition of any benefit until disposition of the share if the option were exercised by the employee and the benefit arose under paragraph 7(1)(a) of the Act. In addition, if the benefit arises under paragraph 7(1)(c) of the Act as a result of a non-arm's length transfer, subsection 7(1.1) of the Act would have no application.

We are also in agreement with your view that paragraph 110(1)(d.1) of the Act applies only in circumstances where the benefit to the taxpayer arises under paragraph 7(1)(a) of the Act by virtue of subsection 7(1.1) of the Act and the other conditions expressed therein also have application.

Finally, we agree with your views that where a benefit is deemed to have been received by the employee under subsection 7(1) of the Act even though the option is exercised by a non-arm's length party, a deduction may be allowed pursuant to paragraph 110(1)(d) of the Act provided that the other requirements of that paragraph are met.

The foregoing represents our considered opinion of the law as it applies generally, but this is not a ruling and is not binding upon the Department.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR

P.D.FUOCO

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