18 October 1990 Ruling 901923 F - Employee Stock Options

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.

October 18, 1990

Dear Sirs:

Re:  Employee Stock Options - Section 7 of the Act

This is in reply to your letter dated August 8, 1990 where you have asked for an interpretation of section 7 of the Act in the following hypothetical situation:

1.     Corporations A and B are controlled by the same taxpayer and by virtue of subsection 251(1) are deemed not to deal with each other at arm's length.

2.     Corporations A and B are Canadian-Controlled Private Corporations.

3.     Corporation B is controlled by a voting preferred share. This share, the only voting shared issued by Corporation B, is owned by the same individual that owns all the issued share of Corporation A.

4.     The employees of Corporation A deal at arm's length with their employer.

5.     Each year some of the employees of Corporation A are offered non-voting common shares of Corporation B for no consideration.

You have asked whether the absence of a written pre-arranged formula in, issuing these shares would preclude the operation of the employee stock option rules in section 7 of the Act.

Our Comments

In the above situation, one must determine whether:

1.     the benefit was conferred on the individuals in their capacity as employees (see subsection 7(5) of the Act), and

2.     the transaction was a gift for no consideration or a transaction between the employer and employees for consideration (i.e. - for services rendered).

Generally, transactions between an employer and arm's length employees occur by virtue of their employment and are for consideration (i.e. - they are not gifts). In our view, there is no requirement that the agreements referred to in subsections 7(1) and (1.1) must be in writing or part of a pre-arranged formula.

Accordingly, we agree with you that subsection 7(1.1) of the Act would likely be applicable in the above hypothetical situation. Of course, if you have an actual case in mind, you may wish to consult the local taxation office who would be in a better position to comment on the facts in that case.

We trust our comments are of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch