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.
5-911385
Dear Sirs:
Object: Issuance of Notes with an Option to purchase additional Notes
This is in reply to your letter of May 15, 1991 concerning the above-mentioned matter. We regret the delay in providing an earlier response to your enquiry.
As noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.
Paragraphs 1 and 3 of Interpretation Bulletin IT-96R4 ("IT-96R4") to which you refer in your letter have now been replaced by paragraphs 5 and 6 of Interpretation Bulletin IT-96R5 (" IT-96R5" ) with some modifications.
As stated in paragraph 5 of IT-96R5 , "Where any option is issued concurrently with another security of the corporation, a reasonable allocation of the issue price and any expenses of issue must be made between the option and the security by the grantor. Similarly, a reasonable allocation of the purchase price and applicable expenses must be made between the option and the security by the holder".
You will note that the last sentence has been added and that the reference in paragraph 1 of the previous IT-96R4 to section 68 has been deleted.
As for paragraph 6 of IT-96R5, it reproduces paragraph 3 of former IT-96R4 in its entirety.
When an option is not severable or tradeable apart from a note, no allocation would generally be required. Also where the security is converted no allocation of the proceeds of disposition between the conversion feature and the security would be made. Therefore section 49 of the Income Tax Act would have no application in such a case.
However, should the purchaser pay a substantial amount for the option privilege, for example, the security is for $1,000 and the purchaser pays $1,100 then it could be argued that the $100 is for the option.
As indicated above and as can be seen by our comments, a confirmation of the results for tax purposes of a particular arrangement could only be given after a review of all of the relevant documentation on submission of a request for an advance income tax ruling.
We trust the above comments will be of assistance to you.
Yours truly, for DirectorFinancial Industries DivisionRulings DirectorateInformation Act l'information
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