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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
DRAFT
TEI Conference
December 7, 1993
Question No. X
OPTION AGREEMENTS IN NON-ARM'S-LENGTH SITUATIONS
Assume a company acquires "from a person from whom he was not dealing at arm's length," an option to acquire property at a fixed price. Assume further that fair market value is paid for the option. The property appreciates in value above the sum of the cost of the option and the option striking price, and, as a result, the option holder exercises the option. Will RC apply paragraph 69(1)(b) to increase the proceeds of disposition of property? Does the answer depend on whether the property was current or capital property to the person disposing it?
Read in isolation, paragraph 69(1)(b) might apply. Subsection 49(3) provides that in computing the vendor's proceeds of disposition of the property, there shall be included the consideration received for the option. Paragraph 69(1)(b) and subsection 49(3) apply to different, but overlapping, sets of special circumstances. In our example, where the overlap occurs, it appears critical to determine which provision has priority. It seems that paragraph 69(1)(b) should not apply since the acquirer of the option has paid fair market value for the option and has assumed the risk of not being able to exercise the option. Please comment.
Department's Position
As stated in Question IX, as a general rule, paragraph 69(1)(b) applies to all dispositions of property between persons who do not deal at arm's length. Accordingly, the paragraph could be applied when the option is granted, if not granted at fair market value. However, the application may be more appropriate when the option is exercised. In our view, the benefit arising at the time of granting an option is often difficult to quantify and it is a question of fact whether the fair market value of the property transferred pursuant to the exercise of the option will be determined with reference to the option agreement.
Though Interpretation Bulletin IT-403R , entitled "Options on Real Estate" needs to be revised as a result of the repeal of subsection 55(1) and the amendment of subsection 245(2), we refer you to paragraphs 5 and 6 of the Bulletin which reflect the Department's general views on these arrangements.
Officer: Carole Chouinard File number: 5-933368 December 8, 1993
Applicable section of the Act: 69(1)(b)
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