30 September 1994 Internal T.I. 940767B - INT. OF 115(1)(B) & 116 WHERE A NON-RES. GRANTS AN OPTION

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.

Principales Questions:

Interpretation of paragraph 115(1)(b) and section 116 where a non-resident corporation grants an option to buy Canadian real property to a Canadian corporation

Position Adoptée:

The grant of an option respecting real property is a disposition of a taxable Canadian property that falls within the ambit of subparagraph 115(1)(b) of the Income Tax Act.

Raisons POUR POSITION ADOPTÉE:

Under the common law, the grant of an option in respect of real property vests in an optionee an interest in the real property itself. It seems reasonable to conclude that on the grant of the option the non-resident optionor would give up some interest in that property within the meaning of subparagraph 115(1)(b). This interpretation is consistent with our interpretation of the expression " d'un droit y afférent" in the French version.

5-940767
XXXXXXXXXX Carole Pronovost
(613) 957-8953

Attention: XXXXXXXXXX

November 1, 2018

Dear Sirs:

Re: Interpretation of paragraph 115(1)(b) and section 116 where a non-resident corporation grants an option to buy Canadian real property to a Canadian corporation

We are writing in reply to your request of March 16, 1994, regarding our interpretation of paragraph 115(1)(b) and section 116 where a non-resident corporation grants an option to buy Canadian real property to a Canadian corporation.

You describe the following factual situation.

US Co. is a corporation resident of the United States that owns land located in Canada. US Co. holds the land as capital property. US Co. does not carry on any business in Canada nor does it have a permanent establishment anywhere in Canada. US Co. enters into an option agreement with a Canadian resident corporation ("Canco") whereby US Co. grants an option to Canco to buy the land. As consideration for granting the option, US Co receives an amount (say) $100,000. The option agreement provides that if Canco exercises its option and buys the land, the amount paid for the option will be credited against the purchase price for the land.

Your interpretation

It is your opinion that the granting of an option to purchase land is not a disposition of taxable Canadian property. Consequently, section 115 and 116 would not apply to the grant of the option. However, upon exercise of the option section 115 and 116 would apply to the disposition of the land which would also include, as proceeds of disposition, the option price.

Finally, it should be noted that you also considered whether subsection 115(3) would apply in this particular situation and you concluded that it should not. Subsection 115(3) provides that a property described in subparagraphs 115(1)(b)(i) to (ix) is deemed to include any interest therein or option in respect thereof, whether or not such property is in existence. You believe that subsection 115(3) is applicable to an optionee who disposes of an option in respect of property. You don't think it applies in respect of a person who grants someone else an option to buy property.

Our comments

It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers, and therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

As you have indicated non-residents are subject to taxation in Canada on taxable capital gains arising from the disposition of taxable Canadian property. Included in the list of "taxable Canadian property" is real property situated in Canada. Subsection 115(3) provides that real property situated in Canada includes an interest in or an option on such real property.

Under the common law, the grant of an option in respect of real property vests in an optionee an interest in the subject land. It seems reasonable to conclude that on the grant of the option the non-resident optionor would give up some interest in that land within the meaning of subparagraph 115(1)(b)(i). This interpretation is consistent with our interpretation of the expression "d'un droit y afférent" (a right in respect thereof) in the French version of the Act which more clearly establishes in our view that the grant of an option respecting real property is a disposition of a taxable Canadian property that falls within the ambit of subparagraph 115(1)(b)(i).

These opinions do not constitute advance income tax rulings and consequently are not binding on the Department.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch