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.
Would new subsection 51(1) apply where an employee pays for shares of a corporation under a stock option by exchanging shares of the corporation that are already owned?
Yes, provided criteria of section 51 are met.
Reasons FOR POSITION TAKEN:
It would appear that the new legislation would not prevent the taxpayer from deferring any gain on the exchange of shares.
XXXXXXXXXX M.P. Sarazin
November 1, 1994
Re: Subsections 51(1) and 51(3)
This is in reply to your letter dated June 15, 1994 wherein you requested our comments with regards to the application of the provisions of subsections 51(1) and 51(3) of the Income Tax Act, as amended by Bill C-27 which received Royal Assent on June 15th, 1994, in the following hypothetical situation.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, consolidated to June 23, 1994 (the "Act").
An employee previously acquired 100 common shares of an employer corporation (the "Old Shares") which have an adjusted cost base and a paid-up capital of $500 ($5 per share) and a fair market value of $1,500 ($15 per share). The Old Shares are held as capital property by the employee. The employee has been granted an option to acquire 30 common shares (the "New Shares") of the employer corporation for an exercise price of $10 per share ($300 in aggregate) and the current trading value of the 30 New Shares is $15 per share ($450 in aggregate). The New Shares are identical to the Old Shares. The employee will satisfy the option price by exchanging 20 Old Shares of the employer corporation having an aggregate fair market value of $300.
You have asked us to confirm the following:
the exchange of shares held by an employee for new shares of the employer as payment of the exercise price of a stock option will not be considered a disposition for income tax purposes, and accordingly, the employee will not be required to recognize any capital gain that had accrued on the exchanged shares up to the date of the exchange by virtue of his tendering the shares;
the paid-up capital of the class of shares (assuming the Old Shares are exchanged for New Shares and no cash consideration is paid for the acquisition of the Old Shares) will not change as a result of the exchange;
any benefit to be included in the employee's income under section 7 of the Act by virtue of the acquisition of the new shares shall be computed by reference to the exercise price of the option, being the fair market value (not the adjusted cost base) of the Old Shares, on the date of exchange; and
no dividend will be deemed to arise by virtue of the exchange of the Old Shares for the New Shares.
It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer 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 income 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.
Subject to subsection 51(4) of the Act, section 51 will apply to any situation where a share of the capital stock of a corporation is acquired by a taxpayer in exchange for a capital property that is another share of the particular corporation and no other consideration is received for the old shares.
The above comment is provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Reorganizations and Foreign Division
Policy and Legislation Branch
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