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.
Principal Issues:
where an employee compensation plan includes convertible preferred shares, whether a benefit arises when the preferred shares are converted to common shares.
Position TAKEN:
YES
Reasons FOR POSITION TAKEN:
7(1)
5-942031
XXXXXXXXXX M. Shea-DesRosiers
Attention: XXXXXXXXXX
September 20, 1994
Dear Sirs:
Re: Stock Option Benefits
This is in reply to your letter of August 4, 1994 wherein you enquire as to whether a benefit arises under section 7 of the Income Tax Act (the "Act") when an employee who had acquired preferred shares of his/her employer exercises a conversion option of the preferred shares to acquire common shares and the fair market value of the common shares at that date exceed the amount paid for the preferred shares.
The Department's position is that where employee compensation plans involve convertible preferred shares, subsection 7(1) of the Act will apply when the preferred shares are converted to common shares.
With respect to plans in place on or before August 31, 1994, the conversion of such shares issued before December 1, 1994 will not give rise to an employment benefit. We enclose for your information a copy of Income Tax Technical News dated July 22, 1994 and refer you to the heading "Section 7 Convertible Preferred Shares" which gives the Department's position on the subject.
As to whether the results would be different if the employee had filed an election under subsection 39(4) of the Act prior to the conversion, since the specific provision of section 7 overrides the more general provisions in the Act it follows that pursuant to paragraph 7(3)(a) of the Act any benefit received by an employee under a stock option plan agreement is taxable under section 7 of the Act and not under any other Part I provision.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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