18 April 1995 External T.I. 9432385 - STOCK OPTION & CCPC GOING PUBLIC

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:

Will an employee be considered to have disposed of their stock option when a CCPC becomes a pubic corporation and the employee becomes a non-resident employed by a wholly-owned subsidiary of the former CCPC. When the employee becomes a non-resident, will there be a deemed disposition of the shares already acquired as a result of the exercise of a portion of the stock option.

Position TAKEN:

The employee will not have disposed of his stock option. Unless the shares acquired on the exercise of the stock option fall within one of the exceptions in paragraph 128.1(4)(b), there will be a deemed disposition when the employee becomes a non-resident.

Reasons FOR POSITION TAKEN:

Subsection 7(4) applies and there is no disposition of the stock option by virtue of subparagraph 128.1(4)(b)(vi).

		943238
XXXXXXXXXX	A. Seidel

Attention: XXXXXXXXXX

April 18, 1995

Dear Sirs:

This is in reply to your facsimile dated December 13, 1994 in which you requested our opinion with respect to the application of subsections 7(1.1) and 128.1(4) of the Income Tax Act (the "Act") in the situation where an employee enters into a stock option plan with a Canadian-controlled private corporation ("CCPC"), the CCPC subsequently becomes a public corporation and the employee becomes a non-resident employed by a wholly-owned foreign subsidiary of the former CCPC. Prior to becoming a non-resident, the employee had acquired some shares of his employer by exercising of his stock option rights. The expressions "Canadian-controlled private corporation" and "public corporation" as used herein have the meanings assigned by subsections 125(7) and 89(1) of the Act, respectively

The Department's position with respect to the application of subsection 7(1.1) of the Act upon a CCPC becoming a public corporation is as outlined in paragraph 13 of Interpretation Bulletin IT-113R3.

Pursuant to subparagraph 128.1(4)(b)(vi) of the Act, the employee would not be deemed to have disposed of his stock options at the time he becomes a non-resident and therefore section 7 would not apply to any unexercised options at that time. However, pursuant to subsection 115(1) of the Act, the non-resident employee would be taxable in Canada on any benefit received when the shares acquired on the exercise of the stock option are disposed of.

Subject to the exceptions described in subparagraphs 128.1(4)(b)(i) to (vi) of the Act, the employee would, by virtue of subsection 128.1(4) of the Act be deemed to have disposed of any other property owned by him immediately before he becomes a non-resident. Since the employer is now a public corporation, any shares acquired upon the initial exercise of the stock options by the employee would not qualify for the exception in subparagraph 128.1(4)(b)(i) of the Act unless the employee and/or persons who do not deal at arm's length with him owned, at any time during the previous 5 years, not less than 25% of the issued shares of any class of the employer's capital stock. Consequently, unless the shares of the employer qualify as taxable Canadian property, any benefit under subsection 7(1) and 7(1.1) would be included in the employee's income for the taxation year in which he is deemed to have disposed of the shares under subsection 128.1(4) of the Act.

In paragraph 4 of Interpretation Bulletin IT-337R2, which deals with payments received on termination of employment, it is stated that changing employment within an affiliated group of corporations would not be considered to be a loss of employment. Even if it could be considered that the employee has ceased to be an employee, subsection 7(4) of the Act would apply. Consequently, in the situation where an employee's employment is transferred to a wholly-owned foreign subsidiary of the corporation which originally entered into the stock option with the employee, it is our view that the provisions of subsection 7(1.1) and paragraph 128.1(4)(b)(vi) of the Act would continue to apply as outlined above.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch