14 November 1996 External T.I. 9635535 - TAX CONSEQUENCES RE EMPLOYEE STOCK OPTIONS

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:

Responding to suggestion that IT-113R4 be expanded to cover non-section 7 tax commentary (e.g., calculation of cost amount of option and attribution of income on shares where employee disposes of option to non-arm's length party).

Position:

We will consider it on next revision.

Reasons:

Policy decision on what is appropriate commentary in this bulletin.

XXXXXXXXXX							963553

November 14, 1996

Dear XXXXXXXXXX:

Re: Interpretation Bulletin IT-133R4 (the "Bulletin")

This is in reply to your letter of October 18, 1996, in which you make a comment and ask several questions about the contents of the Bulletin.

Your comments and queries and our replies follow.

13 of the Bulletin

You refer to the last paragraph of 13 saying that it implies that unless the two conditions are met the stock option is tax-free. You indicate that the paragraph should go on to indicate that there is a capital gain to the employee although there is no employment income inclusion.

The commentary concerning shares purchased before May 23, 1985, has been condensed from the previous version of the Bulletin (IT-113R3 at 12) which indicated what occurred when section 7 of the Income Tax Act (the "Act") did not apply to the disposition of such shares. Technically the reference to the paragraph 7(1)(a) benefit is accurate.

5 of the Bulletin

You ask several questions concerning the tax consequences to both the employee and the non-arm's length transferee where the transferee 1) sells the option in an arm's length sale, 2) exercises the option, 3) receives dividends on the shares, and 4) disposes of the shares in an arm's length sale.

The contents of 5 were not contained in the previous version (IT-113R3) and the discussion is limited to the taxation consequences to the employee occurring by virtue of section 7 of the Act. The tax consequences to the employee or the non-arm's length transferee occurring by virtue of other provisions of the Act were not considered relevant to the subject matter of 5.

With respect to paragraph 69(1)(b) of the Act, it is our view that it does not apply to an employee/transferor who is subject to the provisions of paragraphs 7(1)(c) or (d) of the Act by virtue of paragraph 7(3)(a) of the Act.

With respect to the attribution, pursuant to subsection 74.1(1) or (2) of the Act, of dividend income on shares acquired under employee stock options, we believe it would be rare that such provisions would apply in the typical employee stock option situation.

We appreciate your suggestion that some of the non-section 7 tax consequences flowing from the disposition of employee stock options be contained in the Bulletin. We will consider it on the next revision.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch