11 February 1997 External T.I. 9701725 - STOCK OPTION INCORPORATED EMPLOYEE

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:

Can 7(1) apply to benefits received by an incorporated employee from a corporation to which the person has provided services

Position:		yes

Reasons:		see 94DTC6193

XXXXXXXXXX 970172

Attention: XXXXXXXXXX

February 11, 1997

Dear Sirs:

Re: Section 7 and paragraph 110(1)(d) of the Income Tax Act (the "Act")

This is in reply to your letter of January 16, 1997, in which you asked if a deduction would be available under paragraph 110(1)(d) of the Act to an individual who acquires shares of a corporation under a stock option when the individual provides services to the corporation through a personal services company.

A deduction is available under the provisions of paragraph 110(1)(d) of the Act when the conditions specified under that provision are met and the individual has included a benefit in income for the year in accordance with subsection 7(1) of the Act. Subsection 7(1) generally applies when a corporation agrees to sell or issue shares to an employee of the corporation or a related corporation and any benefit, thereby conferred, is received in respect of, in the course of, or by virtue of the individuals employment.

It is a question of fact whether a section 7 benefit is received in respect of, in the course of, or by virtue of an individual's employment in any particular situation. However it was determined by the Federal Court-Trial Division in Scott v. the Queen (91 DTC 5268, as confirmed by the Federal Court of Appeal, 94 DTC 6193) that an individual employed by a corporation in a situation similar to the one described in your letter could also be employed by a corporation to which the individual was seconded such that any benefits received under an option could be taxable under section 7 of the Act. Subsection 7(3) and paragraph 110(1)(d) or (d.1), as the case may be, will also apply.

It should also be noted that where section 7 of the Act does not apply to any benefits received in respect of an employment, they can be taxable as income from employment pursuant to sections 5 and 6 of the Act. This is discussed in greater detail in the Department's Interpretation Bulletin IT 334.

Yours truly,

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