22 May 1997 External T.I. 9712415 - ELIGIBILITY

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:

Would an employee be eligible for a 110(1)(d) deduction in respect of a benefit included in income under paragraph 7(1)(c)?

Position: Yes

Reasons:

Deduction applies to benefit included in employee's income even though non-arm's length transferee acquires the shares.

971241
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

May 22, 1997

Dear Sirs:

Re: Stock Options and Paragraph 110(1)(d) Deduction

This is in reply to your letter dated May 7, 1997, wherein you requested our views as to whether paragraph 110(1)(d) of the Income Tax Act (the "Act") would apply where a corporation allows its senior officers and outside directors to transfer vested and unvested stock options to a spouse, children or a trust. You have also asked us to confirm that the Act does not provide any relief for U.S. gift taxes.

Comments

It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996. Confirmation of tax consequences 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 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 provide you with the following comments.

Paragraph 5 of Interpretation Bulletin IT-113R4 provides the Department's general views with respect to the application of paragraph 7(1)(c) of the Act. An employee will have an income inclusion under paragraph 7(1)(c) when the employee transfers his or her rights under a stock option agreement to a non-arm's length transferee and that non-arm's length transferee acquires shares under the particular stock option agreement. The amount of the benefit, if any, is the difference between the fair market value of the shares at the time they are acquired by the non-arm's length transferee and the total of the amount paid or payable by that person to the corporation for the shares plus any amount paid by the employee to acquire the rights under the stock option agreement.

A benefit included in an employee's income under paragraph 7(1)(c) of the Act may be eligible for a deduction under paragraph 110(1)(d) of the Act where the conditions described therein are satisfied.

We confirm that there are no provisions in the Act providing relief for gift taxes paid by a taxpayer.

We trust the above comments will be of assistance to you.

Yours truly,

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