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.
Will a reduction in the option price result in the application of 7(1.4)?
The reduction, in and by itself, would not result in a disposition so 7(1.4) can't apply.
XXXXXXXXXX M.P. Sarazin
October 7, 1997
Re: Change of Option Price
This is in reply to your letter dated September 10, 1997, wherein you requested our views as to whether subsection 7(1.4) of the Income Tax Act (the "Act") would apply where the exercise or strike price contained in an existing stock option is reduced to reflect the current fair market value of the shares that may be acquired under the stock option.
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, issued by Revenue Canada. 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.
Subsection 7(1.4) of the Act will only apply where certain conditions are satisfied. One of the conditions is that a taxpayer must dispose of rights under a stock option agreement referred to in subsection 7(1) or 7(1.1) of the Act. Consequently, you would have to determine whether the change in the exercise price under the stock option agreement would constitute a disposition of rights under the particular agreement.
In this regard, we would refer you to John A. Amirault v. The Minister of National Revenue (90 DTC 1330) (T.C.C.) wherein the court concluded that a retroactive change in the option or strike price under a stock option agreement, in and by itself, would not constitute a fundamental change to the particular option for the purposes of applying subparagraph 110(1)(d)(iii) of the Act. In paragraph 2 of Interpretation Bulletin IT-448, the Department states that the significance of the change in the terms of an agreement will be the determining factor in deciding whether there is a disposition. Even though IT-448 deals specifically with changes in the terms of debt obligations and shares, the general principles may be applied to changes in the terms of stock option agreements. Since the court has concluded that a change in option price is not a fundamental change to an option agreement, we can support a conclusion that the change in option price would not generally constitute a significant change in the terms of the stock option agreement and, as such, would not result in a disposition of rights under a stock option agreement. Therefore, subsection 7(1.4) should not apply in the general situation where the only change to an existing stock option agreement is a reduction in the exercise price.
Where an option price is subsequently reduced in order to reflect the subsequent market price, it would appear that the condition in subparagraph 110(1)(d)(iii) would not be satisfied because the option holder would be entitled to acquire the share(s) under the option for an amount that is less than the fair market value of the share(s) at the time the agreement was made.
We trust the above comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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