27 February 1998 External T.I. 9728505 - 7(1.1), VESTING REQUIREMENTS

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 an agreement to issue shares exist where the employee has to remain employed for a certain period before vesting can occur?

Position: Yes

Reasons:

The Act does not refer to existence or non-existence of conditions.

972850
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

February 27, 1998

Dear Sir:

Re: Subsection 7(1.1) and Agreement to Sell or Issue Shares

This is in reply to your letter dated October 20, 1997, wherein you requested clarification of the Department's position in respect of the application of subsection 7(1.1) of the Income Tax Act (the "Act") where a Canadian-controlled private corporation ("CCPC") agrees to sell or issue shares to an arm's length employee, the employee can only exercise his or her rights under the agreement after the completion of a reasonable employment period and it happens that the CCPC ceases to qualify as a CCPC under the Act before the particular employee satisfies the employment condition required under the agreement.

You believe that the views expressed in a technical interpretation (#921669) dated July 28, 1992 appear to conflict with the position expressed in paragraph 14 of Interpretation Bulletin IT-113R4 dated August 7, 1996. Consequently, you are unsure as to how to apply subsection 7(1.1) of the Act in the above situation.

Comments

The provisions of subsection 7(1.1) of the Act apply where a CCPC agrees to sell or issue shares of its capital stock or shares of a CCPC with which it does not deal at arm's length to an arm's length employee (this would include an arm's length employee of a CCPC with which the employer does not deal at arm's length). The existence of an agreement to issue shares is a question of fact. Where a CCPC agrees to sell or issue shares and the only condition that has to be satisfied before the employee can exercise his or her rights under the agreement is the completion of a reasonable employment period, we are now of the view that the arrangement is an agreement for the purposes of subsection 7(1.1) of the Act. We no longer take the position that the employment period must be completed before there is an agreement. Provided that the conditions found in subsection 7(1.1) of the Act are satisfied immediately after the agreement was made between the employer and the employee, the acquisition of shares under the agreement by an employee after the satisfaction of the employment condition will continue to qualify under subsection 7(1.1) of the Act even though the corporation may cease to qualify as a CCPC prior to the completion of the employment period. This position is consistent with the position expressed in paragraph 14 of IT-113R4 and results in a reversal of the position expressed in the technical interpretation referred to above.

We trust that 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