30 January 1998 External T.I. 9801435 - EMPLOYEE STOCK OPTION BENEFIT - WARRANT

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.

Principal Issues:

Whether a warrant is an agreement to sell or issue share for the purpose of section 7 and paragraph 110(1)(d).

Position: Yes

Reasons: Wording of section 7.

XXXXXXXXXX 		980143
			Fouad Daaboul

Attention: XXXXXXXXXX

January 30, 1998

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 September 24, 1997, in which you requested our opinion as to how a warrant is treated under the above noted provisions in a specific situation. We apologize for the delay in our response.

We are unable to provide an opinion which binds the Department except in the context of an advance income tax ruling. We can provide, however, the following general comments.

A warrant that gives the holder the right to purchase the shares of a corporation would be considered an agreement to issue or sell shares for the purposes of section 7 of the Act. Where an employee acquires warrants to purchase shares of a corporation that does not deal at arm's length with the employer and the warrants were acquired by virtue of his or her employment, in our opinion subsection 7(1) would apply to the exercise or disposition of the warrants.

It is also the Department's view that an employee would be entitled to a deduction pursuant to paragraph 110(1)(d) of the Act provided the conditions set out therein are met. One of these requirements is the amount paid to acquire a share must be not less than the fair market value of the share (less any amount paid for the warrant) at the time the agreement was made, which would generally be the time the employee acquires the warrant.

We trust these comments will be of assistance.

Yours truly

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate