18 August 1998 External T.I. 9811345 - STOCK OPTION BENEFIT AND SECTION 517(1)

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: What is the amount paid for purposes of section 7 where shares are surrendered under section 51 of the Act?

Position: FMV of shares surrendered.

Reasons: There is no exemption under section 7 or 52 for this sort of exchange.

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Attention: XXXXXXXXXX 981134
M. P. Sarazin

August 18, 1998

Dear Sirs:

Re: Exchange of Shares as Payment for Acquisition under Stock Option

This is in reply to your letter dated April 17, 1998, wherein you requested our comments regarding the application of subsections 7(1) and 51(1) of the Income Tax Act (the “Act”) when shares of a corporation owned by an individual are used by the individual to acquire additional shares of the corporation under a stock option that is subject to section 7 of the Act.

Comments

It appears that the opinion you seek relates to specific proposed transactions that will 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. However, we are able to provide you with the following general comments.

Subject to subsection 51(4) of the Act, section 51 will apply to any situation where a share of the capital stock of a corporation is acquired by a taxpayer in exchange for a capital property that is another share of the particular corporation and no other consideration is received for the old shares.

An employee’s taxable benefit under paragraph 7(1)(a) of the Act is the fair market value of the shares at the time the shares are acquired by the employee less any amount paid or payable by the employee to the corporation for the shares and any amount paid by the employee to acquire the right to acquire the shares. In our view, the amount paid by an employee would include the fair market value of any property surrendered to the corporation by the employee. This would be the case even if the provisions of section 51 applied to the disposition of the particular property.

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

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate