1 November 1999 Ruling 9924623 - STOCK OPTION PLAN

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: 1) Stock Option Plan- We could not rule as the Plan is already in existence. We gave the taxpayer general opinions with respect to stock option plans.

Position: Established positions re 1) 7(1)(a) benefit, 2) date of acquisition of share, 3) FMV of share at time option granted, 4) exchange rate for day share acquired.

Reasons: 1) requirement of wording of provision, 2) question of fact, 3) satisfaction of 110(1)(d) condition not ascertainable until date share acquired because of variable formula of strike price, 4) value of employment benefit is determined on the day share acquired - that is the day for relevant exchange rate.

XXXXXXXXXX 							992462
M. P. Baldwin
Attention : XXXXXXXXXX 

November 1, 1999

Dear Sirs:

Re: Stock Option Plan

This is in reply to your letter of September 8, 1999 requesting an advance income tax ruling. As discussed in our telephone conversations (Baldwin/ XXXXXXXXXX) of September 23 and October 20, 1999, we cannot rule on the stock option plan (the "Plan") for XXXXXXXXXX as the Plan is already in existence and is no longer a proposed transaction. Also, as discussed, your local tax services office will consider requests for written opinions on completed transactions and provide over-the-counter advice and assistance on general matters. Consequently, we can only offer the following general comments which are not binding on the Department.

Subsection 7(1) of the Income Tax Act (the "Act") applies when a particular corporation, or a trustee acting under its direction, has agreed to sell or issue shares of that corporation or shares of another corporation with which it does not deal at arm's length to an employee of either the particular corporation or of any corporation with which it does not deal at arm's length.

Subject to some exceptions, an employee who acquires shares under such an agreement (commonly referred to as a "stock option") is generally required under paragraph 7(1)(a) of the Act to include in employment income, in the taxation year in which the shares are acquired, a benefit equal to :

• the fair market value of the shares at the time the shares are acquired by the employee

minus

• 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.

The date of the acquisition of shares is a question of fact and law. Generally, acquisition will be considered to have taken place when title passes or, if title remains with the vendor as security for the unpaid balance, when all the incidents of title (such as possession, use, and risk) pass (see current version of IT-170, Sale of Property - When Included in Income Computation. Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca/menu/EmenuKZV.html).

In computing taxable income for the taxation year a subsection 7(1) benefit is included in income, a taxpayer may deduct one-quarter of that benefit pursuant to paragraph 110(1)(d) of the Act if certain conditions are met, one of which is that the amount payable by the taxpayer to acquire the shares under the stock option agreement is not less than the excess of the fair market value of the shares at the time the stock option agreement was made over any amount paid by the taxpayer to acquire the rights. (Please refer to paragraph 18 of Interpretation Bulletin IT-113R4 for more information concerning this deduction.) It is not possible to confirm in advance of the exercise of the option whether the purchase price established by your Plan (i.e., 85% of the share price on the close of the business day prior to the first or last day of the Plan year, whichever is lower) will result in the foregoing condition being satisfied.

Normally, the amount of an employment income inclusion resulting from the exercise of a stock option is recorded in the Canadian dollar equivalent according to the rate of exchange prevailing at the time of the exercise of the option.

We trust our comments will be of assistance to you.

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate