15 February 1990 Income Tax Severed Letter AC59413 - Employee Stock Options - \"Prescribed Shares\"

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.

• 5- 9413

19(1) J.D. Jones
(613) 957-2104

February 15, 1990

Dear Sirs:

Re: Employee Stock Options:
"Prescribed Shares" for Purposes of
Paragraph 110(1)(d) of the Income Tax Act (the "Act")

This is in reply to your letter of January 10, 1990, wherein you requested a technical interpretation in connection with the requirements for qualification of a share as a "prescribed share" for purposes of paragraph 110(1)(d) of the Act.

Specifically, you have requested our views as to whether a share issued to an employee of the issuer upon exercise of a stock option as contemplated in subsection 7(1) of the Act would qualify as a prescribed share under Income Tax Regulation 6204 if the employee/holder has the right, under the terms or conditions of the share or any agreement in respect of the share or its issue, to cause the share to be redeemed, acquired or cancelled by the issuer or "specified persons" in relation to the issuer, where the amount payable upon and in consideration for such redemption, acquisition or cancellation approximates the fair market value of the share at the time of such redemption, acquisition or cancellation.

As noted in your letter, subparagraph 6204(1)(a)(iv) of the Income Tax Regulations requires that, under the terms and conditions of the share or stock option agreement, the holder of the share cannot cause the share to be redeemed, acquired or cancelled by the issuing corporation (except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by subparagraph 6204(1)(a)(iii)). Accordingly, it is our view that in the above situation, the share issued to an employee of the insurer upon the exercise of a stock option as contemplated in subsection 7(1) of the Act would not qualify as a prescribed share pursuant to section 6204 of the Income Tax Regulations for the purpose of paragraph 110(1)(d) of the Act.

We trust our comments clarify the Department's views with respect to this issue.

Yours truly,

for Director
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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