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.
Memo to file:
Options, warrants, etc as flow-through shares:
An option is a right to have a share issued for the purpose of 66(15)(d.1). Even though the right is conditional (ie the holder of the option must exercise it and pay the option price) it is still a right for the purpose of 66(15)(d.1).
An option will be a flow-through share if it is a right to have a share issued pursuant to an agreement in writing to be entered into which meets the conditions set out in 66(15)(d.1)(i) and (ii). As long as the corporation agrees to incur expenses equal to the exercise price of the option and to renounce expenses not exceeding the exercise price of the option pursuant to the agreement to be entered into with respect to the issue, the option will qualify as a flowthrough share. The corporation does not have to agree to incur expenses equal to the amount paid for the option or to renounce anything with respect to the option in order for the option to qualify as a flowthrough share. It is only the terms of the agreement to be entered into with respect to the issue of the actual share that are relevant.
It is our view that the agreement to issue the actual share is not entered into when the option is granted. It is only entered into when the option is exercised.
For the purposes of 66(12.6), (12.62) and (12.64) the share referred to is the flow-through share as defined in 66(15)(d.1) which includes an option. Thus expenses may be renounced with respect to an option that is a flow-through share for the period commencing with the date the agreement to issue the option was entered into. The amounts of any such renunciations cannot exceed the consideration paid for the option.
The prescribed share rules in 6202.1 do not apply to options but only to the actual share to be issued.
The provisions of section 49 will apply to the corporation that grants the option such that if it expires, the corporation will have a capital gain (49(2)). If the option is capital property to the holder 49(3) will be applicable on the exercise but since the option does not have a cost base by virtue of 66.3(3), no amount will be added in computing the cost of the share acquired on the exercise. If the option is not capital property to the holder, section 49 will not apply to him. Even if there is a disposition of the option on the exercise it is questionable that any proceeds will become receivable. It may be that the effect is the same as for an option that is capital property (i.e. the cost of the option is added to the cost of the property acquired) and income is not recognized until the property acquired is sold.
Chief
Resource Industries Section
Bilingual Services and Resource Industries Division
Rulings Directorate
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