What the "Archived Content" notice means for interpretation bulletins

NO: IT-384R

DATE: January 14, 1987

SUBJECT: INCOME TAX ACT
Reassessment Where Option Exercised in Subsequent Year

REFERENCE: Subsection 49(4) (also paragraph 152(4)(c))

This bulletin replaces and cancels Interpretation Bulletin IT-384 dated June 20, 1977. Current revisions are designated by vertical lines.

1. Consideration may be received by grantors of options to acquire property or to dispose of property, in connection with the granting, extension, or renewal of such options. Subject to the comments in 8 below (concerning the granting of options by individuals to acquire property), where in a particular taxation year receipt of such consideration has resulted in the inclusion of an amount in the grantor's income and the option is exercised in a later year, subsection 49(4) provides a means of removing from the grantor's income for the prior year the effect of the consideration received.

2. If the grantor has filed a return of income for the prior year in accordance with the requirements of section 150, an amended return for the prior year may be filed by virtue of subsection 49(4), provided the amended return is filed on or before the day the grantor is required, by section 150, to file a return for the year in which the option is exercised.

3. Paragraph 152(4)(c) specifies the time limit (in this bulletin referred to as the ""reassessment period'') within which the Department may reassess a return of income in the absence of fraud or misrepresentation, where a valid waiver is not in effect or where subsection 152(6) does not apply. For the 1983 and subsequent taxation years the ""reassessment period'' is three years (four years for years prior to 1983) from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year.

4. In the circumstances described in 2 above, a reassessment to exclude the option proceeds will be made pursuant to subsection 49(4), even though it occurs subsequent to the reassessment period described in 3 above. Where the amended return is filed after the filing deadline set out in paragraph 49(4)(c), a reassessment may be made only within the reassessment period unless a valid waiver is in effect. Details of the requirements of the Act and the Department's practice with respect to reassessments and the provision of waivers are contained in Information Circular 75-7R3.

5. Adjustments made pursuant to such an amended return may affect other taxation years as well. If these other affected years are within the reassessment period, and the grantor wishes to have the returns for these years reassessed, a written request should be submitted for a refund, giving the relevant details. The return for any such affected year that is outside the reassessment period may be reassessed only if a valid waiver is in effect in respect of the year.

6. An option granted by an individual may remain in effect after the individual's death. If such an option is exercised after the grantor's death:

(a) An amended return under subsection 49(4) is unavailable.

(b) The grantor's estate or heirs (i.e., the vendor or purchaser of the property, depending on the type of option) is required to take into account only the exercise amount of the option. In the case of an option to acquire, no upward adjustment of the proceeds of disposition of the property is required and, in the case of an option to dispose, no downward adjustment of the cost of the property is required, in respect of the consideration received by the grantor of the option.

Of course, the person to whom the option was granted is subject to the provisions of subsection 49(3) or (3.1) as the case may be, in the normal manner.

7. Prior to November 13, 1981, if an individual grantor received consideration in a year for the granting of an option and a taxable capital gain resulted, the grantor could have purchased an income-averaging annuity contract (""IAAC'') in respect of the related qualifying income. If the return for that year is later reassessed to exclude the taxable capital gain, IT-230R2 should be consulted to determine treatment of the contract.

8. The provisions of subsection 49(4) do not apply to the disposition of property under an option granted, extended or renewed after November 21, 1985 where the option is to acquire property and was granted by an individual. Where such an option is exercised in a year subsequent to the one in which it was granted, none of the consideration received by the grantor in respect of the option will be added to the proceeds of disposition of the property transferred on the exercise of the option, and the grantor's return of income for any prior year will not be adjusted by reason only of the exercise of the option.

9. The comments in this bulletin are also applicable with respect to call options and put options on which the grantor treats gains and losses as being on capital account. See also IT-479R.