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:
Whether a put option exercisable at the FMV of the
underlying share at the time of exercise results in the
share being subject to the rules under 112(2.2)
Position TAKEN:
It is a question of fact
Reasons FOR POSITION TAKEN:
A put option is a guarantee agreement; we would need to
examine the agreement to determine whether it meets the
criteria in (a) and (b) of the subsection
XXXXXXXXXX 940769
Attention: XXXXXXXXXX
April 19, 1994
Dear Sirs:
Re: Technical Interpretation on subsection 112(2.2) of the Income Tax Act (the "Act")
This is in reply to your letter of March 18, 1994, wherein you requested our comments with respect to the application of
subsection 112(2.2) of the Act in a situation where a specified financial institution grants a put option on common shares held by a particular private corporation.
The situation you describe appears to relate to a specific factual situation and as such should be the subject of an advance
income tax ruling, or if it represents a completed transaction should be discussed with your local district taxation office.
Generally, it is our view that, for the purpose of subsection 112(2.2) of the Act, a "guarantee agreement" could include an obligation to acquire a share under a put option. Consequently, the application of subsection 112(2.2) of the Act would depend, in part, on whether the put was given to ensure the results described in paragraphs (a) and (b) of the aforenoted subsection, which is a question of fact to be determined based on the pertinent facts and supporting documentation.
We trust the above comments are of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
STATEMENT OF ISSUES
File 940769 F. Francis
Facts
- Aco holds the common shares of Bco.
- an SFI grants Aco a put option exercisable at the fmv of
the common shares at the date of exercise.
- Aco and Bco deal at arm's length with the SFI
Issue
Does the put option result in the application of 112(2.2)
Analysis
The put option is a "guarantee agreement" since it is an
obligation to purchase the shares.
The issue is whether it results in limiting the loss on the
shares or ensuring that Aco derives earnings by reason of
ownership of the shares.
The representative notes the exceptions in the definitions of
taxable preferred shares and short-term preferred shares for
agreements to acquire at fmv.
I could not find anything on Megatext. But an article written by
D. Sugg in the 1992 CTF conference had the following footnote
with respect to FMV purchase agreements:
" The explicit exceptions are contained in
paragraph (f) of the taxable preferred share
definition in subsection 248(1) and
subparagraphs (a)(i) and e(i) of the short-
term preferred share definition in subsection
248(1). Implicit exceptions for fair market
value agreements are contained in subsections
112(2.2) ,(2.3), (2.4) and 258(5) of the Act.
Collectively, these provisions apply to
agreements in respect of a share that ensure
earnings on the shares, protect against or
reduce the impact of any loss on the share,
protect against or reduce the impact of any
loss on the share, or result in some person
other than the dividend recipient having the
risk of loss or
opportunity for gain or profit with respect to the share. An
agreement to acquire a share for its fair market value would not
likely satisfy any of these conditions."
It is our opinion that a determination of whether a particular
put option exercisable at FMV meets the conditions would only be
possible after reviewing the specific agreement.
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