27 July 1999 External T.I. 2000-0020595 - Translation of 9916225 options + RRSP

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:

TRANSLATION OF 9916225

1. Can a stock option, the benefit of which is subject to section 7, be transferred to an RRSP?

2. Does subsection 248(28) apply when a benefit is included in income pursuant to subsection 146(8) and paragraph 56(1)(h) when a benefit had already been included in income pursuant to paragraph 7(1)(c)?

Position:

1. Yes. Inasmuch as the property which the option gives the right to acquire is a qualified investment during the period of ownership by the RRSP trust.

2. No.

Reasons:

1. Text of the Regulations and discussion with Finance

2. There is no double taxation of the same source of income.

XXXXXXXXXX 5-991622
A. St-Amour, CA
Attention: XXXXXXXXXX

July 27, 1999

Dear Sir:

Subject: Technical interpretation - Qualified investment
Stock options transferred into a registered retirement
savings plan ("RRSP")

This is in reply to your letter of May 27, 1999, asking us to confirm your interpretation of the application of the Income Tax Act (the "Act") and of the Income Tax Regulations (the "Regulations") when options granted to an employee by a Canadian-controlled private corporation (CCPC), under a stock option plan, are transferred to a RRSP trust.

The situation described in your letter appears to us to be an actual situation involving taxpayers. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, the Department does not generally provide a written opinion relating to proposed transactions other than by way of advance income tax rulings. Determining whether a completed transaction received proper tax treatment is the responsibility of Tax Services Offices. We can, nevertheless, offer the following general comments which may be helpful. These comments may, however, not be applicable to your specific situation.

The benefits resulting from a stock option granted by an employer are generally included in the individual's employment income in accordance with section 7 of the Act. In general, when an employee transfers rights under a stock option agreement to a person with whom he is not dealing at arm's length, such as an RRSP trust, and the latter exercises these rights, the following tax consequences apply (assuming that the stock option is a qualified investment for the RRSP trust):

• According to paragraph 7(1)(c), there is no inclusion in the employee's income at the time the rights become vested in the RRSP trust; the employee must include a benefit in his income only when the trust exercises the option. In general, the amount of the benefit is equal to the fair market value of the shares less the total amount paid or payable by the employee to acquire the shares. We are of the view that when the employee must include a benefit in his income pursuant to paragraph 7(1)(c), subsection 7(1.1) does not apply.
• When the options are transferred to the RRSP trust, the employee/annuitant will qualify for a deduction pursuant to subsection 146(5) in an amount equal to the FMV of the options.
• The employee may be entitled to a deduction pursuant to paragraph 110(1)(d), provided the conditions in this paragraph are met. If they are, the employee will not be entitled to the deduction provided in paragraph 110(1)(d.1) since this paragraph applies only in circumstances where the benefit under paragraph 7(1)(a) results from the application of subsection 7(1.1).
• In a situation where the shares are sold by the RRSP trust and the proceeds are distributed to the employee/annuitant, the amount received constitutes a benefit within the meaning of subsection 146(1) and is included in computing his income in accordance with subsection 146(8) and paragraph 56(1)(h) of the Act.

Under paragraph 4900(1)(e) of the Regulations, a warrant or right giving the owner thereof the right to acquire property all of which is a qualified investment for the RRSP trust is a qualified investment if the property in question is a qualified investment during the entire period of ownership by the RRSP trust. For the purposes of the definition of qualified investment in subsection 146(1) of the Act, a share of a CCPC is a qualified investment if it meets, among other things, at the time it is acquired by the RRSP, the conditions set out in subsection 4900(12) of the Regulations. However, we are of the view that, for the purposes of paragraph 4900(1)(e), the shares subject to the option must qualify for the purposes of subsection 4900(12) at all times during the period between the time the RRSP acquired the option and the time it exercised the option. Note that the rights in question as provided by subsection 4901(2.2) must be considered for the purposes of applying the definition of connected shareholder in subsection 4901(2).

Subsection 248(28) of the Act is intended to provide relief when, under the Act, an amount from a particular source is included in income more than once. In our view, this provision does not contemplate the situation where an amount is included in the income of the employee/annuitant in connection with payment of a benefit in accordance with subsection 146(8) even if a benefit resulting from an office or employment pursuant to paragraph 7(1)(c) has already been included in his income. In this case there is no double taxation of the same source of income.

These comments are not advance income tax rulings and, as indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, they are not binding on the Department. We do, however, hope they will be helpful to you. If you have further questions, please do not hesitate to get in touch with us.

Yours sincerely,

for the Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch