12 March 1990 Administrative Letter 59206 F - Application of Roll-Over Election for Granting of Options

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.

March 12, 1990

Dear Sirs:

Re: Subsections 49(1) and 85(1) of the Income Tax Act (the "Act")

We are writing in response to your letter of December 6, 1989 wherein you requested our view as to whether subsection 85(1) of the Act would be applicable to the granting of an option to which subsection 49(1) of the Act applies in the following hypothetical situation as described in your letter.

1.     Mr. A, a Canadian resident, owns shares of a taxable Canadian corporation ("Canco") having a fair market value of $100 and a cost amount of $1. "Taxable Canadian corporation" and "cost amount" have the meanings assigned by paragraph 89(1)(i) and subsection 248(1) of the Act, respectively.

2.     Mr. A wishes to grant an option to a taxable Canadian corporation ("Subco"), all of the shares of which are owned by Mr. A, to purchase the shares of Canco from him at their current fair market value of $100. As consideration for the granting of such option, Mr. A. will receive shares of Subco having a fair market value of $10.

3.     Mr. A and Subco will jointly file an election, if possible, pursuant to subsection 85(1) of the Act and within the time referred to in subsection 85(6) of the Act. The agreed amount in respect of the election will be $1.

Comments

Subsection 49(1) of the Act states that, for the purposes of subdivision c of Division B of the Act, the granting of an option, except for options described in paragraphs (a) and (b) of that subsection, is a disposition of property the adjusted cost base of which to the grantor immediately before the grant is nil (Emphasis added). Subsection 49(1) of the Act is only applicable for the purposes of subdivision c of Division B of the Act. In our view the granting of an option would not normally be considered as a disposition of property for other purposes of the Act, including subsection 85(1). Consequently, it is our opinion that subsection 85(1) would not be applicable to the situation described in your letter.

We trust the above comments will be of assistance.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch