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.
June 27, 1986
BY HAND
Mr. R.A. Short General Director Tax Policy and Legislation Branch Department of Finance Place Bell Canada, 26th Floor 160 Elgin Street Ottawa, Ontario K1A OGS
Dear Al:
Re: Employee Stock Appreciation Rights Paragraph 110(1)(d)
Specialty Rulings Directorate has asked us to request your views with respect to the application of paragraph 110(1)(d) to "stock appreciation rights", i.e., rights granted to an employee to elect to dispose of part or all of his rights to purchase shares under an employee stock option agreement for consideration in the form of treasury shares of the employer company equal in value to the difference between the fair market value of that right as of the date of disposition and the exercise price of the stock option.
In such arrangements, the provisions of subparagraph 110(1)(d)(iii) may be met if the right is part of the original agreement and if the fair market value of the share equals or exceeds twice the option price.
While our concern is primarily with the applicability of paragraph 110(1)(d) to certain of these transactions, we wish to mention some arrangements which provide the employee with the option to take cash from the corporation for the difference between the fair market value of the shares which could be acquired and the exercise price of the option.
The Department of Justice has considered one such case and considers paragraph 7(1)(b) to be applicable to the employee. In our view, a deduction by the employee under paragraph 110(1)(d) could not be made since subparagraph 110(1)(d)(ii) contemplates the issuance of shares. The corporate payor seems entitled to a deduction, as the amounts paid by it are in essence additional remuneration to the employee and subsection 7(3) would not deny the deduction. These results are similar to those obtaining to a "phantom stock option plan".
Copies of Rulings' memoranda and the attachments provided to us are attached.
Your early reply would be appreciated.
Yours sincerely,
Original signed by
M.A. Hiltz Director Current Amendments Division
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