Section 49

Subsection 49(1) - Granting of options

See Also

CIR v. Scottish Provident Institution, [2004] UKHL 52

The Special Commissioners concluded that under an arrangement whereby the respondent ("SPI") granted an option to Citibank International PLC ("Citibank") to acquire governments bonds at an exercise price equal to 90% of the face amount, and Citibank granted an option to SPI to acquire identical government bonds at an exercise price of 70% of their face amount, each option should be treated as separate because there was a commercially realistic (albeit quite unlikely) possibility that the option granted by Citibank to SPI would not be exercised (i.e., that the bonds would fall in price below 90% of their face amount).

The Court concluded that in applying the Ramsay principle the composite effect of the arrangement should be considered as the scheme was intended to operate without regard to the contingency that one of the options might not be exercised. Accordingly, it was held that Citibank did not have an "entitlement" to the property covered by its option.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership commercially realistic prospect of put and call not being exercised 155

Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187

Before finding that a clause in a lease giving the lessee the unilateral right to compel the lessor to sell helicopters to the lessee at their reasonable fair market value was an "option", Major J. stated his agreement with the following list of the three principal features of an option:

  1. exclusivity and irrevocability of the offer to sell within the time period specified in the option;
  2. specification of how the contract of sale may be created by the optionholder; and
  3. obligation of the parties to enter into a contract of sale if the option is exercised.
Words and Phrases
option exercise
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(3) 141

Kopec v. Pyret, [1987] 3 WWR 449 (Sask. C.A.)

A right of first refusal contained in a lease was not an option. An option gives to the optionee at the time it is granted a right which he may exercise in the future to compel the optionor to convey to him the optioned property. [C.R.: 251(5)(b)]

Canadian Long Island Petroleums Ltd. et al. v. Irving Industries Ltd., [1974] 6 WWR 385, [1975] 2 S.C.R. 715

A right of first refusal, unlike an option, is only a personal right rather than an interest in land, and therefore is not subject to the rule against perpetuities.

Administrative Policy

22 January 2020 External T.I. 2014-0559281E5 F - T5008

writing of call option (with deemed nil ACB) is reported as having nil “cost” on T5008

Respecting the application of s. 49(1) to the writing and sale on an exchange of a naked call option and the reporting of the “cost” of the option on the T5008 issued by the securities dealer, CRA stated:

[W]here an option is capital property … subsection 49(1) … provides (subject to the application of subsections 49(3) and 49(3.1) … and the exceptions in paragraphs 49(1)(a) to (c) …) that the granting of an option is equivalent to a disposition of property having an adjusted cost base of nil … [so that] there is no need to allocate cost to the option.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) option writer can deduct its expenses from deemed s. 49(1) proceeds 111
Tax Topics - Income Tax Regulations - Regulation 230 - Subsection 230(2) “cost” of call options closed out by writer is nil, not the cost of offsetting call option purchase/cost re short sale is the FMV of the borrowed shares 325
Tax Topics - Income Tax Act - Section 9 - Computation of Profit cost of short sale is FMV of borrowed shares 57

18 July 2011 External T.I. 2010-0370561E5 F - Location avec option d'achat

where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds

Where there is a real estate lease with a purchase option, is the landlord deemed to have disposed of the option when granting it, and is a portion of the rent paid under a lease with a bargain purchase option allocated to the option? CRA responded:

Subject to subsections 49(3) and 49(3.1), subsection 49(1) provides that, for the purposes of Subdivision c … the granting of an option represents a disposition of property whose adjusted cost base is nil. …

Where the landlord receives a payment during the term of a lease with a bargain purchase option … the landlord must allocate a portion of that amount to the lease and another portion to the purchase option, where that option has a value. …

[A] method of allocating a payment between the lease and the proceeds of disposition of the option that unduly defers the inclusion of the rent in the lessor's income will not give an accurate picture of profit.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance lease is a lease in the absence of sham 86
Tax Topics - Income Tax Act - Section 68 where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds 137

Income Tax Technical News No. 44 13 April 2011 [archived]

exchangeable debenture exercise

CRA stated:

[W]hen a holder of an exchangeable debenture exercises the right to exchange the debenture for the target shares, the holder would dispose of the debenture for proceeds equal to the FMV of the consideration received—that is, the FMV of the target shares. The adjusted cost base (ACB) of the target shares to the holder would equal the FMV of the debenture given up to acquire them which (ignoring interest rate fluctuations) would ordinarily equal the FMV of the target shares.

2004 APFF Roundtable Q. 13, 2004-008699 -

Discussion of CRA position that where a lease contains a bargain purchase option, a portion of each rent payment may be considered to be a payment for the right to purchase the property in the future.

92 C.R. - Q.51

Warrants issued in connection with a "poison pill" arrangement are a form of option and, therefore, are subject to the usual option rules.

IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(3) 0

Articles

Jack Bernstein, "Canadian Tax Treatment of Index Participation Units and Exchange Traded Index Derivates", 35 Tax Notes International, 20 September 2004, p. 1107.

Watkins, "Equity Exchangeable Debentures and Appreciation Rights", 1993 Conference Report, C. 20; and Kingissepp, "Summaries of Corporate Finance Panel Discussion", 1993 Conference Report, C. 21

Discussion of whether s. 49 applied to an offering of "appreciation rights" by Canadian Pacific.

Subsection 49(2) - Expired option — shares

See Also

Garner v. Pounds Shipowners and Shipbreakers Ltd., [1997] BTC 223 (Ch. D.)

The taxpayer received £399,750 for granting an option to buy land at a sale price of over £4M, but subject to a condition that the taxpayer was to use its best endeavours to procure releases from certain restrictive covenants. The option was never exercised. In finding that £90,000 paid by the taxpayer in order to secure the release of a restrictive covenant was a permissible deduction in computing the value of the consideration received by the taxpayer for the granting of the option, Carnwath J. stated (at p. 233):

"... It is contrary to business reality to have regard only to the nominal consideration stated in the agreement, without regard to the other incidents of the transaction which materially affect the value of that consideration to the grantor. The value to which the company was entitled under the option was not £399,750. ... The need to obtain the release of the covenants ... is an essential incident of the right to consideration."

Subsection 49(3) - Where option to acquire exercised

Cases

Salt v. The Queen, 84 DTC 6395, [1984] CTC 414 (FCTD)

It was argued by a taxpayer who had granted an option to purchase his land that the Act included no provision permitting the taxation of payments received by him in consideration of extending the term of the option. It was held, however, that the amounts paid for extending the option term were characterized by the option agreement and treated by the parties as constituting payments in part of the purchase price in the event of the exercise of the option, and thus formed part of the proceeds of disposition of the land. [This result confirmed by addition of s. 49(5).]

See Also

Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187

Major J. noted, with respect to a clause in a lease that gave the lessee the unilateral right to compel the lessor to sell helicopters to the lessee at their reasonable fair market value, that the giving of initial notice by the lessee 120 days prior to the expiry of the lease could not qualify as an "exercise" of the option (irrespective of how the giving of notice was labelled), given that the exercise of an option must lead to a binding contract of a purchase and sale. Instead, the determination by the lessor of the reasonable fair market value of the helicopters, along with the giving of the initial notice, were conditions precedent to the exercise of the option. Accordingly, "the option could only be exercised by the lessee giving its written assent to the valuation performed by the lessor" (p. 202).

Administrative Policy

28 November 2001 Internal T.I. 2001-009124

S.49(3) did not apply to deem the exercise of employee stock options held by a non-resident former employee to not be a disposition of the options, given that s. 49(3) applied only to capital property, whereas employee stock options are governed by s. 7. However, there was no liability under s. 116(5) to the Canadian corporation that had issued the options as it should not be considered to have acquired the options from the employee and, therefore, had no cost therefor.

2003 Ruling 2003-002803 -

A lease is amended to add an option to purchase and to increase the annual lease payment by an amount that would be in excess of the fair market value rent in the absence of the option. The additional lease payment are treated for purposes of s. 49(5) as payments in respect of the extension of the original option, with the result that, for purposes of s. 49(1), such amount are deemed to be proceeds of disposition in respect of the grant of the option at the time of receipt of each such payment.

Upon the exercise of the option, the vendor by virtue of s. 248(28) will not be required to include in its proceeds of disposition the amounts included as capital gains under s. 49(5) and 49(1) except to the extent that pursuant to s. 49(4) it files amended tax return to exclude such amounts from the computation of its income for those taxation years as proceeds of disposition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) 155

6 September 1994 Memorandum 941986 and 942090 (C.T.O. "Are Special Warrants Flow-through Shares?)

Special warrants to acquire shares that if not exercised prior to the specified expiry time are deemed to be exercised at that time without any further action on the part of the holders, likely would not qualify as an "option to acquire property" given such deemed or mandatory exercise.

IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1) 0

Subsection 49(5) - Idem [Reassessment where option exercised in subsequent year]