Section 7

Subsection 7(1) - Agreement to issue securities to employees

Paragraph 7(1)(a)

Commentary

Ss. 7(1)(a) to (e) stipulate various rules that apply where a corporation has agreed to issue shares to an employee of it or another corporation with which it does not deal at arm's length (an "option agreement"). Similar rules apply to mutual fund trusts (see s. 7(7)).

Under s. 7(1)(a), the employee is deemed to have received a benefit from his or her employment at the time that he or she acquires shares under the option agreement (unless, in the case of the exercise of an option agreement by an arm's length employee to acquire shares of a Canadian-controlled private corporation, the recognition of this benefit is deferred until the time that the employee disposes of the shares). The amount of the benefit is equal to the "value" of the shares at the time of their acquisition by the employee minus the exercise price, i.e., the amount paid by by employee under the option agreement to acquire the shares. (In the unusual circumstance where the employee has paid an amount to acquire the option agreement, the amount of the computed benefit is correspondingly reduced.) The amount of the computed benefit then is included in the employee's income under s. 6(1)(a).

These rules apply in the same manner to options of an employee to acquire shares of a non-resident corporation, even if the employee was not resident in Canada and was employed outside Canada at the time he or she received the stock options in respect of his or her employment (Tedmon).

The word "value" in s. 7(1)(a) is essentially synonymous with "fair market value" (Steen, IC 89-3).

Although we utilize the term "option agreement" to reference the agreement of the employer to issue shares, it has been stated that the terms "agree" and "agreement" are not technical expressions (but cf. Statutory Interpretation, "Ordinary meaning"), so that, for example, an option embedded in the terms of a convertible debenture issued by the employer also would be sufficient to engage the application of s. 7 (Mansfield). Similarly, it has been stated that no formal contract is required in order to engage the application of s. 7 (Aylward).

For the purposes of s. 7(1)(a), the time at which the employee acquired shares under an option agreement has been determined as being the time at which the shares which he contracted to acquire were validly issued to him. Accordingly, the employee has been found not to have acquired shares where his option was to acquire "freely trading shares" and at the time in question the employer was not yet capable of issuing freely tradeable shares (Clemiss), where the shares supposedly acquired by him would be forfeited upon failure to pay the exercise price (Gesser), or where the taxpayer had not yet paid the exercise price for shares purportedly issued to him (Ball) . Although under most or all corporate statutes, shares are not validly issued until they are fully paid for, in one case it was found that an employee had acquired shares of a trust company when there was a binding agreement for him to acquire them, notwithstanding that he did not fully pay for them at that time (Grant).

The acquisition of shares by a nominee will not give rise to a taxable benefit to the nominee (Williams, Bertram cf. Stafford).

Cases

Ferlaino v. Canada, 2017 FCA 105

exercise price of employee stock options should be translated at the exercise-date spot rate

The taxpayer was the Director of Taxes at a wholly-owned Canadian subsidiary of a NYSE-listed U.S. public company (“UTC”) who, following his exercise (on a cashless basis) of employee stock options on UTC shares, computed his resulting s. 7(1)(a) benefit in the usual manner, except that in translating the U.S.-dollar exercise price for the shares, he used the Cdn.$/U.S.$ exchange rate at the date of grant of the options (of over 1.5) rather than the exchange rate (of around par) on the date of exercise.

In dismissing the taxpayer’s appeal, Scott JA stated (at paras 3, 5 and 6):

[S]ection 7… constitutes a complete code for the taxation of employee stock options. …

The taxable transactions in this appeal occurred when the appellant exercised his stock options… .

Only then was the appellant required under paragraph 261(2)(b)… to calculate his reportable benefits by converting at once all relevant amounts, being the exercise price, along with the fair market value of the shares at the time the appellant exercised his options, using the exchange rate applicable on the date of the exercise.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) exercise price translated on exercise date 148

Canada v. Morin, 2006 DTC 6057, 2006 FCA 25

The taxpayer entered into an arrangement with a consultant ("Bobsan") under which Bobsan would recommend to him firms within the high-tech area to whom the taxpayer might apply for a position, and the taxpayer agreed to pay Bobsan the first $100,000 of any employee stock option benefits realized by him from such an employer, plus 1/3 of the excess over $100,000. In finding that an amount paid by the taxpayer to Bobsan pursuant to this arrangement did not qualify as an "amount ... paid by the employee to acquire the right to acquire ... securities" for purposes of s. 7(1)(a)(iii), so that the amount so paid was not deductible under s. 7(1)(a)(iii), Malone J.A. stated (at p. 6059) that:

"An amount paid to acquire property is an amount paid in exchange for title to the property or in exchange for the incidents of title, and here is apparent that the payments made by the taxpayer to Bobsan were not made to acquire the stock options, which instead were received directly from the employer to whom he had been referred by Bobsan, and he was not required to pay any money to that employer for the options."

Words and Phrases
acquire

Clemiss v. The Queen, 92 DTC 6509 (FCTD)

Reed J. accepted the Crown's submission that the taxpayer's purported acceptance of his employer's offer, set out in an option agreement, to issue "freely trading shares", could not constitute a binding agreement at that time to acquire the shares because the company at that point was not capable of issuing freely tradeable shares. Accordingly, the taxpayer did not acquire the shares until a later date on which the board of directors alloted and issued the shares to him, a share certificate was delivered to him and he waived the requirement for free tradeability.

The Queen v. Gesser Estate, 92 DTC 6273 (FCA)

In 1970 an executive ("Gesser") entered into a letter of agreement with his employer ("Cemp") which confirmed the purchase by Gesser of 8,400 common shares of a related company ("Fairview") for a purchase price payable (with the exception of a small "supposed" initial payment) in ten years' time. Gesser's interest in the shares, and any previous payments made on account of the purchase price, would be forfeited upon failure to pay the purchase price without any further recourse. Gesser had the right to "put" his shares to Cemp commencing in five years' time for their value as determined by the auditors.

In finding that the Minister had correctly assessed on the basis that Gesser had not acquired the shares in 1970, with the result that s. 7(1)(a) applied to the receipt of the shares by Gesser in 1972, Marceau J.A. found that the 1970 agreement probably gave Gesser the right to compel Cemp after five years to pay the difference between the value of the shares of Fairview in 1970 and at the time of payment.

Scott v. The Queen, 91 DTC 5268 (FCTD), varied 94 DTC 6193 (FCA)

varied on other grounds 94 DTC 6193 (FCA)

The taxpayer, whose services were provided to a corporation ("Nighthawk") by a corporation ("Delsco") owned by his wife and the spouses of members of a law firm, was also a director of Nighthawk. Ss. 7(1)(a) and 7(1.1) governed the benefit which he received on the disposition of shares acquired by him pursuant to stock options which have been granted to him and the other directors of Nighthawk given that the number of stock options granted to him represented the work which he did for Nighthawk (notwithstanding that his regular remuneration was paid by Delsco).

Steen v. The Queen, 86 DTC 6498, [1986] 2 CTC 394 (FCTD), aff'd 88 DTC 6171, [1988] 1 CTC 256 (FCA)

An employee "acquires" shares pursuant to a stock option agreement at the time he exercises his option to purchase shares from his corporate employer, rather than at the time of the granting of the option. The word "value" in s. 7(1)(a) is essentially synonymous to "fair market value" or "market value".

Words and Phrases
value
Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 107

Mansfield v. The Queen, 83 DTC 5136, [1983] CTC 97 (FCTD), aff'd 84 DTC 6535, [1984] CTC 547 (FCA)

In 1972, the taxpayer and other employees of a private company were offered convertible debentures of their employer which, in the case of the taxpayer, had a principal amount of $5,000. When in 1977 the taxpayer exercised the conversion rights under his debenture to acquire shares of his employer with a fair market value of $11,700, he was deemed by s. 7(1)(a) to receive a taxable benefit equal to the difference between such fair market value and the $5,125 price for which his convertible debenture had been issued to him. This benefit was not exempted from taxation by s. 51, which only dealt with the adjusted cost base of the shares and whether there had been a disposition, and did not deem the exchange to be non-taxable.

Mahoney, J. also stated (at p. 5138 DTC) that "'agree' and 'agreement' are not terms of art or technical expressions," so that the acquisition option embedded in the terms of the debenture represented an agreement with the employer.

The Court of Appeal rejected a submission that the $11,700 value of the debenture in 1977 constituted the "amount paid" for purposes of s. 7(1)(a), as this interpretation "would have the effect of rendering that subsection of no effect."

Words and Phrases
agree agreement
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) 78

Grant v. The Queen, 74 DTC 6252, [1974] CTC 332 (FCTD)

The effect of two resolutions and applications for shares by the company's employees was to create binding agreements. The taxpayer "acquired" his share for the purposes of s. 85A(1)(a) at the time of the agreement, notwithstanding that he did not fully pay for the share and receive a share certificate until later when the market price of the shares had risen.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 52

See Also

Ferlaino v. The Queen, 2016 TCC 105 (Informal Procedure)

exercise price of employee stock options to be translated at the exercise-date spot rate

The taxpayer was the Director of Taxes at a wholly-owned Canadian subsidiary of a NYSE-listed U.S. public company (“UTC”) who, following his exercise (on a cashless basis) of employee stock options on UTC shares, computed his resulting s. 7(1)(a) benefit in the usual manner, except that in translating the U.S.-dollar exercise price for the shares, he used the Cdn.$/U.S.$ exchange rate at the date of grant of the options (of over 1.5) rather than the exchange rate (of around par) on the date of exercise. In rejecting this approach, Smith J stated (at paras. 46, 52):

Any doubt as to whether an employee has received a taxable benefit effective the date of the grant of the stock options is resolved by a reading of paragraph 7(3)(a).

[T]here is nothing in section 7 that suggests that the cost base of the shares should be established as of the date of the grant of the stock options.

He also found (at para 87):

“[T]he day on which the particular amount arose” for the purposes of paragraph 261(2)(b) was when the Appellant exercised his stock options, that is, the date on which he acquired the UTC shares and simultaneously disposed of them.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1.5) - Paragraph 110(1.5)(a) purpose of satisfying exe4rcise price test 249
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) exercise price of employee stock options to be translated at the exercise-date spot rate 109

Van de Velde v. The Queen, 2007 DTC 1314, 2007 TCC 533 (Informal Procedure)

RSUs (which Miller J. appeared to treat as securities) did not have their value included in his income until the time that his entitlement to them vested.

Williams v. The Queen, 97 DTC 887 (TCC) (Informal Procedure)

When the taxpayer exercised stock option rights, he did so as nominee for others. Accordingly, he had not "acquired" (i.e., obtained for himself) the shares and, accordingly, was not taxable.

Words and Phrases
acquire

Bertram v. The Queen, 93 DTC 1251 (TCC)

Although the taxpayers purported to exercise employee stock options and assign them for the exercise price to the purchaser of shares of the corporation at a time that the market price was well in excess of the exercise price, in fact, they were doing so as agent for the purchasers. Accordingly, they realized no stock option benefits.

Stafford v. The Queen, 93 DTC 438 (TCC)

In order to evade limitations established by the Vancouver Stock Exchange as to the number of shares a stock promoter was permitted to have the right to acquire under option, a promoter entered into an arrangement with the taxpayer under which the taxpayer was granted employee stock options and agreed to sell a portion of the shares acquired by him under option to the promoter at the taxpayer's cost. Because the agreement with the promoter was separate from the stock options granted to the taxpayer, the taxpayer realized an employment benefit under s. 7(1) when he exercised his options at the request of the promoter.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 75

Ball v. MNR, 92 DTC 2123 (TCC)

only portion of shares validly acquired on exercise

The taxpayer was granted an option to purchase 25,000 shares of his employer at a price of $2.05 per share. On July 10, 1985 the taxpayer purported to exercise his option and was issued a share certificate for 25,000 shares. He thereafter sold 9,700 shares and, only at that time, paid the exercise price for those shares. His employer became insolvent before he could sell the balance of the shares purportedly issued to him, and he returned the share certificate for the balance of the shares to his employer.

Because only 9,700 shares had been validly issued to him, he was subject to tax under s. 7(1)(a) only with respect to the exercise of his option with respect to those shares.

Tedmon v. MNR, 91 DTC 962 (TCC)

The taxpayer while a resident of the U.S. and while employed by a U.S. company ("GE") was granted stock options by GE. He subsequently resigned from his position with GE (but without losing his entitlement to his options under the GE stock option plan) and commenced to work for an unrelated Canadian company (Noranda Inc.)

Beaubier, TCJ rejected a submission that s. 7 did not apply to the employee stock options of a Canadian resident where the stock options were granted while the resident had been a non-resident with a non-resident employer. Accordingly, the taxpayer was deemed to realize a benefit from employment when (while still resident in Canada) he exercised his GE stock options.

Ingram v. MNR, 91 DTC 939 (TCC)

The taxpayer was asked by some stock promoters to sit on the board of a junior company listed on the Vancouver stock exchange, to give them the authority to trade in the shares of the company in his name but for their account and to receive stock options in his name but held by him for their benefit and at their direction. This agency arrangement pursuant to which the taxpayer acquired and exercised stock options was void (on the basis of the principle that an agent cannot be authorized to that which it is not legally possible for the principal to do, and the option transactions in question were contrary to securities laws). Nonetheless, the resulting stock option benefits nonetheless were income of the promoters, rather than of the taxpayer, because the economic benefit of the options was that of the promoters.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency 24

Administrative Policy

1 June 2015 External T.I. 2015-0581311E5 - Application of section 7 to employee share purchase

application to sale to an employee of a subsidiary share investment

Holdco, which owns substantially all of the shares of Opco, agrees to sell shares of Opco to one of Opco's employees at a price which is intended to be at fair market value, although "it is possible that the fair market value ultimately determined may be greater." Does s. 7 apply? CRA responded:

Section 7… applies where a corporation agrees to sell or issue shares of the corporation or shares of a corporation with which it does not deal at arm's length to an employee of either corporation or to an employee of another corporation with which it does not deal at arm's length. As the situation you describe meets these conditions, …section 7… would apply.

4 May 2015 External T.I. 2013-0502761E5 F - Stock Options and Earnout

FMV of shares at time of stock option exercise determined by valuing earn-out clause in subsequent sales agreement

At the very moment of the acquisition by employees of shares under a stock options agreement, it is agreed that their shares will be subsequently sold to an arm's length purchaser. The sales agreement contains an earnout clause. Do ss. 7(1) and 110(1)(d) apply to amounts received under the earnout clause? After noting that the s. 7(1)(a) benefit was based only on the excess of the fair market value of the shares over the exercise price at the time of acquisition (and any amount paid for the options), CRA stated (TaxInterpretations translation):

Determining the FMV is a question of fact. ... [T]he earnout clause had become known before exercise of the options. In these circumstances,…the value of the rights under this clause must be taken into account in determining the FMV of the shares and be used in the computation of the benefit determined under paragraph 7(1)(a).

If subsection 7(1.1) applies…[it] will not change the value of the benefit which the employee is deemed to receive… . [T]he amounts [subsequently] received by virtue of the earnout clause relate to the sale of the shares and not to the exercise or disposition of the options…[and] are not a benefit under section 7… .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares FMV of shares at time of stock option exercise determined by valuing earn-out clause in subsequent sales agreement 88

20 March 2015 External T.I. 2014-0526941E5 - RSU Plan-Cash Dividend Equivalents

RSU qualified as s. 7 plan

CRA noted that "generally, an RSU that provides an employee with the right to acquire a share of an employer, subject to certain vesting conditions, would be subject to section 7." See summary under s. 248(1) – salary deferral arrangement – para. (k).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangements - Paragraph (k) addition to RSU plan of dividend equivalent units to be cashed out not excluded 207

24 March 2015 External T.I. 2012-0432951E5 F - Application of section 7

agreement to sell for nil monetary consideration is included

A non-resident parent acquires its own shares on the open market and resells those shares to its Canadian subsidiary at fair market value. By virtue of an agreement between the subsidiary and its employees, the subsidiary subsequently transfers the shares to them for no monetary consideration. Should the subsidiary be considered to have agreed to issue or sell the shares for purposes of s. 7, and would s. 7(3)(v) preclude a deduction by the subsidiary. CRA responded (TaxInterpretations translation):

In the context of section 7, the term "sell" should be read in relation to the term "issue." An issuance of shares has a specific meaning and refers to the delivery of unissued shares by a corporation including the issuance of unissued shares for no monetary consideration. Consequently, for purposes of section 7, the term "sell" generally is intended to include all situations which do not entail the issuance of shares and where an Employer transfer to an employee shares in its capital or those of a corporation with which it does not deal at arm's length.

…[T]he fact that the employee acquires the shares without monetary consideration is not, in itself, a factor which prevents concluding that the Employer has agreed to issue or sell shares in accordance with section 7. On that basis, if all the other conditions of section 7 are satisfied, the agreement between the parties will be contemplated by section 7 In such circumstances, the cost of acquisition by the Employer will not be deductible…[under] paragraph 7(3)(b).

25 September 2013 External T.I. 2011-0428941E5 F - Transfer of Stock Options to Protective Trust

transfer out of protective trust before exercise

An employee of a CCPC transfers stock options to a protective trust in his favour, with the options eventually being distributed to the employee before their exercise. CRA found that as the trust did not exercise the options, s. 7(1)(c) had no application, and that s. 7(1)(a) applied on exercise of the options. Accordingly, s. 7(1.1) could apply to the shares which the employee acquired under the options.

19 July 2013 External T.I. 2012-0458961E5 F - Stock option, cashless exercise

cashless exercise - timing of acquisition

A cashless exercise method of exercising employee stock options is utilized under which identical shares are sold short through a broker, with the proceeds of that sale then being applied to pay the employee's exercise price. Accordingly, a portion of the shares issued by the employer are used to cover the short sale.

After referring to Guide T4130, p. 24 and stating that the s. 7(1)(a) benefit is computed on the basis of the shares' fair market value "at the moment of their acquisition," CRA stated (TaxInterpretations translation):

…in the context of a short sale, the CRA generally is of the view that an employee has acquired the shares of the employer at the moment that the employer transfers the shares to the employee and they are paid for. When the shares are not issued directly to the employee but instead to the broker for the employee's benefit, the CRA is of the view that the employee has acquired the shares at the moment the employer remits the shares to the broker and they are paid for.

28 December 2012 Guide T4130

When a corporation agrees to sell or issue its shares to an employee, or when a mutual fund trust grants options to an employee to acquire trust units, the employee may receive a taxable benefit. The taxable benefit is the difference between the fair market value of the shares or units when the employee acquired them and the amount paid, or to be paid, for them, including any amount paid for the rights to acquire the shares or units. Also, a benefit can accrue to the employee if his or her rights under the agreement become vested in another person, or if they transfer or sell the rights.

The shares or trust units are considered to be acquired when legal ownership of the shares has been transferred and the vendor has entitlement to receive payment. In general, this would occur where the shares have been transferred to the employee/broker and paid for.

2004 Ruling 2004-007204 -

Ruling respecting a deferred share unit plan under which the board of directors in its discretion could elect to pay the director participants in treasury shares, shares purchased on the exchange, or in cash net of applicable withholding taxes, that s. 7(1)(a) will apply to the fair market value of the treasury shares issued to a participant, and s. 6(1)(c) will apply to include in income of the participant the amount of applicable withholding tax withheld and remitted by the employer.

18 August 2004 External T.I. 2004-0070361E5 -

acquisition under cashless exercise on settlement of short sale

An employee generally will acquire shares pursuant to a stock option plan at the time of exercise. In the case of utilization of the cashless exercise method, the date of settlement of the associated short sale by the broker generally will be the date the employee is considered to acquire securities from the employer.

2002 Ruling 2001-011593 -

Where two trusts and a corporation are the limited partners and a second corporation is the general partner of a partnership, benefits under a stock option plan set up in respect of the partnership will be covered by ss.7 and 110(1)(d). "There are no agreements in place which limit the employment relationship of any of the employees of the partnership to any of the corporate or trust partners. Consequently, each of the employees of the partnership are considered to be employees of each of the partners of the partnership for the purposes of section 7."

2001 Ruling 2001-008401 -

no new plan where vesting change; no comment on 30-day trading average

A change to the vesting of options granted under a stock option plan would not result in a new plan being created for income tax purposes. Respecting a situation where the exercise price for options issued on the last day of a month was equal to the average closing price on the NASDAQ for the trading days from the 15th day of the preceding month to the 15th day of the current month, CCRA could not give a definition answer respecting whether the exercise price would qualify as "fair market value"

2001 Ruling 2001-007775 -

options received on behalf of partnership

Confirmation that where employees of the general manager of two partnerships sit on the board of directors of corporations on behalf of their employer, they are not required to report directors' fees and stock options paid to them as directors of the company. When the stock options are exercised, the partnerships will be considered to have received business income equal to the excess of the fair market value of the underlying securities at the time of exercise over the exercise price.

1999 APFF Round Table, Q. 1 (No. 9M19190)

Where an American citizen, who received stock options from an American public corporation while working for it and living in the United States, becomes a resident of Canada, s. 7 would apply in the year in which he exercises his right to acquire the shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) stock option rights 64

1997 Ruling 1 January 1997 9716083 [ADS]

American depositary shares would be considered to be shares for purposes of s. 7, as CRA previously had concluded that they were shares for purposes of s. 146(1).

21 October 1996 T.I. 960437 [partnership employees employed by each partner]

partnership employees employed by each partner

Where the employees of a partnership are granted stock options by a corporate partner, they generally will be considered to be employees of each partner unless there is a contrary indication (for example, agreements between the partners specifying which partners employ which employees). Where the facts would lead to a conclusion that an employee is employed by a particular corporate taxpayer, s. 7 will apply where the employee is granted options to acquire shares of that partner.

2 June 1995 T.I. 950472 (C.T.O. "Employee Stock Option Plan")

"When a person enters into an agreement to sell certain shares but retains the option to pay cash instead of delivering the shares, we would not consider it to be an agreement to sell shares. However, it would be our position that an agreement to sell shares exists where the vendor simply pays cash to the purchaser who must use it to purchase the shares."

20 January 1994 T.I. 940074 HAA4735-1 (C.T.O. "Section 7 Employees Profit Sharing Plans")

An employees profit sharing plan can be structured to be an agreement by an employer to sell or issue shares of the employer or a non-arm's length corporation and, in such circumstances, s. 7 would be more specific than s. 144, with the result that s. 7 will apply.

11 June 1993 T.I. (Tax Window, No. 31, p. 10, ¶2519)

Where an employee surrenders her rights under a phantom stock plan and receives an option to acquire shares in the employer company with an exercise price equal to the difference between the fair market value of the shares at the time the option was granted and the value of the units under the phantom stock plan surrendered by her, the value of the surrendered units will be included in her income, but such amount will be considered to be paid by her for the right to acquire the shares under the stock option plan for purposes of ss.7(1) and 110(1)(d)(ii).

Tax Professionals Mini Round Table - Vancouver - Q. 4 (March 1993 Access Letter, p. 102)

Discussion of criteria for determining the "value" of publicly treated shares for purposes of s. 7(1)(a).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 16

5 November 1991 Memorandum (Tax Window, No. 12, p. 8, ¶1561)

In contrast with its approach to dividend reinvestment plans, RC will assess an employee benefit where shares are acquired by an employee at a 5% discount to the market price.

27 March 1990 T.I. (August 1990 Access Letter, ¶1362)

The employee would be considered to have "acquired" shares where he is issued a restricted share which cannot be transferred or sold during the initial four years and which is exchanged for an unrestricted common share at the end of the four-year period, or where the restricted shares are issued to the employee but held by the company.

86 C.R. - Q.64

a director is an employee for purposes of s. 7.

IT-113R4 "Benefits to Employees - Stock Options" 7 August 1996

6. ...The word "issue" means to deliver unissued shares of a corporation, including...for no monetary consideration. Therefore, section 7 applies when an employer corporation agrees to sell or issue, to an employee of the corporation or of a corporation with which it does not deal at arm's length, its own shares, or to sell or have issued those of a corporation with which it does not deal at arm's length, at less than fair market value or for no monetary consideration.

IC 89-3 "Policy Statement on Business Equity Valuations", para. 38

The reference to "value" is generally interpreted to mean fair market value.

Articles

Christina Medland, Andrew Stancel, "Tax-effective Risk-adjusted Incentive Arrangements for Public Companies", Taxation of Executive Compensation and Retirement, Vol. 22, No. 9, May 2011

Includes overview of treasurey RSU and PSU plans.

Christina Medland, Jennifer Sandford, "Tax Treatment of Share-Based Compensation", Taxation of Executive Compensation and Retirement, September 2005, p. 583.

Scott Sweatman, Richard Schubert, "Long Term Incentives for Employees of Income Trusts", Taxation of Executive Compensation, Vol. 15, No. 2, September 2003, p. 319.

Michael F.T. Addison, Gil J. Korn, "Employee Stock Options: An Up-Date", Personal Tax Planning, 2000 Canadian Tax Journal, Vol, 48, No. 3, p. 778.

Singer, "Forward Participating Shares - A Question by Revenue Canada", Taxation of Executive Compensation and Retirement, June 1992, p. 622.

Lee, "Stock-Based Compensation: Selected Regulatory and Taxation Issues", 1991 Corporate Management Tax Conference Report, c. 4.

Dunbar, "Time of Acquisition of Restricted Shares May Determine Value of Stock Option Benefit", Taxation of Executive Compensation and Retirement, November 1990, p. 361

Further discussion of 27 March 1990 T.I. (see August 1990 Access Letter, ¶1362).

Paragraph 7(1)(b)

Commentary

Under s. 7(1)(b) an employee will be deemed to receive a taxable benefit equal to the value of any consideration received on the disposition of an employee stock option to a person with whom he or she was dealing at arm's length (minus any amount paid by the employee to acquire those options).

It is clear that s. 7(1)(b) applies when the employee voluntarily surrenders his or her options to the issuer of the options (with whom he or she deals at arm's length) in consideration for a cash payment (Greiner, Harvey). In contrast to a voluntary cash surrender payment, a payment of damages for breach of a stock option agreement was not (before the enactment of s. 7(1.7))taxable under s. 7(1)(b) (Buccini, Bernier, Huestis). However, amounts purported paid as damages which essentially were agreed to in advance of a termination of the stock option agreements may be found in substance to represent cash surrender payments (see Dundas).

S. 7(1.7) now deems damages received as a result of employee stock options ceasing to have become exercisable to be proceeds for the disposition of those options to an arm's length person, so that s. 7(1)(b) (and, where applicable, s. 110(1)(d)) are then engaged.

Prior to the enactment of s. 7(1)(b.1), no provision of s. 7 applied to a disposition of stock options by a taxpayer to a person with whom he or she did not deal at arm's length (Bowens).

Cases

Buccini v. Canada, 2000 DTC 6685 (FCA)

Following the amalgamation of the taxpayer's employer with other Canadian subsidiaries of the U.S. parent, the taxpayer executed a settlement agreement with the Canadian employer in which he acknowledged that a payment of $83,900 was in full settlement of all claims arising from his employer's unilateral termination of the employee stock option agreement between the taxpayer and the employer. In finding that this sum was a tax-free receipt, and in reversing a finding of the Tax Court Judge that it represented the value of consideration from a disposition pursuant to s. 7(1)(b), Malone J.A. stated that "a 'disposition' under paragraph 7(1)(b) refers to a transaction in which the taxpayer voluntarily agrees to exchange property rights that have accrued under an employee stock option agreement for some other consideration", and noted here that instead there had been a unilateral repudiation of the taxpayer's rights under the option agreement by the employer, and that such unilateral conduct constituted a fundamental breach of the contract that terminated it as of that date.

Words and Phrases
disposition

Bernier v. Canada, 2000 DTC 6053 (FCA)

In the course of preparing a response to a proposed acquisition of the employer ("Nordair") by another corporation ("CP Air"), Nordair discovered that options which it had issued to the taxpayer and other employees were null and void because they contravened the requirements of Quebec's securities law. CP Air then stated that it was its "present intention ... to take such steps as may be appropriate and legally permissible to compensate (whether in cash or in some other manner) the relevant directors and officers of Nordair for the loss of benefits which would have accrued to them under the original stock option plan". Ultimately, the taxpayer received a lump sum of $58,000 while still an employee.

The Court of Appeal affirmed the finding that this amount was not taxable under s. 7(1)(b) (a finding which effectively affirmed an assessment of the Minister founded on s. 6(1)(a)). As in the Huestis case, the matter involved "the unilateral cancellation of an option contract which gave rise to the financial compensation received by the appellant and not an assignment of rights set out in a contract" (p. 6054).

Dundas v. The Queen, 95 DTC 5116 (FCA)

After the amalgamation of a Canadian corporation ("Canadian Reserve I") with a wholly-owned subsidiary of the U.S. parent of Canadian Reserve I, the taxpayer, who was the President of Canadian Reserve I, was paid an amount in respect of his stock options equal to the difference between the cash amount received by minority shareholders on the amalgamation and the exercise price. Notwithstanding the purported giving of a release by the taxpayer subsequent to the effective date of the amalgamation releasing any cause of action supposedly arising as a result of the amalgamation, Strayer J.A. adopted the finding of the trial judge that the release was not given in settlement for previous options already cancelled by the amalgamation agreement, but rather represented in effect the confirmation of the compensation to which the taxpayer was already entitled under the amalgamation agreement; and that the release agreement, if anything, was evidence of an arrangement worked out prior to the effective date of the amalgamation contemplating the disposition by the taxpayer of his options in accordance with the amalgamation agreement. Accordingly, the amount so received by the taxpayer represented proceeds of disposition of his employee stock options pursuant to s. 7(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 180 - Subsection 180(3) 77

Hale v. The Queen, 90 DTC 6481 (FCTD), aff'd 92 DTC 6473 (FCA)

While resident in Canada, the taxpayer was granted rights under the employee stock option plan of his Canadian employer (Alcan) and further "share appreciation rights" to be paid amounts based on the appreciation in the Alcan shares over the strike price in lieu of exercising his stock option rights. Amounts paid to the taxpayer pursuant to his exercise (at a time that he had become a resident of the United Kingdom and had ceased to be an Alcan employee) of the share appreciation rights constituted a benefit received by virtue of his employment as described in s. 7(1)(b) (although they were not "remuneration" for purposes of the Canada-UK Income Tax Convention) given that s. 7(4) deemed him to continue to be an employee at the time of exercise.

Beaumont v. The Queen, 86 DTC 6264, [1986] 1 CTC 507 (FCTD), aff'd 88 DTC 6522, [1988] 2 CTC 365 (FCA)

Since the taxpayer was held to be dealing at arm's length with a corporation ("Clarebeau") 1/2 of whose shares were owned by the taxpayer's family holding company and 1/2 of whose shares were owned by the family holding company of his business associate ("Claridge"), a sale by the taxpayer of share purchase options to Clarebeau for nominal consideration was governed by s. 7(1)(b) rather than s. 7(1)(c). The plaintiff and Claridge believed that they (with their respective wives) enjoyed precisely equal control of Clarebeau (although, as they discovered much later, Claridge as president had the right to cast deciding votes at meetings), they had equal rights to the assets and earnings of Clarebeau, and the share options represented a business opportunity that the plaintiff felt himself obliged to pool with Claridge through the medium of Clarebeau.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) JV company at arm's length with 50% shareholder 185

Greiner v. The Queen, 84 DTC 6073, [1984] CTC 92 (FCA)

Prior to the effective date of an amalgamation squeeze out, the taxpayer agreed to surrender his unvested stock option rights in consideration for a cash payment from his employer equal to the accrued gain. His entitlement to this payment was found to arise under the stock option agreement rather than being in respect of a (separate) claim for damages in respect of the cancellation of those rights. The words "otherwise disposed of" include the surrender for value by employees of share options at a time when their rights under the stock option agreement are still alive. For the purpose of determining whether the rights were still alive at the time of surrender, it was found that the surrender took place when the taxpayer agreed to surrender his rights upon the occurrence of certain events (including shareholder approval of an amalgamation), rather than the date on which the option rights were actually released. In addition, s. 7(1)(b) was not found to be restricted to amounts received from a person other than the optioner/employer, and the words "otherwise disposed of" are "sufficiently broad as to include an amount received as consideration for the surrender of rights that are thereby extinguished."

The Queen v. Harvey, 83 DTC 5098, [1983] CTC 63 (FCTD)

Prior to the effective date of a merger between a Michigan corporation ("Tranter") and a second American corporation, Tranter approached Harvey who was the chief executive of its Canadian subsidiary, and obtained his agreement to surrender his option to purchase Tranter's shares, which had been granted by Tranter to Harvey in 1976, for $25,500. Because Tranter was not in breach of the option agreement when Harvey agreed to surrender his option, the payment made to him was consideration for the disposition of his option (rather than damages for its breach) and accordingly was taxable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disposition of property to corporation even though property extinguished 43

See Also

Bowens v. The Queen, 94 DTC 1853 (TCC), aff'd 96 DTC 6128 (FCA)

When a corporation ("Trilogy") made an offer to acquire all the shares of a corporation ("DEB"), including any outstanding stock options, the taxpayer, who was the chief financial officer of DEB, incorporated a numbered company, transferred his options to it, sold the shares of the numbered company to Trilogy for shares of Trilogy, and filed a joint election with Trilogy under s. 85. In finding that the taxpayer did not deal at arm's length with Trilogy, so that s. 7(1)(b) could not apply to a transfer of his option rights to Trilogy, Bowman TCJ. noted that the taxpayer was a partner in a partnership which, with other corporations, raised capital and promoted the acquisition by Trilogy of the shares of DEB and that the taxpayer for some time had been an executive vice-president of Trilogy and was instrumental in formulating the exchange offer made by Trilogy for the shares and options. In addition, since it was not suggested that the transaction with the numbered company was a sham or legally ineffective, the taxpayer did not "transfer or otherwise dispose of" the options to Trilogy.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 147

The Queen v. Huestis, 75 DTC 5393, [1975] CTC 560 (FCA), briefly aff'd 77 DTC 5044 (SCC)

After the employer corporation ("Bethel") granted options to purchase its shares to the taxpayer and other employees, it commenced winding-up proceedings and gave the taxpayer shares in the purchaser of the assets of Bethel in settlement of Bethel's liability under the option agreement. It was held that the shares in the purchaser were not received "under" the option agreements, nor could the taxpayer be said to have "transferred or otherwise disposed of rights under" the option agreements. (Ss.85A(1)(a), (b) of pre-1972 Act).

Administrative Policy

3 August 2016 External T.I. 2015-0572381E5 - Employee Stock Option-CCPC Shares

s. 7(1)(a) inapplicable where shares issued equal to in-the-money value

A Canadian-controlled private corporation issues treasury shares to the employee holder of a stock option (with a fair market value exercise price) equal in value to the in-the-money value of the option . CRA stated:

The scenario you have described results in an employee disposing of the employee’s rights under a stock option for consideration equal to the stock option’s intrinsic or in-the-money value where the consideration is paid in employer treasury shares. In this scenario, paragraph 7(1)(b)...will apply and not paragraph 7(1)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d.1) not available where share payment of in-the-money value 65
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) no 110(1)(d) where share payment of in-the-money value 110

16 June 2016 External T.I. 2015-0623031E5 F - Application of paragraph 7(1)(b)

contingent amount included under s. 7(1)(b), cannot subsequently be excluded

In the course of the acquisition of shares in the capital of a Corporation, it cancels stock options of certain employees for an amount corresponding to the shares' value. However, as the final determination of the per share purchase price depends on the outcome of litigation to which the Corporation is party, part of the agreed amount is retained. Must the retained amount be included in the value of the consideration for the disposition of the stock options pursuant to s. 7(1)(b)? Can an employee request an amendment of the employee’s tax return for the year of disposition of the stock options if, in a subsequent year, the retained amount is not paid to the employee? CRA responded (TI translation):

[T]he term "value of the consideration for the disposition" under paragraph 7(1)(b) includes a receivable from the employer. Therefore…if the agreed price for the options includes the amount retained at the moment of the disposition of the stock options subject to a possible future reduction, the retained amount would be a part of the value of the consideration for the disposition under paragraph 7(1)(b).

Furthermore, if the employees have received a benefit described in paragraph 7(1)(b) which has been correctly treated as taxable in the year of disposition of the stock options, the employees would not be able to amend their declared income for that year.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date contingent amount included under s. 7(1)(b) cannot later be reversed 110

7 May 2015 External T.I. 2015-0570801E5 - Exchange of Stock Options-7(1)(b) Applies

deduction for "amount...paid to acquire…rights" does not include value of old exchanged options

In an exchange of employee stock options in a takeover situation which does not satisfy the conditions in s. 7(1.4), will the value of the old options exchanged to acquire the new options be considered "the amount, if any, paid by the employee to acquire those rights" for purposes of s. 7(1)(b)? CRA responded that in this situation:

[W]here the provisions of subsection 7(1.4) do not apply, the exchange of stock options will result in a disposition of the exchanged options for the new options and the application of paragraph 7(1)(b)… .

…[T]he reference in subparagraph 7(1)(b)(ii) to "the amount, if any, paid by the employee to acquire those rights (under the employee stock option)" refers to an amount paid by the employee to acquire the rights under the employee stock option that is being disposed of, i.e., the exchanged option. …[T]he value of the exchanged options at the time of the exchange/disposition would not be considered part of "the amount, if any, paid by the employee to acquire the rights disposed of under the exchanged options". However, the new options acquired as a result of the exchange will have a cost equal to the value of the exchanged options at the time of the exchange.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) executives potentially avoid double taxation on a "bad" (offside s. 7(1.4)) stock option exchange 72

Income Tax Technical News No. 19, 16 June 2000

Where under a securities option plan "an employee has the right to choose to receive the fair market value of the securities option rights in shares, paragraph 7(1)(b) will apply in respect to the disposition of those rights".

1999 Ruling 990259 [cash surrender of subscription rights for unlisted shares]

cash surrender of subscription rights for unlisted shares

Canadian employees of a Canadian subsidiary of a foreign parent had "subscription rights" to acquire unlisted ordinary shares of the foreign parent. The subscription rights plan provided that, for reasons relating to the tax rules in the foreign jurisdiction, at the time of the grant of such right, the employee also would acquire a non-interest bearing bond of the parent at an appropriate discount. In addition, under put and call agreements with a non-resident corporation ("Putcallco") the employee could cause Putcallco to acquire the employee's foreign parent shares (after exercise of the subscription right) at their fair market value at the time of such exercise (as determined under a formula), and Putcallco could acquire the subscription rights for their fair market value (as also determined under the formula) in the event the individual ceased to be an employee. The foreign parent and the Canadian subsidiary had agreed that when a subscription right was exercised by an employee, the Canadian subsidiary would be obliged to pay to the foreign parent the amount by which the fair market value of the shares acquired by the employee exceeded the exercise price.

The granting by the Canadian subsidiary to the employees of the right to surrender their subscription rights to it for a cash amount equal to the difference between the fair market value of a foreign parent share (determined on the same formula basis) and the exercise price would not result in a disposition under s. 7(1)(b) or result in a conferral of a benefit by the Canadian subsidiary on the foreign parent under s. 15(1).

22 July 1999 T.I. 983381 [change to employer cash-out right]

change to employer cash-out right

If an existing stock option arrangement under which only the employee has the right to elect to receive cash instead of shares has changed so that the employer has the right to pay the employee cash instead of shares, this will not cause an immediate disposition pursuant to s. 7(1)(b).

21 January 1998 T.I. 973116 [cost of new options acquired on exchange

"When section 7(1)(b) applies to the exchange of an old option for a new option, it is our opinion that, for the purposes of any subsequent application of sections 7 and 110(1)(d) of the Act, the new options will have a cost equal to the value of the old option at the time of the exchange. Accordingly, if the new options are subsequently exercised, the provisions of paragraph 7(1)(a) will result in a reduction of the benefit otherwise determined at that time, by that value. If the value of the two options is not equal at the time of the exchange, the series of transactions may result in the inclusion of benefits that exceeds the value ultimately received."

IT113R4 "Benefits to Employees - Stock Options" 7 August 1996

7. Section 7 applies where a corporate employer issues shares to an employee as a salary bonus or under a stock bonus plan. ...

11. … Where, under a stock option agreement, an employer elects to pay cash in lieu of issuing shares, subsection 7(1) does not apply and the amount of cash received by the employee is taxable under either subsection 5(1) or paragraph 6(1)(a)… . Where it is the employee who has the right to choose cash instead of shares, paragraph 7(1)(b) will apply, in respect of the cash received by the employee in satisfaction of the employee's rights under the plan. …

Income Tax Technical News, No. 7, 21 February 1996

s. 7(1)(b) if employee cash-out right

Where under an employee stock option plan, it is the employee rather than the employer who has the option to choose cash instead of shares, s. 7(1)(b) will apply in respect of the cash that the employee elects to receive in satisfaction of his rights under the plan.

Income Tax Technical News, No. 1, 22 July 1994

If an employee compensation package includes any convertible preferred shares, s. 7(1) will apply when those shares are sold or converted to common shares unless, in the case of the conversion or sale of a convertible preferred share that is a not a forward participating share, the share was issued before December 1, 1994 as part of an employee compensation that was in place on or before August 31, 1994.

17 February 1994 External T.I. 5-940137 -

Where an employee may elect to receive cash instead of shares under an employee stock option plan, any benefit will be included in her income under s. 7(1). However, if the decision to pay cash rather than issue shares remains with the employer, any cash actually paid will be included in her income under s. 5(1) or s. 6(1)(a).

1 May 1991 T.I. (Tax Window, No. 3, p. 28, ¶1224)

Where a stock option plan provides that, at the time the option otherwise would be exercisable, the employee may elect to receive cash in lieu of shares and the employee so elects, the amount received by the employee will be included in his income pursuant to s. 7(1)(b), and a deduction will be available under paragraph 110(1)(d) if the provisions of that paragraph are otherwise met.

Articles

Anna Malazhavaya, "Stock Options and Foreign", Taxation of Executive Compensation and Retirement, Vol. 23, No. 1, July/August 2011, p. 143

Where a foreign corporation repurchases its own shares and then transfers those same shares to an employee under a stock option plan, it would appear that such shares cannot be considered to be "issued" to the employee; but that they may be considered to be "sold."

Jeremy Forgie, Elizabeth H. Boyd, "Tax Issues Relating to Stock Options in the Context of Corporate Mergers, Acquisitions and Reorganizations", Taxation of Executive Compensation and Retirement, Vol. 11, No. 5, December/January 2000, p. 224.

Elizabeth H. Boyd, "Stock Options and Other Executive Compensation Arrangements in a Reorganization, Merger or Acquisition - Tax Issues", Taxation of Executive Compensation and Retirement, Vol. 10, No. 1, July/August 1998, p.3.

Paragraph 7(1)(c)

Administrative Policy

1 December 2009 External T.I. 2009-0307821E5 - TFSA Contributions - Options and Warrants

contribution to TFSA – recognition deferred until exercise by TFSA

What are the tax consequences of an employee stock option being contributed to a TFSA? CRA responded:

[T]he property must be contributed to the TFSA at its fair market value (FMV) and the contribution is subject to the holder's unused TFSA contribution room. …The CRA is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV.

Where a TFSA exercises an employee stock option, pursuant to paragraph 7(1)(c)… the employee is deemed to have received a benefit in the taxation year that the TFSA exercises the option equal to the amount by which the value of the shares acquired under the option exceeds the total of the amount paid by the TFSA to acquire the shares and the amount, if any, paid by the employee to acquire the option.

[P]roposed amendments were announced to prohibit asset transfer transactions (swaps) between TFSAs and other registered and non-registered accounts.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Options in-the-money value not reflective of option value 56

2002 Ruling 2001-010761 -

Where an arm's length employee transfers options to a personal holding company for no consideration, he will not, except as provided by s. 7, be deemed to have received or enjoyed any benefit under or because of the options or their transfer to the corporation. Under s. 7(1)(c), he will realize a benefit when the corporation exercises the options during his lifetime or, if the options are exercised after his death, the corporation will be deemed to receive employment income under s. 7(1)(c) on exercise.

31 October 1996 T.I. 963433 (C.T.O. "RRSP Options")

"Where an employee stock option is a qualified investment for an RRSP trust and it is disposed of by the employee to his or her RRSP or spousal RRSP, it is the Department's general position that the employee would not have any immediate income inclusion as the result of such disposition. However, the employee will have an income inclusion, as of the date that the RRSP exercises the option, equal to the amount that the fair market value of the shares acquired on the exercise date exceeds the exercise price paid by the RRSP for such shares."

28 April 1995 T.I. 950344 (C.T.O. "Stock Option in RRSP")

Where an employee has transferred a stock option to her RRSP, the difference between the value of the share and the exercise price will be included in her income upon exercise of the stock option by the RRSP trust. If the conditions in s. 110(1)(d) are met, she will be entitled to the 1/4 deduction under s. 110(1)(d).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(5) 36

12 December 1989 Memorandum (May 1990 Access Letter, ¶1207)

Where an employee held unexercised employee stock options at the time of his death, no amount will be included in the income of the deceased or the estate in respect of their value, whether under ss.7(1)(c), 70(2), 70(5), or otherwise. S.7(1)(c) does not apply because the employee is deceased at the time the estate exercises the options. The ACB of the options to the estate is fair market value by virtue of s. 69(1)(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(2) 55

Paragraph 7(1)(e)

Administrative Policy

16 June 2014 STEP Roundtable, 2014-0523011C6 - STEP Roundtable 2014-7(1)(e)

nil valuation of unvested options

How does s. 7(1)(e) apply if a deceased employee held unvested stock options which therefore are not exercisable after death? CRA stated:

…Where the terms of the owned unexercised stock option provide that the stock options are automatically cancelled in the event of the employee's death, the value of the options immediately after death, and the paragraph 7(1)(e) benefit, will be nil. If the employee stock options are not vested prior to the employee's death, the employee would not own unexercised stock options prior to their death and paragraph 7(1)(e) would not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6.1) overview 135

21 December 2012 Internal T.I. 2009-0327221I7 - Paragraph 7(1)(e) - Death of a Taxpayer

CRA stated:

Where an employee stock option provides that the option is automatically cancelled on death of an employee, the value of the option immediately after death will be nil with the result that no amount will be included in the deceased's income in accordance with paragraphs 7(1)(e) and 6(1)(a).

In a situation where the stock option provides that the deceased's estate may exercise the option within a limited period after the employee's death, paragraph 7(1)(e) may result in an income inclusion. Subsection 164(6.4) is intended to provide relief in such situations.

May 19 1995 Executive Institute Round Table, Q. 24 (C.T.O. "Employee Stock Option")

An employer is required to issue a T4 in the year of death of an employee computing the benefit under s. 7(1)(e).

26 April 1990 Memorandum (September 1990 Access Letter, ¶1442)

Discussion of state of law prior to enactment of s. 7(1)(e).

Subsection 7(1.1) - Employee stock options

Cases

Wiebe v. The Queen, 87 DTC 5068, [1987] 1 CTC 145 (FCA)

significant changes giving rise to new stock option agreement

A stock option agreement which the trial judge found to have been in place in 1972 or 1973 was held to have been so radically altered in its terms in 1977, that in that year it should be regarded as a new agreement, with the result that the agreement should be regarded as coming into being after 31 March 1977. The changes consisted of requiring the employee, as a condition to acquiring the shares: (1) to guarantee indebtedness of the employer; and (2) to execute a buy-back agreeement.

Administrative Policy

7 October 2016 APFF Roundtable Q. 21, 2016-0655901C6 F - Section 7 and bonus paid in share

7(1.1) applicable to non-discretionary bonus payable in shares

CRA considers that where a Canadian-controlled private corporation has agreed in writing “to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares” equal in value to the bonus amount, then the value of the shares generally will not be included in the employee’s income when issued by virtue of ss. 7(3)(a) and 7(1.1). In addition, although an arrangement in which the employer has full discretion as to whether to award the bonus or as to the mode of payment will not come within the s. 7 rules, such a discretionary arrangement could become a qualifying one if, for example, “after the first year, the employer exercises its discretion and sets the amount of the bonus at [say] 75 shares, which is payable in shares at the end of the year if the employee is still employed by the employer.”

The right of the employee to elect to be paid in cash does not detract from this analysis if that right is not exercised.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(a) s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance 254
Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) - Paragraph 84(1)(b) PUC of shares issued in satisfaction of bonus equal to bonus amount 116

21 October 1996 External T.I. 5-963321 -

"Where an employee stock option is transferred by the employee to a non-arm's length person such as an RRSP under which the employee is the annuitant, recognition of any benefit under section 7 of the Act is not made in accordance with paragraph 7(1)(a) of the Act but under 7(1)(c) if the option is exercised by the RRSP. Accordingly, subsection 7(1.1) of the Act can not apply to defer taxation of the amount."

28 July 1992 T.I. (Taxation of Executive Compensation and Retirement, November 1992, pp. 682-683)

The preferential rules for a Canadian-controlled private corporation will be applicable after the corporation becomes a public corporation only in relation to rights under the employee stock option plan that had vested in the employee at the time the corporation became a public corporation.

28 May 1990 T.I. (October 1990 Access Letter, ¶1450)

S.7(1.1) will be available to an employee under a plan who can elect to receive either cash or shares as a year-end bonus, and he elects to receive shares.

Subsection 7(1.3) - Order of disposition of securities

Administrative Policy

Income Tax Technical News No. 19, 16 June 2000

Under "Change of Position in Respect of GAAR - Section 7".

15 October 1997 T.I. 972531

Where an employee/shareholder owns shares of a CCPC which have a nominal adjusted cost base and subsequently acquires shares under a stock option arrangement, subsequent dispositions by the employee of shares will be deemed to come first out of the original shareholding, with the result that the realization of an employment benefit under s. 7(1.1) (and of a corresponding addition to ACB) will be deferred.

25 October 1999 T.I. 990956

Discussion of the order of disposition of identical shares, some acquired under option and some not, for the purposes of s. 7.

Subsection 7(1.31)

Administrative Policy

6 December 2016 External T.I. 2015-0605971E5 - Paragraph 110(1)(d.01) deduction

s. 7(1.31) election also effective where a broker sale under s. 110(2.1)

Would the taxpayer be required to file an s. 7(1.31) election if the taxpayer were entitled to an s. 110(1)(d.01) deduction by virtue of s. 110(2.1)? CRA responded:

[T]he designation provided by subsection 7(1.31) may be necessary to permit a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1). For example, assume a scenario where, before the exercise of an employee stock option, a taxpayer holds identical securities to those acquired under the option. If, in exercising the option, the taxpayer directs the disposition of the acquired securities and the donation of the proceeds as provided for in subsection 110(2.1), the taxpayer can designate the acquired securities as the securities disposed of in order to claim a deduction under paragraph 110(1)(d.01) by virtue of subsection 110(2.1). Absent the designation under subsection 7(1.31), subsection 7(1.3) would generally apply to deem identical properties to be disposed of in the order in which they were acquired.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(2.1) broker must immediately pay sales proceeds of the stock option shares directly to the charity 137

9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 2, 2015-0595841C6 F - Stock option, disposition, newly-acquired security

shares acquired on option exercise must be disposed of in one transaction to avoid basis averaging

A, who is the sole shareholder of Holdco and also holds low-cost shares of PublicCo, will exercise his option to acquire 100,000 shares of PublicCo (giving rise to a s. 7(1)(a) benefit). Of the 100,000 shares acquired, 35,000 will be donated to a qualified done (the “Donation”), and then 65,000 will be disposed of to Holdco (the “Transfer”). Assuming that its other conditions are satisfied, would the conditions of s. 7(1.31.)(a) be satisfied for both the Donation and Transfer?

CRA indicated that the s. 7(1.31) rules does not apply to avoid basis averaging if the executive (A), immediately after exercise, disposes of the acquired shares in two tranches, i.e., here, the Donation and the Transfer. The second disposition (the Transfer) is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition under the Donation) following the exercise - and conversely, if the Transfer occurred before the Donation.

Subsection 7(1.4) - Exchange of options

Administrative Policy

2015 Ruling 2014-0558831R3 - No-type of property spin-off butterfly

replacement stock options issued by Spinco treated as boot

A butterfly spin-off by a specified corporation (DC) of two business divisions (which it prepackages in a Newco subsidiary) to “Spinco” entails an exchange of old DC employee options for new options with a no-greater in-the-money value. In particular, there will be an exchange of a pro rata portion (based on the relative FMV of the Newco shares) of each DC stock option to Spinco and DC in consideration for the grant of replacement options. Such issuance by Spinco will be treated as non-share consideration for the butterfly transfer of Newco shares to Spinco (otherwise occurring in consideration only, or mostly, for the issuance of Spinco special shares).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution prior drop-down of assets to Newco/split of DC manager's business/CEC proration/replacement option issuance as boot 1106
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) new common shares with same attributes as old subject to rights of new special shares/pro rata PUC 162
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(d) proration of CEC preliminary to butterfly 154
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition splitting of fee for management of 2 divisions not a disposition of contract 139

7 May 2015 External T.I. 2015-0570801E5 - Exchange of Stock Options-7(1)(b) Applies

executives potentially avoid double taxation on a "bad" (offside s. 7(1.4)) stock option exchange

An exchange of s. 7 stock options of an employee on Target shares for options on Buyer's shares does not qualify under s. 7(1.4). CRA indicated that the exchange gave rise to a s. 7(1)(b) benefit but that the new options had a cost based on the value of the exchanged options - perhaps implying that such cost could be deducted on a subsequent surrender of the new options. See summary under s. 7(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) deduction for "amount...paid to acquire…rights" does not include value of old exchanged options 209

S4-F7-C1 - Amalgamations of Canadian Corporations

s. 87(5) not applicable

1.81 Subsection 87(5) does not apply where an employee holds rights under an agreement to acquire shares of a predecessor corporation and subsection 7(1) is applicable to such right, because the right will not constitute capital property of the employee. However, by virtue of subsection 7(1.4), no benefit arises under paragraph 7(1)(b) when such a right is exchanged by the employee for a right to acquire a share of the new corporation or of a corporation with which the new corporation does not deal at arm's length provided that the fair market value of the new option does not exceed the fair market value of the old option.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12) application following amalgamation 103
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) deemed tcp following amalgamation 155
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) deemed non-arm's length relationship on amalgamation 164
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) no deemed dividend to dissenter on amalgamation 81
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14) class continuity on non-arm's length amalgamation 311
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

2009 Ruling 2009-0338731R3 - Public spin-off butterfly

public company butterfly spin-off with Spinco options including tandem SARs

underline;">: Overview. Public company spin-off butterfly by DC of Spinco including splitting of stock options..

Option exchange

DC had an option plan under which it had granted stock options some of which included "tandem share appreciation rights" (which permitted the option holder to surrender a vested stock option in exchange for a cash payment equal to the "in the money value" of the option thereby extinguishing the holder's option). Under the butterfly reorganization those options were exchanged for options to acquire shares of Spinco and new options to acquire shares of reorganized DC (a.k.a., New DC), corresponding to the division of assets between the two corporations. In the case of Spinco, its option plan enabled it to issue stock options with "attached tandem share appreciation rights". In the case of New DC, the ruling does not expressly refer to tandem share appreciation rights but the replacement options are issued under DC's existing plan, which includes such rights.

Ruling

The exchange of the existing options for new options of Spinco and New DC would be governed by s. 7(1.4). The ruling was conditioned on the new options of Spinco and New DC being the sole consideration for the disposition of the old options and the old options being cancelled. Although the tandem share appreciation rights are not expressly addressed, the ruling in effect treats the tandem share appreciation right as part of the option itself.

2004 Ruling 2004-005817 -

Ruling that the rules in ss. 7(1.4)(d) to (f) will apply where an Optionee exchanges his or her existing options for a Substituted Right (with further provision that if an Optionee elects to exercise his or her options, the company may, in its discretion, require the Optionee to exchange his or her options for Substituted Rights).

7 October 1997 T.I. 972427

RC followed Amirault v. MNR, 90 DTC 1330 (TCC) in indicating that a reduction in the exercise price for an employee stock option would not represent a disposition.

1997 Ruling 9716083

The addition of dividend equivalent rights to stock options received on a merger would constitute additional rights for purposes of s. 7(1.4).

27 March 1992 T.I. (Tax Window, No. 18, p. 16, ¶1840)

The 1991 amendment to s. 7(1.4) eliminated the requirement that a corporate reorganization take place in order for the subsection to apply.

25 September 1991 Memorandum (Tax Window, No. 9, p. 10, ¶1471)

S.7(1.4) does not apply in a takeover situation where stock options of the target are exchanged for stock options of the acquiring company and the target company is then dissolved, if the acquiring company deals at arm's length with the target immediately after the exchange and the arrangement involves no amalgamation or a merger.

Articles

Eva M. Krasa, "Exchange of Stock Options Under Subsection 7(1.4): Some Unexpected Issues", Taxation of Executive Compensation and Retirement, Vol. 20, No. 6, February 2009

Includes discussion of effect on valuation test of an increase in value of Acquireco shares subsequent to agreement date, earn-out; multiple exchanges of the options in question; and acquisitions by mutual fund trust.

K.A. Siobhan Monaghan, "Reorganization of Stock Options in the Context of a Dividend-in-Kind", Corporate Structures and Groups, Vol. IV, No. 4, 1997, p. 232.

Subsection 7(1.5) - Rules where securities exchanged

Administrative Policy

20 March 2001 External T.I. 2001-007144 -

S.7(1.5) is not available where the proceeds for the exchange of shares include a put right, even if the put right has nominal value. Accordingly, s. 7(1.5) is not available on exchanging shares for exchangeable shares.

23 March 1995 External T.I. 5-950040 -

Where an individual transferred his shares of an CCPC to his holding company, the fact that he elects an amount under s. 85(1) greater that the ACB of the transferred shares does not affect the operation of s. 7(1.5).

13 October 1994 External T.I. 5-942547 -

RC intimated that it would be prepared to apply its position that s. 85.1(1) applies to some transfers where non-share consideration also is received, to s. 7(1.5).

2 December 1993 T.I. 933266 (C.T.O. "Adjustments to ACB of Section 7 Shares")

S.7(1.5) will apply where an employee elects under s. 85(1) to be deemed to receive proceeds of disposition of the share in excess of its ACB.

There will be an increase to cost base under s. 53(1)(j) where new shares acquired as described in s. 7(1.5) are later sold or exchanged.

19 February 1992 T.I. (Tax Window, No. 16, p. 12, ¶1756)

By virtue of s. 7(1.5)(g), the rules in s. 7(1.5) will apply to reorganizations involving more than one exchange of shares.

9 January 1992 T.I. (Tax Window, No. 15, p. 19, ¶1691)

Relief of the type described in s. 7(1.5) is not available to a transfer to which s. 85(1) applies.

21 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 5, ¶1001)

The favourable treatment accorded under s. 7(1.1) will apply if there has been both a share-for-share exchange and an amalgamation.

86 C.R. - Q.65

S.86 was knowingly excluded.

Articles

Firoz Ahmed, "Treatment of Employee Stock Options in Corporate Reorganizations", Canadian Current Tax, Vol. X, No. 3, December 1999, p. 23.

Dunbar, "Draft Tax Amendments Correct Technical Deficiencies in Stock Benefit Provisions", Taxation of Executive Compensation and Retirement, September 1990, p. 330.

Subsection 7(2) - Securities held by trustee

Cases

MNR v. Chrysler Canada Ltd., 92 DTC 6346 (FCTD)

After finding (below) that the Chrysler employee stock ownership plan was both an employee benefit plan and an agreement to issue shares to employees within the meaning of section 7, Strayer J. found that section 7 had "priority" over paragraph 6(1)(g).

Re MNR and Chrysler Canada Ltd., 91 DTC 5526 (FCTD)

oral agreement

Chrysler (U.S.) contributed treasury shares to a trust for the benefit of its employees and those of Chrysler Canada. Chrysler Canada reimbursed Chrysler (U.S.) for the shares contributed for the benefit of Chrysler Canada's employees. The trustee allocated the shares notionally to employees, reinvested dividends and further shares which are similarly allocated and at the termination of the plan (which occurred some seven years later) distributed the shares or cash proceeds thereof.

Subject to any further argument on how to resolve any conflict between the two sets of provisions, this arrangement was held to entail both the issue of shares as described in ss.7(1) and (2), and an employee benefit plan as described in s. 248(1). After noting that Canadian employees agreed to make wage concessions partly in return for right of participation in the plan, Strayer J. stated (p. 5531):

"I can see no reason why the 'agreement' referred to cannot be an oral agreement or an implied agreement - even an implied agreement based on a collective bargaining arrangement ..."

Administrative Policy

19 September 2016 Internal T.I. 2016-0641841I7 - Employee stock option rules

no agreement if allocation of shares in trustee's discretion

CRA first stated that Placer Dome, Chrysler and McAnulty “stand for the proposition that an arrangement to issue or sell shares need not be a detailed written contract to fall within the scope of section 7 or paragraph 110(1)(d), but nonetheless must create legally binding rights and enforceable obligations.”

CRA considered a trust established by a CCPC to acquire and hold shares of the corporation for employees, with allocations among the employees and distributions entirely at the discretion of the trustees. Several years later and after appreciation in the value of the shares, the trustees decide to distribute the shares to employee beneficiaries (including subsequent hires) in accordance with an allocation determined by the trustees at that time. In finding that the s. 110(1)(d) deduction was not available, CRA stated:

A trust arrangement that provides for allocations and distributions of employer shares on a fully discretionary basis would not be governed by section 7. Such a discretionary arrangement lacks the requisite legally binding agreement as neither the corporation nor the trustees have any obligation to transfer shares to any specific beneficiary and no particular beneficiary has any enforceable right to shares until the discretion is exercised. …

[S]ubsection 7(2) cannot apply any earlier than when a specific number of shares have been allocated to an identifiable employee pursuant to a legally binding agreement to issue or sell shares.

Since section 7 would not be applicable, the income tax treatment would be determined under the EBP rules.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) discretionary share bonus plans have no s. 7 agreement unless there is delayed vesting 323
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) no agreement to issue shares if vesting in employer's discretion 241

3 May 1994 T.I. 940975 (C.T.O. "Tax Adjustment for Forfeiture Under Stock Option")

S.7(2) deems an employee to have acquired a share at the time a trustee commences to hold it for the employee, even if the employee's entitlement is not vested. On the occurrence of forfeiture, the employee will realize a capital loss based on a disposition of the shares for nil proceeds.

Articles

Ian MacDonald, "Trusts Holding Employee Shares - After the Initial Transfer", Taxation of Executive Compensation and Retirement, Vol 22, No.10, June 2011, p. 1415:

There are a number of indicators which suggest that an s. 7(2) trust is not governed by various employee benefit plan rules.

Subsection 7(3) - Special provision

Paragraph 7(3)(a)

See Also

Rogers v. The Queen, 2015 DTC 1029 [at 124], 2014 TCC 348

s. 7 a complete code for taxation of stock option benefits

The taxpayer, who was the CEO of a Canadian corporation ("RCI") whose voting and non-voting shares both traded on the TSX, did not deal at arm's length with RCI as he held over 90% of its voting shares. RCI issued stock options to the taxpayer in 1997 pursuant to the RCI employee stock option plan, and in 2007 attached a share appreciation right ("SAR") to all previously granted options, permitting the holder to cash surrender options for their in-the-money value. The taxpayer exercised the SAR in 2007, and reported a capital gain.

Hogan J found that s. 7(3)(a) applied to preclude a benefit under s. 6 (as assessed by the Minister), stating (at paras. 38-39):

[T]his provision [s. 7] is meant to provide a complete code for the taxing of benefits arising under or because of a stock option agreement. … If the carve‑out in section 7(3)(a) is interpreted in a narrow fashion, as the Respondent argued it should be – that is it only applies if the benefit is subject to tax under subsection 7(1) of the Act – it would mean that a non-arm's length transfer could become immediately taxable notwithstanding the fact that section 7 specifically provided that this should not be the case.

In the result, the taxpayer received the benefit as a capital gain (see summary under s. 39(1)).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) cash surrender of employee stock options for their value was not shareholder benefit 116
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) capital gain can arise from property which is not capital property 249
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) exercise of stock option surrender plan for FMV was not "remuneration" 111
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Options holding one's employee stock options until just before they expire is not typical of an adventure in the nature of trade 171

Mathieu v. The Queen, 2014 TCC 207

non-arm's length option surrender proceeds were exempted by s. 7(3)(a)

In successive years, the taxpayer cash-surrendered employee stock options to the corporation ("Forages Garant") which had granted the options. Paris J found that the taxpayer was related to his wife from whom he was legally separated but not divorced. Accordingly, he was a member of a related group which controlled Forages Garant, which meant that his stock option surrender benefits were not taxable under s. 7(1)(b).

In rejecting a Crown submission that the option surrender benefits were taxable under s. 6(1)(a), Paris J stated (at para 77, TaxInterpretations translation) that "the principle of generalibus specialia derogant applies and subsection 7(3) deflects the application of the general provision," that the provisions of s. 7(3)(a) "are clear and unequivocal" (para. 79) and that "it is evident that the [subsequent] addition of paragraph 7(1)(b.1) effected a change to section 7 and not a clarification" (para. 85). Accordingly, the benefits were not taxable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(a) separated wife was related 165
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) may look at subsequent amendment to determine whether it changed the law 126
Tax Topics - Statutory Interpretation - Specific v. General Provisions stock option rules more specific than employee benefits 51

Ward v. The Queen, 98 DTC 2097 (TCC)

Shares issued to the taxpayer were found to be in satisfaction of consulting fees owed to him that had been written off by the corporation in question on its books, rather than being received by him by virtue of his employment with the corporation, based on a finding that the consulting fees would not have been written off had the shares not been issued to him, and given that the records of the corporation did not show him to have become an employee of the corporation until subsequently (although he was a director). Accordingly, the value of the shares received by him was includible in his income under s. 9, or under s. 5(1) by virtue of the application of s. 6(3)(b), and the benefits of the application of s. 7(1.1) were not available to him.

Aylward v. The Queen, 87 DTC 1097 (TCC)

Before concluding that s. 7(1.1) governed the issuance of shares to the taxpayer, Margeson TCJ. found that they were issued to the taxpayer in respect of his former employment with the issuer and that there was no requirement under s. 7 that the taxpayer be an employee of the company at the time of the granting of a stock option or at the time of its exercise.

Although there was no formal agreement for the issuance of the shares, there is nothing in the word "agreed" that suggested that "a formal contract in the sense of an offer and acceptance" is required (p. 1108).

Words and Phrases
agreed

Administrative Policy

7 October 2016 APFF Roundtable Q. 21, 2016-0655901C6 F - Section 7 and bonus paid in share

s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance

In accordance with the terms of the employment contract, a Canadian-controlled private corporation pays a bonus to an employee which is payable in shares. Will the share issuance be governed by s. 7, particularly s. 7(1.1)? What if the employee has the choice to be paid the sum in cash or shares? CRA responded:

[I]n the situation where an employer establishes an arrangement under which it undertakes to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares, then this arrangement could be an agreement contemplated by section 7. …

[I]f an employer establishes an arrangement under which it has full discretion to award a bonus or has full discretion as to the mode of payment of this bonus (in shares or in cash), [this] discretion… would ensure that it could not be an agreement for purposes of section 7… .

It is possible that an arrangement which is not initially within section 7 due to the employer's discretion as to whether or not to grant shares could become an agreement in which section 7 applies at the time the employer undertakes to issue shares. This could be the case [where]…[a]fter the first year, the employer exercises its discretion and sets the amount of the bonus at 75 shares, which is payable in shares at the end of the year if the employee is still employed by the employer. …

[T]he choice of the employee…does not preclude an undertaking from being an agreement to issue shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) - Paragraph 84(1)(b) PUC of shares issued in satisfaction of bonus equal to bonus amount 116
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.1) 7(1.1) applicable to non-discretionary bonus payable in shares 174

2004 Ruling 2004-005692 -

The replacement of a SAR plan of a private-company (CCPC) employer with an agreement to acquire its preferred and common shares that is subject to s. 7 will not be an immediate taxable event. S.7(3)(a) will limit the recognition of any benefits that might arise as a result of this conversion, and the employees will not receive any amount as a result of the agreement to waive any rights under the SAR. Notwithstanding that the corporation will add to its stated capital account maintain in respect of the common shares and preferred shares an aggregate amount not exceeding its estimate of the current accrued liability owing to the executives under the SAR plan.

2004 Ruling 2004-005692 -

Ruling that s. 7(3)(a) would govern a plan under which a Canadian-controlled private corporation agrees to issue common shares and preferred shares to executives in replacement of a SAR plan and the executives have the right to sell the shares in specified circumstances to the corporate employer or (where it is advantageous to the executive from a tax perspective) to a nominee of the corporate employer.

2002 Ruling 2001-010761 -

Where an arm's length employee transfers options to a personal holding company for no consideration, he will not, except as provided by s. 7, be deemed to have received or enjoyed any benefit under or because of the options or their transfer to the corporation. Under s. 7(1)(c), he will realize a benefit when the holding company exercises the options during his lifetime or, if the options are exercised after his death, the company will be deemed to receive employment income under s. 7(1)(c) on exercise.

16 February 2001 Internal T.I. 2000-005365 -

A s. 7 employee stock option plan can be implemented in substitution for an existing SAR Plan without any immediate tax consequences. "However, we caution that this position is only valid where there is an exchange of the SAR unit for the option and the employee does not otherwise receive any amount or right to receive an amount. For example, a receipt of a taxable benefit might occur at the time of an exchange if the arrangement provided for the acceleration of the vesting of the SAR and, because of the vesting, the employee obtained a right to receive cash for the unit."

10 May 2001 External T.I. 2001-007568 -

Where an employee has contributed employee stock options to his RRSP, by virtue of s. 7(3)(a) there would be no income inclusion at the time of the transfer to the RRSP, and the employee would be entitled to a deduction under s. 146(5) or (5.1) equal to the fair market value of the option at the time of the transfer. When the RRSP exercised the option, there would be an income inclusion to the employee under s. 7(1)(c) at that time.

26 June 2000 External T.I. 2000-001820 -

Where an employee transfers employee stock options to a wholly-owned corporation ("Holdco"), then by virtue of s. 7(3)(a) a benefit from his stock option rights will only be taxed when Holdco exercises the option under s. 7(1)(c) or disposes of the option rights under s. 7(1)(d). No amount will be included in the employee's income as a result of the transfer of the stock options to Holdco. Where, in order to avoid the application in s. 7, the employee disposes of his Holdco shares to the public-company employer before Holdco exercises the options, the Agency would have to consider whether s. 245(2) should be applied.

10 August 2000 External T.I. 2000-001687 -

Where an employee exercises his or her SAR rights and the property received is shares of a CCPC that is the employer, the provisions of s. 7 will apply to the issuance of the shares.

18 February 1999 Memorandum 990081

Where Canadian employees of a Canadian corporation are eligible to participate in an employee stock option plan of an indirect U.S. public-corporation parent, amounts paid by the Canadian employer to the U.S. parent to reimburse it for the difference between the option price and the amount actually paid by the U.S. parent in order to purchase the shares for distribution to the Canadian employees, will not be deductible by virtue of s. 7(3)(b).

6 December 1995 T.I. 952703 (C.T.O. "Taxation of Benefit of Employee Share Offering")

"If a benefit is received by an individual qua employee, paragraph 7(3)(a) requires that it be taxed under section 7 and not under any other provision in Part I of the Act."

Paragraph 7(3)(b)

Cases

The Queen v. Placer Dome Inc., 92 DTC 6402 (FCA)

discounted stock purchase plan

In finding that an employee stock purchase plan (under which employees contributed up to 6% of their salary and the taxpayer and its affiliated companies then were obligated to contribute an amount equal to 1/2 of each employee's contribution) was governed by s. 7(1)(a), with the result that s. 7(3) applied to deny a deduction to the taxpayer (except to the extent that the taxpayer's contribution to the plan was not returned to it in the form of a share subscription), Marceau J.A. stated (p. 6410):

"Based on the following facts: that the trustee is merely a conduit through which the employer administers the Plan; that the employees never receive money or money's worth until termination or withdrawal and, even then, never from the employer directly; and, that the funds payable by the employer to the trustee each month have a predetermined destination and never fall under any real control or genuine power of the employees or the trustee, it must be concluded that the true benefit the employees acquire by their participation in the Plan is not the entitlement to an additional remuneration but the entitlement to a credit for shares of Placer at two-thirds of their market value."

Kaiser Petroleum Ltd. v. The Queen, 90 DTC 6034 (FCTD), rev'd 90 DTC 6603 (FCA)

In an agreement between the U.S. parent of the taxpayer and Kaiser Resources Ltd. for the sale of shares of the taxpayer to Kaiser Resources Ltd. for $33.50 per share, it was agreed that the U.S. parent would cause the taxpayer to obtain the cancellation of outstanding employee stock options on the shares of the taxpayer on the payment by the taxpayer of the difference between the exercise price per share and $32.50 per share. Before finding that the payment of such amounts by the taxpayer in consideration for the cancellation of the options was deductible notwithstanding s. 18(1)(b) on ordinary principles, Joyal J. implicitly accepted the submission of the taxpayer's counsel that s. 7(3) "has no application as no issue of shares took place" (p. 6036).

See Also

Transalta Corporation v. The Queen, 2012 DTC 1106 [at 3044], 2012 TCC 86

no bilateral agreement to pay bonuses only in shares

Near the beginning of each year, the taxpayer would notify each of its executives that an award of units (within a specifed range) would be made to the executive in respect of the three-year compensation period commencing with that year, which would then be used to determine, within 120 days after the end of that compensation period, the bonus that would be paid to the executive in respect of the compensation period. Bonuses were paid at the option of the taxpayer in cash or shares with full stated capital.

Margeson J. found that the taxpayer's deduction of the amount of the bonuses which were paid in treasury shares was not barred under s. 7(3)(b) because such shares were not paid or issued pursuant to an "agreement." The word "agreement" in s. 7 refers only to legally binding agreements, meaning contracts. There was no "meeting of the minds" that could have led to the formation of a bilateral contract (para. 71), nor did the employees do or refrain from doing anything specified in an offer for a unilateral contract (para. 86). The implicit notion that the bonuses would be earned through superior work performance was not enough to constitute an offer (para. 85). Even if there had been an agreement to pay bonuses, they could have been paid entirely in cash, so there was no agreement to issue securities.

Words and Phrases
agree agreement

Administrative Policy

19 September 2016 Internal T.I. 2016-0641841I7 - Employee stock option rules

discretionary share bonus plans have no s. 7 agreement unless there is delayed vesting

In response to several enquiries from auditors on the meaning of “agreement” for the purposes of ss. 7 and 110(1)(d), the Directorate first referenced the Placer Dome, Chrysler and McAnulty decisions, and stated:

These cases stand for the proposition that an arrangement to issue or sell shares need not be a detailed written contract to fall within the scope of section 7 or paragraph 110(1)(d), but nonetheless must create legally binding rights and enforceable obligations.

This principle was confirmed in Transalta… .

The Directorate then discussed this issue in the context of various types of plans.

Respecting a discretionary share bonus plan (where “the corporation determines at the end of the [3-year] period the number of shares earned and whether the bonus would be paid in the form of shares issued from treasury or cash equivalent.,” it stated:

Because the corporation’s commitment remains fully discretionary at all times, the arrangement does not give rise to a legally binding agreement for the purposes of section 7. Therefore, where the corporation opts to settle the bonus by issuing shares, paragraph 7(3)(b) does not apply to prohibit the corporation from deducting the bonus expense.

Similarly, a fully discretionary stock bonus plan without a cash option will also fall outside section 7 where the granting of the awards and the issuance of the shares is made concurrently. However, if the eventual issuance of the shares is subject to time or other objective vesting conditions, it is our view that section 7 would apply. …

A share bonus plan that has been designed to avoid the application of paragraph 7(3)(b) (by the inclusion of a discretionary cash settlement option) will also need to… [qualify as a] three-year bonus plans… deferred share unit plan… .

Respecting a SAR or DSU plan, because “there is no agreement to issue shares…[i.e.,] the corporation is free to choose the form in which the payment will be made (which includes cash) [a]ccordingly, paragraph 7(3)(b) will not apply… .

Words and Phrases
agreement
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) no agreement to issue shares if vesting in employer's discretion 241
Tax Topics - Income Tax Act - Section 7 - Subsection 7(2) no agreement if allocation of shares in trustee's discretion 242

29 July 2016 Internal T.I. 2015-0600941I7 - Share Based Deferred Compensation - Section 7

CRA treats amounts paid by a Canadian sub, to reimburse its U.S. parent for dilution under SARs that could be settled in cash at the issuer’s option, were deductible

The “Plan” provides for shares of USco to be issued to employees of its Canadian subsidiary (Canco) under the Deferred Stock, Restricted Stock, Performance Shares, Stock Appreciation Rights and Stock Options component of the Plan as well as making the “ESPP” available to them. Canco deducted the reimbursement payments it made to USco respecting the costs incurred by USco in issuing its common shares at a discount to Canco’s employees, claiming under Transalta that a legally binding agreement to issue shares did not exist for s. 7 purposes.

SARs

A Stock Appreciation Right provided a right to receive a payment in cash or shares, as selected by the Compensation Committee. The Directorate stated:

The issue of shares or payment in cash in satisfaction of the SAR is at the Committee’s complete discretion. Accordingly, Transalta will apply and paragraph 7(3)(b) will not apply to deny Canco a deduction.

Performance Shares

Under the Performance Shares Deferred Stock Agreement USco provided an award letter attached to the PSDSA specifying that the employee may obtain a targeted number of Performance Shares which are earned over a 3 year period based on the employee’s performance. After the 3 year period, the employer determines the total number of Performance Shares earned by the employee and at that point the appropriate number of shares of Deferred Stock are issued and delivered to the employee. CRA stated:

Based on the PSDSA, section 7 has application as USco appears to have a legal obligation to issue shares to a Canco employee… and… does not appear to have discretion concerning how to settle Performance Shares. Accordingly…paragraph 7(3)(b) should apply.

Other

USco did not appear to have discretion concerning how to settle Deferred Stock grants, Restricted Stock and a Non-Qualified Stock Options; and the ESPP obligated it to issue the number of subscribed-for shares. Therefore, s. 7(3)(b) applied respecting these.

3 May 2005 External T.I. 2005-0124261E5 - Employee stock purchase plan

s. 7(3)(b) applies to trusteed treasury share, but not open-market purchase, plan

A corporate employer contribute amounts to a newly-established trust from time to time, and the trustee uses those contributions to acquire shares of the employer from the employer or non-arm’s length shareholders thereof. The trust holds the shares for the benefit of the specific employees through the use of accounts established for the employee, and the shares may then be distributed by the trust to the employees at a future date on the occurrence of an event such as the employees' termination of employment. CRA stated:

[S]ubsection 7(2)… will apply when the shares held in the trust are allocated to the accounts of the employees. As a consequence… paragraph 7(3)(b)… will apply to limit the reduction of the employer's income for any year as a consequence of the distribution of shares to an employee under the arrangement. To clarify…where it is evident, from its inception, that the arrangement is subject to subsection 7 of the Act, it is our view that an employer cannot deduct any amounts with respect to any contributions made by the employer under the arrangement. …

[However] section 7… will not apply to situations where an employer contributes an amount to a trust and the trust uses the funds to acquire shares through open market transactions. Instead, we have taken the view that in these circumstances, the EBP provisions of the Act will apply. Furthermore, we have indicated that where a trust acquires some shares from an employer or a related corporation and other shares on the open market, CRA is, in general, prepared to apply the EBP provisions of the Act with respect to the shares acquired on the open market and the provisions of section 7 to the remaining shares.

2005 Ruling 2005-0120771R3 - Stock Option Plan

full deductibility of cash surrender payment made on surrender of options granted on common shares tracking appreciation in partnership interest

The two equal partners (“PartnerCo1” and “PartnerCo2”) of “Partnership” subscribe for voting redeemable retractable preferred shares of a corporation (“ManagementCo”) which had been newly formed by them. ManagementCo hires employees to fulfill its new contract to manage the Partnership and grants the employees options to acquire non-voting common shares of ManagementCo (the “Option Shares”) with an exercise price equal to their current modest fair market value and specified vesting and forfeiture conditions. In general, vested options may be exercised on the occurrence of a specified exit event (e.g., IPO or sale of the Partnership assets), or after XX years of service (or earlier “not for cause” termination or death. The options may be physically exercised, or cash-surrendered for their in-the-money value, at the optionee’s election. The preferred share proceeds will then be used by ManagementCoto acquire shares of a newly-incorporated subsidiary (“ManagementSubCo”) which, in turn, will use those proceeds to acquire an interest in the Partnership. The optionees will have the right to sell Option Shares to PartnerCo1 and PartnerCo2 for an amount not exceeding their fair market value.

Ruling that where options are cash-surrendered, ManagementCo may deduct the gross amount of the cash payment made by it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) stock option rules apply to common shares tracking a closely-held partnership interest 193

18 March 2004 Internal T.I. 2004-0055311I7 -

cash applied to share purchase

Under the employee stock option plan, optionees had the right to elect to receive cash (the "Put"), subject to a redacted right of the employer to decline to pay cash. Furthermore, optionees had the right to use the Put cash to subscribe for common shares which were differenct from those subject to their options, namely, flow-through shares. The pUt was exercised, and the cash so applied.

S. 7(3)(b) did not apply. CRA stated:

Although the election by the employee to receive cash in lieu of receiving shares under the stock option agreement is subject to the right of XXXXXXXXXX to decline to pay cash, XXXXXXXXXX , in our opinion, the employee still has the right to elect to receive cash and our position in paragraph 11 of IT-113R4 will apply (document 2000-0063133).

25 January 2002 External T.I. 2001-0112985 - EBP

EBP purchasing treasury shares of related corp

Would s. 7 apply to an employee benefit plan ("EBP") thatacquires treasury shares of a corporation that is related to the employer who contributes to the EBP? CRA responded:

In the context of a ruling request, we would review all of the facts to determine whether there would be an agreement to issue shares and whether section 7 of the Act would be applied to the particular situation.

We have previously concluded that, where employer contributions to a trust established for the benefit of its employees are used to acquire treasury shares of the employer corporation or a corporation related to the employer corporation, the plan or arrangement will be considered to constitute an agreement to sell or issue shares as contemplated by section 7 of the Act. Where this is the case, the employee will include a taxable benefit under section 7 of the Act and the employer will be denied a deduction for its contributions that are used to acquire the shares pursuant to paragraph 7(3)(b) of the Act. This result was supported by...Chrysler Canada...and...Placer Dome... .

14 November 2000 External T.I. 2000-004835 -

employer option to pay cash

In response to a request for further clarification of the CRA position respecting a stock option plan where the employer can elect to pay the employee cash instead of issuing shares at the exercise price, the Agency stated that it was its view that "no agreement is entered into until the corporation decides that it will issue shares to an employee upon that employee's exercise of an option. It is at that time that the option in respect of the employee will be subject to the provisions of section 7 ... ."

Furthermore, "the result in Kaiser...is not inconsistent with our position that the payment by an employee of cash rather than shares pusuant to the terms of a stock option plan will, in the absence of evidence to the contrary (e.g. the fact situation in Kaiser)...be a deductible expense to the employer."

1999 Ruling 990259 [use of employee bond to acquire foreign parent share at initial value]

use of employee bond to acquire foreign parent share at initial value

Canadian employees of a Canadian subsidiary of a foreign parent had "subscription rights" to acquire unlisted ordinary shares of the foreign parent. The subscription rights plan provided that, for reasons relating to the tax rules in the foreign jurisdiction, at the time of the grant of such right, the employee also would acquire a non-interest bearing bond of the parent at an appropriate discount. In addition, under put and call agreements with a non-resident corporation ("Putcallco"), the employee could cause Putcallco to acquire the employee's foreign parent shares (after exercise of the subscription right) at their fair market value at the time of such exercise (as determined under a formula), and Putcallco could acquire the subscription rights for their their fair market value (as also determined under the formaula) in the event the individual ceased to be an employee. The foreign parent and the Canadian subsidiary had agreed that when a subscription right was exercised by an employee, the Canadian subsidiary would be obliged to pay to the foreign parent the amount by which the fair market value of the shares acquired by the employee exceeded the exercise price.

An employee right to cash-surrender the subscription right to the Canadian subsidary is subsequently granted. Ruling that the Canadian subsidiary will be entitled to claim a deduction in computing its income under s. 9(1) equal to the amount paid in cash to an employee who exercises the cash-out right.

18 February 1999 Memorandum 990081 [non-deductibility of reimbursements by Cdn employer to US parent]

non-deductibility of reimbursements by Cdn employer to US parent

Where Canadian employees of a Canadian corporation are eligible to participate in an employee stock option plan of an indirect U.S. public-corporation parent, amounts paid by the Canadian employer to the U.S. parent to reimburse it for the difference between the option price and the amount actually paid by the U.S. parent in order to purchase the shares for distribution to the Canadian employees, will not be deductible by virtue of s. 7(3)(b).

Income Tax Technical News, No. 7, 21 February 1996

employee option to receive cash

Where under an employee stock option plan, the employee has the option to receive cash instead of shares, s. 7(3)(b) will not deny a deduction by the employer of a resulting cash payment because no shares will have been sold or issued under the plan.

1995 Institute of Chartered Accountants of Alberta Round Table, Q. 9 (9511740)

In RC's view, it is not appropriate for cash that an employee elects to receive in lieu of exercising a stock option to be eligible for the deduction under s. 110(1)(d), with the employer at the same time being entitled to a corresponding deduction. Accordingly, this matter is under study by RC and Finance.

ATR-64 April 20, 1995 (cancelled)

shares purchased through broker

Ruling that s. 7(3)(b) would not apply to an arrangement under which bonuses are paid by Y Co (a subsidiry of X Co, which is a public corportion) no later than the end of the third calendar year after the particular year of service (the "Deferral Period") through the transfer to the employee of shares of X Co (whose number, before taking into account a notional dividend reinvestment feature, is specified at the time of the grant of the bonus), given that the shares are purchased at the time of payment through an independent broker. CRA stated:

Section 7 is not applicable in the case of Y Co. as the corporation is not agreeing to issue or sell its own shares or shares of its parent company, X Co. Instead, an independent broker will purchase the shares of X Co. on the stock exchange on behalf of the employees at the end of the Deferral Period. At the same time Y Co. will pay the broker the purchase price of the shares.

20 January 1994 T.I. 940075 HAA4735-1 [purchase of employer shares under EPSP]

purchase of employer shares under EPSP

If employer contributions under an employees profit sharing plan can be used to purchase treasury shares, s. 7 will apply and the employer will be denied a deduction pursuant to s. 7(3)(b).

92 C.R. - Q.47

Placer Dome

In response to the decision in the Placer Dome case, RC is undertaking a complete review of its practices whereby treasury shares of the employer are acquired by employees or employee stock purchase plans.

92 C.R. - Q.45

stock option reimbursement to parent

A payment by a Canadian subsidiary to its U.S. parent to compensate the U.S. parent for the participation of employees of the Canadian subsidiary in a U.S. stock option plan, would not be deductible on computing the Canadian subsidiary's income.

4 May 1992 Tax Executive's Round Table, Question 10 (December 1992 Access Letter, p. 48)

S.7(3)(b) will not deny a deduction in computing the income of a corporation in respect of a cash payment which an employee elects to receive in lieu of exercising his stock option.

21 November 1991 T.I. (Tax Window, No. 15, p. 16, ¶1672)

Where a Canadian subsidiary acquires shares of its U.S. parent for cash and the parent then issues the shares to Canadian executives of the Canadian subsidiary at the subsidiary's direction, s. 7(3) will apply to grant the deduction to the Canadian subsidiary.

Articles

MacKnight, "Pyrrhic Policy: Fixing the Phantom Loophole in Paragraph 7(3)(b)", 1993 Canadian Tax Journal, No. 3, p. 429.

Subsection 7(4) - Application of s. (1)

Cases

Hurd v. The Queen, 81 DTC 5140, [1981] CTC 209 (FCA)

Where an individual was granted a stock option by reason only of his employment by the grantor company, he will realize taxable employment income in the year that the option is exercised notwithstanding that in that year he (1) is no longer an employee of the company (s.7(4)) and (2) is no longer a resident of Canada. Respecting the second point, the reference in S.2(3) to "a previous year" makes it clear that the duties of employment need not be performed in Canada in the year in which the benefit is sought to be taxed.

Administrative Policy

26 November 1992 T.I. 912281 (September 1993 Access Letter, p. 405, ¶C5-213)

A Canadian employee who exercised an employee stock option after becoming a non-resident of Canada would be taxable in Canada on the benefit subject to the provisions of any tax convention.

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 15 56

Articles

Tobias, "Taxing Benefits Realized by Former Canadian Residents", Taxation of Executive Compensation and Retirement, March 1994, p. 889

The author argues that Canada has no right to tax the benefit resulting from the exercise or realization of employee stock options on shares of non-Canadian corporations with no connection to Canada if such options are exercised after the employee has departed Canada and has established residence in a treaty jurisdiction and the individual is present in Canada in the year of exercise or realization for less than 183 days.

Subsection 7(5) - Non-application of this section

Commentary

The provisions of s. 7 do not apply to a benefit conferred by an agreement if it was not "received in respect of, in the course of, or by virtue of" the employment. The quoted phrase has also been interpreted in the context of s. 6(1)(a).

Even if an individual is a director or employee of a corporation at the time that it grants stock options to him or her, the resulting benefit may be found not to have been received by virtue of his or her employment. For example, the grant of options to the taxpayer and other individuals may not be correlated in any way with the extent of the individuals' duties (if any) as employees or directors (Grohne, Bernstein cf. Scott, Del Grande).

Cases

Scott v. The Queen, 94 DTC 6193 (FCA)

The taxpayer, who was the Director and Secretary-Treasurer of a public corporation ("Night Hawk") and whose work as corporate secretary (for which he received no remuneration) of advising directors of meetings, taking minutes and preparing directors resolutions etc. was usual work of a corporate secretary, was issued stock options by Night Hawk and exercised them at a gain.

The Court affirmed the finding of the Trial Judge that the options were granted to the taxpayer in respect of, in the course of, or by virtue of his "employment" with Night Hawk notwithstanding that the taxpayer was an employee of a corporation ("Delsco") which provided significant managerial services of the taxpayer to the Night Hawk group (who provided such services to the group on close to a full-time basis). The award of stock options to the directors were proportined to the degree of time and effort they devoted to the affairs of Night Hawk, and they received no other direct compensation. Furthermore, and notwithstanding the form of the agreements with Delsco, there was evidence to support the finding of the trial judge that in substance the taxpayer was a Night Hawk employee independently of his position of (an ostensibly unpaid) director and officer of Night Hawk. Accordingly, the taxpayer was taxable under s. 7(1)(a) when he exercised his options.

Grohne v. The Queen, 89 DTC 5220 (FCTD)

The taxpayer, along with other promoters of a company, entered into a "standby agreement" whereby they agreed to purchase shares of the company for 25¢ per share to the extent that shares pursuant to a rights offering by the company were not fully subscribed for. At the time the taxpayer acquired shares pursuant to the standby agreement, the market price was well in excess of the 25¢ per share paid by him.

Strayer J. held that the taxpayer received this advantage by virtue of being a promoter of the company rather than by virtue of being its president and a director, in light of the fact that all five promoters of the company had equal rights and obligations under the standby agreement irrespective of any of their employment duties, and in light of the fact that the taxpayer had no regular duties or remuneration as an employee.

Busby v. The Queen, 86 DTC 6018, [1986] 1 CTC 147 (FCTD)

It was found that the taxpayer received stock options in two mining companies as a result of her close personal relationship with a German businessman and, to a lesser extent, as a result of her agreement to guarantee some loans, and not by reason of her part-time employment at the German businessman's management company.

Bernstein v. MNR, 77 DTC 5187, [1977] CTC 328 (FCA)

The two beneficial shareholders of a company ("Highland") each received an option, and exercised that option, to purchase redeemable preference shares of a subsidiary of Highland for $200, and then received the sum of $100,000 when those shares were redeemed. It was held that they did not receive their options by virtue of their employment with Highland, but rather in their capacities as shareholders, in light of their substantial salaries as officers, the fact that other valuable employees did not receive the stock options and their desire to devise a scheme to extract the earnings of Highland in a fashion that minimized tax. (S.83A(7) of pre-1972 Act.)

See Also

Del Grande v. The Queen, 93 DTC 133 (TCC)

In finding that any benefit received by the taxpayer as a result of the granting or exercise of options would have been received more by virtue of being an officer and director rather than by virtue of being a shareholder, Bowman J. stated (p. 138):

"... the option agreements refer to his contribution to the business and affairs of the companies. The options are exercisable only while he is an officer or director of the companies. In other words the granting and exercise of the options may have been connected with his position as an officer and director but they are in no way connected with his being a shareholder."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) not a shareholder benefit if option exercisable only while officer; obligation v. conferral 189
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) 63
Tax Topics - Statutory Interpretation - Specific v. General Provisions 75

Administrative Policy

6 September 1994 External T.I. 5-942052 -

Options are received by a director in respect of an employment where the options were granted to the director in consideration for the services to be performed as director.

Subsection 7(6) - Sale to trustee for employees

Administrative Policy

14 November 2013 External T.I. 2013-0500641E5 - Subsections 7(6) and 153(1) - Withholding

employer rather than s. 7(6) trust withholds

Under an arrangement described in s. 7(6), does obligation to withhold tax rests with the corporation/employer or the s. 7(6) trust? CRA stated:

[T]he arrangement is deemed to be a section 7 agreement to issue shares. Accordingly…the corporation is paying the section 7 employment benefit as remuneration for purposes of paragraph 153(1)(a) and therefore, the corporation has the obligation to withhold and remit the appropriate amount of tax.

Before so concluding, CRA summarized s. 7(6) as follows:

[S]ubsection 7(6) provides that where a corporation has entered into an arrangement where the corporation's shares are issued or sold to a trustee to be held for sale to the corporation's employees, for purposes of section 7 and paragraphs 110(1)(d) and (d.1), the following apply:

(i) the arrangement is deemed to be a section 7 agreement to issue shares between the corporation and the corporation's employee;

(ii) shares acquired under the arrangement are deemed to be acquired under the section 7 agreement, and

(iii) amounts paid to the trustee under the arrangement by the employee are deemed to be paid to the corporation under the section 7 agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) employer rather than s. 7(6) trust withholds 67

Subsection 7(8)

Administrative Policy

27 September 2016 Internal T.I. 2015-0572901I7 - Deferral of employment benefit under ss. 7(8)

deferred amount triggered on rollover

A stock option benefit which was deferred under s. 7(8) on a stock option exercise before March 4, 2010 will be triggered on a disposition of the shares, even if this is as a rollover under s. 73(1.01)(b) of the shares to the taxpayer’s ex-spouse on a matrimonial settlement. The triggered s. 7 gain will add to the ACB of the rolled-over shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(b) s. 7(10) deferred gain is triggered on a s. 73 rollover 200

Subsection 7(9)

Articles

K.A. Siobhan Monaghan, "Amendments to Stock Option Rules - The New Deferral of Section 7 Benefits", Corporate Structures and Groups, Vol. VI, No. 4, p. 336.

Subsection 7(11)

Administrative Policy

21 February 2002 External T.I. 2001-010965 -

Given that the 13 July 2001 comfort letter of Finance dealing with a reduction in the option price of employee options discusses only the application of s. 110(1)(d) and not s. 7(11), in the repricing situation the specified value for purposes of s. 7(11) is based on the fair market value of the security at the time the option was granted to the employee and not the fair market value at the time the option was repriced.