Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1) Can stock options be transferred to an employee's wholly-owned corporation? 2) Can shares of the wholly-owned corporation be acquired by the employer without any tax ramifications to the employee?
Position: 1) Yes. 2) Probably not.
Reasons: 1) Paragraphs 7(1)(c) and (d) contemplate such transfers. 2) Series of transactions appear to be avoidance transactions and subsection 245(2) may apply.
XXXXXXXXXX 2000-001820
M. P. Sarazin
Attention: XXXXXXXXXX
June 26, 2000
Dear Sirs:
Re: Transfer of Stock Options to a Wholly-Owned Corporation
This is in response to your letter of March 28, 2000, wherein you requested our views on how the Income Tax Act (the "Act") would apply where an employee of a public corporation ("Pubco") transfers stock options granted by his or her employer to his or her wholly-owned corporation.
You are of the view that paragraphs 7(1)(b), (c) and (d) of the Act would not apply as a result of the transfer of the options to the wholly-owned corporation. You are also of the view that the employee could acquire the shares of the wholly-owned corporation for an amount equal to the fair market value of the transferred options. If the employee immediately disposes of his or her shares in the wholly-owned corporation to Pubco, you believe that the employee would not have any income inclusion as a result of the series of transactions because section 7 would not apply and the shares of the wholly-owned corporation would be disposed of by the employee for an amount equal to their adjusted cost base.
Confirmation of the tax consequences associated with completed transactions are provided by the relevant tax services office. Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, please refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of Information Circulars and Interpretation Bulletins are available from your local tax services office or on the Internet at the following site: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.
Paragraph 5 of Interpretation Bulletin IT-113R4, Benefits to Employees - Stock Options provides the Agency's general views with respect to the application of paragraphs 7(1)(c) and 7(1)(d) of the Act.
An employee may have an income inclusion under paragraph 7(1)(c) when the employee transfers his or her rights under a stock option agreement to a non-arm's length transferee (i.e., the wholly-owned corporation hereinafter referred to as "Holdco") and Holdco acquires shares under the particular stock option agreement. The amount of the benefit, if any, is the difference between the fair market value of the shares at the time they are acquired by Holdco and the total of the amount paid or payable by Holdco to Pubco for the shares plus any amount paid by the employee to acquire the rights under the stock option agreement.
An employee may have an income inclusion under paragraph 7(1)(d) when the employee transfers his or her rights under a stock option agreement to a non-arm's length transferee (i.e., Holdco) and Holdco disposes of those rights in an arm's length transaction. The amount of the benefit, if any, is the difference between the fair market value of the consideration received by Holdco for the stock option rights and any amount paid by the employee for those rights.
IT-113R4 does not discuss the taxation of the disposition of the stock option rights by the employee to the non-arm's length transferee. By virtue of paragraph 7(3)(a) of the Act, the employee's benefit from the stock option rights will only be taxed when Holdco exercises the option under paragraph 7(1)(c) of the Act or disposes of the option rights under paragraph 7(1)(d) of the Act. Consequently, no amount will be included in the employee's income as a result of the transfer of the stock options to Holdco.
Where a capital loss results on the disposition to Pubco of the shares acquired under the stock option by Holdco (because the amount paid by Holdco to acquire the options from the employee and the adjustment to the adjusted cost base under paragraph 53(1)(j) of the Act exceeds the proceeds of disposition), we have previously stated that the application of subsection 245(2) of the Act would have to be considered by the Agency.
Where, in order to avoid the application of section 7 of the Act, the employee disposes of his or her Holdco shares to Pubco before Holdco exercises the options, we would have to consider whether subsection 245(2) of the Act should be applied to the series of transactions.
We trust the above comments will be helpful.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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