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: Does a change in a stock option plan to give the employer the right to pay an employee cash instead of shares cause an immediate disposition pursuant to 7(1)(b)?
Position: No.
Reasons: As long as the employee could potentially still receive shares under the agreement (albeit at the employer's discretion) the plan still falls within the ambit of s.7 & no 7(1)(b) disposition.
XXXXXXXXXX 983381
G. Kauppinen
(613) 957-8971
Attention: XXXXXXXXXX
July 22, 1999
Dear Sirs:
Re: Stock Option Rights
This is in reply to your letter dated December 23, 1998 wherein you requested our opinion on the application of paragraph 7(1)(b) of the Income Tax Act ("Act").
If a corporation has a stock option plan where the employee has the right to receive cash instead of shares at the time the option is exercisable (i.e. the option "vests") then the comments in paragraph 11 of Interpretation Bulletin 113R4 dated August 7, 1996 will apply. As stated in that paragraph, where the employer has the right to pay the option-holder cash instead of shares when the employee's rights under the agreement vest, then the employee is taxable under section 5(1) or paragraph 6(1)(a) of the Act at the time the cash is received and is not entitled to a paragraph 110(1)(d) deduction.
If an existing stock option arrangement in which only the employee has the right to receive cash instead of shares is changed so that the employer acquires the right to pay the employee cash instead of shares, it is our opinion that the change would not cause an immediate disposition to pursuant to paragraph 7(1)(b) of the Act as long as the employee retains the right (albeit now at the employer's discretion) to acquire shares of the employer corporation or a corporation with which the employer corporation does not deal at arms length.
Where the shares of a corporation are sold to another corporation and as a consequence a new stock option arrangement is entered into after the sale between the purchaser corporation and the employees of the corporation whose shares have been sold, subsection 7(1.4) of the Act may apply so that there is no disposition pursuant to paragraph 7(1)(b) of the Act.
We trust the foregoing comments are of assistance.
Your truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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