We are writing in reply to your letter of January 2, 1991, wherein you requested our interpretation of application of section 7 and paragraph 110(1)(d) of the Income Tax Act (the "Act") to an employee's stock option plan. As discussed by telephone on January 2, 1991, since this request deals with a specific taxpayer and a completed transaction, we regret that we are unable to provide you with specific comments.
Your request concerns the employees of a Canadian subsidiary who are granted stock option rights to acquire shares in the U.S. parent corporation. These rights vest with the individuals over the term of their employment. Subsequently, the U.S. parent company merges with another U.S. company to form "Amalco". The merger of the U.S. companies will qualify as an amalgamation or merger for Canadian tax purposes.
Under the merger agreement, all stock options outstanding on the merger date will be cancelled. The employees receive compensation in the form of cash for their vested stock options and new options for their unvested stock options. The new stock options can be exercised at the same exercise price as the old options for new redeemable common shares of Amalco. The new common shares will be redeemable at the option of Amalco for a period of five years at pre-determined redemption amounts.
Your Opinion
1. Assuming there has been a merger for Canadian tax purposes and particularly for the purposes of subsection 7(1.4) of the Act, an employee who receives new stock options for the unvested share options will not be subject to a benefit under paragraph 7(1)(b) of the Act. This is so even though the employee may receive cash for the vested stock options.
2. Where an employee receives cash for the vested stock options and incurs a benefit under paragraph 7(1)(b) of the Act, the employee will be entitled to a deduction under subparagraph 110(1)(d)(ii) of the Act assuming the requirements of paragraphs 6204(1)(a) and (c) of the Regulations are satisfied. In this regard, it is your opinion that the merger agreement would not represent "... any term or condition of the share or any agreement in respect of the share ..." for the purposes of paragraphs 6204(a) and (c) of the Regulations.
Our Comments
With respect to your first opinion, it is our view that, in order for subsection 7(1.4) of the Act to apply the rights in the predecessor company's stock option plan, must be exchanged for no consideration other than the rights to Amalco's stock option plan. Since the employees are entitled to receive both cash and new options in exchange for their options in the predecessor company, it is our opinion that subsection 7(1.4) of the Act would not apply to the situation described above. Consequently, paragraph 7(1)(b) of the Act would apply to determine the amount of a benefit.
Your second opinion involves a determination of whether the merger and its related arrangements constitute "... any term or condition of the share or any agreement in respect of the share...". Since this determination can only be made by an examination of all of the facts and circumstances in your client's situation, you may wish to discuss the matter with Mr. P. St-Laurent, Chief of Audit at the Toronto District Taxation Office. Mr. St-Laurent may be contacted by telephone at (416) 973-9005.
As discussed during our telephone conversation of January 2, 1991, we can not provide any comments with respect to the other issues raised in your letter of October 11, 1990.
We trust that these comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. P. St-Laurent Chief of Audit Toronto District Office