| 19(1) | File No. 5-9559 |
| J.D. Jones | |
| (613) 957-2104 |
April 9, 1990
Dear Sirs:
Re: Subsection 7(1.1) of the Income Tax Act (the "Act")
This is in reply to your letter of February 2, 1990, wherein you requested our opinion with respect to several hypothetical situations as to whether the arrangements would be considered a stock option agreement qualifying under subsection 7(1.1) of the Act.
Our understanding of the situations is as follows:
a) A corporation has a written policy allowing any employee to purchase stock at the fair market value at the time relevant in lieu of receiving compensation due.
b) Same as in a) except the policy is verbal.
c) Due to a shareholder's agreement in a widely held Canadian controlled private corporation (CCPC) new shareholders are not allowed. The written agreement discussed in a) above is only available to employees who are already shareholders (arm's length).
d) Due to shareholder's agreement in a widely held Canadian CCPC (35 shareholders are not allowed. The verbal agreement discussed in b) above is only available to employees who are already shareholders (arm's length).
e) Directors in a widely held corporation accept shares in a CCPC as payment for director's fees due to them to a cash squeeze in the corporation. If the fees are paid, the full fees could not be put back into the company as shares due to the tax due personally by the individuals.
Based on the above, you have asked for our opinion as to whether taxation of the remuneration in examples a) to e) above could be deferred by considering the arrangement to be stock option agreement tax otherwise payable if the employee had accepted cash rather than the shares until such time as the shares are subsequently sold.
In our view, in all of the situations outlined in a) to b) above, the employee could not defer the tax payable on the remuneration due by agreeing to purchase shares in the employer corporation in lieu of receiving the compensation due him. In these situations it is our view that the employee has constructive receipt of the remuneration due and, accordingly, such amounts would be required to be included in the employees' income as income from an office or employment in the year of such receipt.
We trust our comments are of assistance to you.
Yours truly,
for Director Business and General Division Specialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch