| 5-922676 | |
| 24(1) | D. S. Delorey |
| (613) 957-8953 |
Attention: 19(1)
September 30, 1992
Dear Sirs:
This is in reply to your letter of September 8, 1992 concerning the relationship between the option price and the fair market value ("FMV") of shares of a Canadian-controlled private corporation ("CCPC").
Where an option is given to an employee to acquire shares of a CCPC and the provisions of subsection 7(1.1) of the Income Tax Act (the "Act") are otherwise satisfied, there is no requirement in the Act that the option price be a certain amount. The fact that the option price might be less than the FMV of the shares at the time the option was issued will not trigger a benefit at that time. Rather, the employee will be considered to receive income only when the shares have been disposed of, with such income being the difference between the FMV of the shares at the time they were acquired and the price paid for them by the employee (i.e., the option price). These tax implications are reflected in the comments in paragraph 4 of Interpretation Bulletin IT-ll3R3.
With respect to your question concerning paragraph 110(1)(d.1) of the Act, it was intended that the enactment of that paragraph together with the amendment to subsection 7(1.1) applicable to CCPC shares acquired after May 22, 1985 would preserve the tax treatment applicable where such shares were acquired prior to May 23, 1985. In this regard, we refer you to the Department of Finance's relevant Explanatory Notes.
Under subsection 7(1.1) of the Act as it formerly read, any benefit computed under paragraph 7(1)(a) of the Act was not required to be included in the employee's income provided the employee held the shares for two years. The result was that if the shares were held for the two-year period, any gain on their disposal was included in income in accordance with the capital gain inclusion rate, which at the time was 50%. There was no FMV test. The combination of paragraph 110(1)(d.1) and subsection 7(1.1) as it currently reads gives the same result in that any gain will be included in income in accordance with the capital gains inclusion rate, which currently is 75%, provided the shares are held for two years. In this regard, we refer you to paragraph 12 of IT-113R3. Had the amendments not been made, it would have been possible for the total gain to be effectively excluded from income because of the capital gains exemption that was introduced at the time.
There was thus no need to introduce into paragraph 110(1)(d.1) any FMV test to achieve the intended result. The fact that this intended result is more beneficial than the tax consequences that arise where non-CCPC shares are involved reflects overall government policy. Questions concerning such policy decisions should be addressed to the Department of Finance.
We trust our comments are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate