N.R. Mitchell (613) 957-2134 DEC 11 1987
Dear Sirs:
Re: Changes to Employee Stock Option Agreements; Paragraph 110(1)(d) of the Income Tax Act (the "Act")
This is in reply to your letter of November 7, 1987, in which you request our views on certain technical issues relating to employee stock option agreements in the context of the following hypothetical fact situation.
1. A public corporation has entered into agreements with certain of its employees whereby the corporation has agreed to issue shares of its capital stock at and for a price equal to the trading price on the relevant stock exchange on the day the agreement was entered into.
2. Since the date of the agreements, the market price of the shares has fallen significantly and the corporation wishes to enter into new agreements with the employees.
3. It is proposed that the old agreements will be cancelled and new agreements entered into on substantially the same terms as the old agreements except that the issue price in the new agreement will be reduced to equal the trading price on the date of the new agreement.
In response to your specific inquiries, we would first of all confirm that it is our view that in the situation described above, no benefit fer the purposes of paragraph. 7(1)(b) of the Act would be considered to have been received by the employees as a result of the cancellation of the old agreements and the entering into the new agreement. In conformity with the position set out in the last sentence of paragraph 10 of Interpretation Bulletin IT-113R2 concerning the cancellation and substitution of stock option plans, we would not consider the cancellation and substitution of particular option agreements to be a taxable event for the purposes of section 7 of the Act. Furthermore, we would also confirm that in the event that the old agreements are simply amended to reflect the current share price - rather than being expressly cancelled with new agreements being extended - the amended agreement could be considered to be a new. agreement to issue shares for the purposes of paragraph 110(1)(d) of the Act and the date of that agreement would be the date of the amendment.
The foregoing represents our considered opinion with respect to the issues raised in your letter, but this is not a ruling and is not binding upon the Department. Nonetheless, we trust this will be of assistance to you.
Yours truly,
ORIGINAL SIGNED sr ORIGINAL SIGNED PAR ROBERT M. JOYCE
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch