Revenue Canada Taxation
Head Office
XXXX
M.S. Lalonde (613) 957-8959
March 12, 1987
Dear Sirs:
This is in reply to your letter of January 26, 1987 wherein you requested our views as to the taxation of benefits provided to an employee through a stock option plan in a number of situations.
Whether the benefits provided pursuant to an agreement between an employer and an employee are subject to the provisions of section 7 of the Income Tax Act ("Act") or section 5 of the Act can only be determined on the basis of the facts of a particular case and in particular the terms of the agreement.
The Department's general views in this regard are set forth in IT-113R2
entitled "Benefits to employees-stock options". As we indicated to you in our letter of December 22, 1986 in our view shares received in lieu of a bonus that has already been declared would result in income to the employee pursuant to section 5 of the Act. Generally where an agreement provides the employee, as opposed to the employer, with the option of receiving shares or a cash bonus and the employee, prior to the bonus becoming payable, elects to receive shares the related benefit would be subject to the provisions of section 7 of the Act. Where the option is the employer's it may be argued that the employer has not "agreed to sell or issue shares" as required by the preamble to subsection 7(1) of the Act.
We hope our comments are of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch