R. Nanner (613)957-3494 November 26, 1987
Dear Sirs;
This is in reply to your letter of October 22, 1987 concerning a stock option plan where the options have stock appreciation rights. An option holder under the above-mentioned plan is entitled to dispose of the option to the employer for proceeds, in cash or in the form of the employer's shares, equivalent to the difference between the fair market value and the option price of the shares. You enquired whether paragraphs 7(1)(b) and 110(1)(d) of the Income Tax Act (the "Act") apply to the above-described situation.
It is our view that where an option holder disposes of his option and receives proceeds, in cash or in the form of the employer's shares, equivalent to the difference between the fair market value and the option price of the shares, paragraph 7(1)(b) is applicable. Furthermore, it is also our view that paragraph 110(1)(d) as it presently reads is not applicable in a situation to which paragraph 7(1)(b) applies as such a situation invariably fails to satisfy the requirement set forth in subparagraph 110(1)(d)(ii) of the Act. However, if Bill C-64 is enacted into law in its current form (in respect of paragraph 110(1)(d)), then paragraph 110(1)(d) will apply to the above situation and will be retroactive to May 22, 1985.
We hope the above comments are of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch