J.D. Jones (613)957-2104 JUL 11 1988
Dear Sirs:
Re: Stock Option Benefits - Application of Paragraph 7(1)(b) of the Income Tax Act
This is in reply to your letter of May 18, 1988, June 27, 1988 and our telephone conversation regarding the above noted matter.
You provided the following facts for our consideration:
1. Canco is a Canadian company and is a subsidiary of US co (a U.S. public company).
2. In prior years, certain employees of Canco were granted options to acquire shares of US co at a price not less than the fair market value of the shares on the date the options were granted.
3. US co intends to reorganize its share capital structure by acquiring its outstanding shares from its current shareholders in exchange for new shares. It also intends to settle all outstanding stock options held by employees, including employees of Canco, by offering to acquire the outstanding stock option rights for an amount equal to the excess of the fair market value of the shares on the date of exercise over the option price.
4. US co has extended an offer to the holders of the outstanding stock options to pay cash as consideration for the surrender of the stock option rights and that this offer would not be made under the terms of the stock option plan. It is a separate offer made by the company in the course of the capital reorganization.
5. At no time has USCO granted a "stock appreciation right" (SAR) to the holders of the stock options. The offer was not made pursuant to the terms of the stock option plan and does not constitute the grant of an SAR to the employee.
It is our view that in situations of this nature, the agreement to issue shares must be looked at as a whole. The key question to be determined is whether the employee could have acquired shares under the agreement if he so chose or, alternatively, whether the employer had the ultimate discretion to pay only cash and did in fact elect to pay cash. Where the election to receive cash instead of shares under the agreement is the employee's choice to make, rather than the employer's decision, the resultant benefit would be included in the employee's income under subsection 7(1) of the Act. On the other hand, if the decision to pay cash rather than issue shares remains with the employer, and cash is actually paid, we would maintain that the benefit so received would be included in the employee's income by virtue of subsection 5(1) of the Act.
Our opinion is based on the assumption that the original option to acquire shares of US co did not provide that the employer may elect to pay cash in lieu of issuing shares.
Based upon the above, it is our view that an amount received by an employee under US co's offer to acquire the outstanding stock option rights of the employee for cash consideration would be deemed to be a benefit from employment pursuant to paragraph 7(1)(b) of the Income Tax Act and not as remuneration under paragraph 5(1)(a) of the Income Tax Act.
We hope the above comments are of assistance to you.
Yours truly,
ORIGINAL SIGNED BY
P.D. FUOCO for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch