13 June 1986 Income Tax Severed Letter 5-0409 - [Employee Stock Appreciation Rights Paragraph 110(1) (d)]

TO - MR. C.D. McDonald Director General Legislative Affairs Directorate

FROM - SPECIALTY RULING DIRECTORATE
        N.R. Mitchell
        957-2139

RE Employee Stock Appreciation Rights Paragraph 110(1)(d)

Further to our memorandum of March 13, 1986, concerning the issue of stock appreciation rights ("SAR's") and paragraph 110(1)(d) of the Act, we wish to draw to your attention a further consideration in this context. We currently have before us a referral from Appeals branch which raises the matter of agreements to issue shares to employees which contain SAR's which the employee may elect to exercise by receiving the value of his SAR's in cash rather than in the form of treasury shares.

It is an open question, in our view, whether or not the benefit derived by an employee as a result of the exercise of such a term in an agreement could be brought within paragraph 7(l)(b) of the Act (rather than subsection 5(1) or paragraph 6(l)(a)). Our resolution of that issue will be influenced by the underlying consideration of whether, if such a benefit does fall within subsection 7(1), the deduction provided for in paragraph 110(l)(d) would or should be available to an employee who simply receives cash payment directly pursuant to the terms of an agreement with his employer. We would therefore request the views of the Department of Finance on the issue of the acceptability from a policy standpoint of the deduction in paragraph 110(l)(d) possibly being available in these circumstances.

We would draw to your attention that in the case of Greiner 84 DTC 6073, the Federal Court of Appeal held that a cash payment received in consideration for the surrender of stock option rights was taxable pursuant to paragraph 7(1)(b). It is less certain that paragraph 7(1)(b) can be invoked where the cash payment is expressly contemplated by the terms of an agreement with one's employer, given that paragraph 7(l)(b) uses the words "transferred or otherwise disposed of rights ...". The term "disposed of" may not include the mere exercise of rights as specifically provided in an agreement, but plausible arguments can be put forward to support the opposite conclusion.

A copy of our earlier related memorandum is attached for your reference, as well as some background material on the issue brought to our attention by Appeals Branch.

Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosures