A Canadian-controlled private corporation (“CCPC”) is granted an option to acquire shares of an arm’s length CCPC. The option will only vest upon completion of a medical research project in which it is engaged in the course of its business. Such vesting occurs at the end of the third year, and the corporation exercises its option to purchase the shares at the beginning of the fourth year.
Regarding the timing of the recognition of any business income, CRA stated:
Generally speaking, where stock options are granted to a taxpayer as payment for consulting services rendered, the FMV of the underlying shares on this date over the aggregate of the exercise price of the option should be included in the taxpayer’s business income, pursuant to subsection 9(1). … [W]here it can be determined … that the option is granted in consideration for services that are to be rendered after the time of grant and upon the fulfillment of a condition or contingency, the income should instead be recognized when the services are rendered, the amount is quantifiable and the rights are unrestricted.
… [Here] the vesting of the option is linked to the completion of the long-term research project. As such, it may be difficult to conclude that the income is earned before the vesting date under the particular arrangement. … [G]enerally, it is at the time where the services have been rendered and the contingency has been fulfilled, that the FMV of the underlying share over the aggregate of the exercise price of the option should be included in income under subsection 9(1). …
… Where the facts indicate that the incremental value represents part of the consideration received by the taxpayer for consulting services rendered, the incremental value should generally be treated as business income for purposes of the Act.