2020-0836991E5 Eligible property and stock options

Principal Issues: Can "in the money" stock options, not subject to the rules of section 7, be transferred into the issuing corporation on a tax deferred basis receiving share consideration instead of exercising the options?

Position: Yes.

Reasons: Stock options meet the definition of eligible property. Tax consequences can vary depending on the fact scenario.

Author: McPherson, Ryan
Section: 85(1), 85(1.1), 54(b)

XXXXXXXXXX                                                                               2020-083699
                                                                                                       Ryan McPherson
April 3, 2020

Dear XXXXXXXXXX

Re: Request for Technical Interpretation – Definition of “Eligible Property”

We are writing in reply to your email dated January 10, 2020, wherein you requested our views on the interpretation of the definition of “eligible property” in subsection 85(1.1) of the Income Tax Act (the “Act”). Specifically, you wanted to know if certain stock options could be considered as eligible property for the purposes of subsection 85(1) in the following hypothetical situation.

An adult individual resident in Canada (Mr. X) holds stock options in Corporation A, a corporation resident in Canada, which upon exercise will allow Mr. X to purchase a specific number of shares of Corporation A at a pre-defined price (“exercise price”). Mr. X holds the stock options as capital property. Recently, the fair market value of the shares of Corporation A has exceeded the exercise price and as such the stock options owned by Mr. X are “in the money”. For greater clarification, the stock options held by Mr. X are not employee stock options subject to the rules in section 7.

OUR COMMENTS

Unless otherwise stated, all references to a statute are references to the provisions of the Act, as amended to the date hereof and every reference herein to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Generally speaking, the rules in section 85 allow for a tax-deferred transfer of “eligible property” by a taxpayer to a taxable Canadian corporation where consideration for that transferred property includes shares of that corporation and the other conditions set out therein are met.

Eligible property is defined for the purposes of these rules in subsection 85(1.1) and includes inter alia, a capital property (other than real or immovable property, an option in respect of such property, or an interest in real property or a real right in an immovable, owned by a non-resident person).

Subsections 85(1.11) and (1.12) provide two additional exceptions to the definition of eligible property. Subsection 85(1.11) excludes certain non-arm’s length transfers of foreign resource properties (or a partnership interest that derives its value from such property) and subsection 85(1.12) excludes an “eligible derivative” as defined in subsection 10.1(5) and applicable to taxpayers subject to subsection 10.1(6). Based on the hypothetical facts and for the purposes of this response, neither of these exclusions would appear to be applicable.

“Capital property” is defined in section 54 as “any property, any gain or loss on the disposition of which would, if the property was disposed of, be a capital gain or a capital loss as the case may be, of the taxpayer. With respect to a stock option held by a taxpayer as capital property, a disposition of such an option could result in a capital gain or loss by the holder. As such, a stock option could meet the definition of eligible property as described in paragraph 85(1.1)(a).

However, the specific income tax consequences of any transaction or series of transactions involving a transfer of a stock option held by a particular taxpayer back to the granting corporation can only be determined after a complete review of all the facts and circumstances.

We trust these general comments will be of assistance to you.

Yours truly,

Michael Cooke, CPA, CA
Manager
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020