Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Comments on put and call options
Position: Comments provided that are consistent with IT-479R
Reasons: See position
XXXXXXXXXX 2000-003374
M. Eisner
September 21, 2000
Dear XXXXXXXXXX:
Re: Stock Options
This is in reply to your letter received in our office on June 23, 2000, concerning the above-noted subject.
You have set out two examples which concern the tax treatment of options issued in respect of shares.
In the first example, an individual ("Individual A") owns publicly traded shares and issues an option to another individual ("Individual B") for a purchase price that is greater than the fair market value of the shares. Individual B, who purchases the option, pays Individual A a premium.
In the second example, Individual C writes an option with respect to the possible acquisition of publicly traded shares from another individual ("Individual D") in the future, and agrees to pay Individual D less than the fair market value of the shares at the time the option is written. Individual D, who acquired the option, pays Individual C a premium.
With respect to the above examples, you have raised three questions. The first is whether the premiums are of an income or capital nature. The second is that if the premiums are of an income nature, how they are to be reported on a tax form. Your third question is whether the proceeds from the sale of the underlying shares that result from a stock option transaction, continue to be treated as capital gains or losses.
In order to determine the tax consequences of a particular transaction that has occurred, it is necessary to review all the relevant facts and documentation. Such a review falls within the responsibility of your local tax services office. We are, however, providing you with the following general comments.
In the first situation, Individual A has issued a call option under which the holder (Individual B) is entitled, if he or she so chooses, to purchase the number of publicly traded shares as specified in the option agreement. The writer (Individual A) is committed to deliver the shares specified in the option agreement if the option is exercised by the holder. In the second situation, Individual C (the writer) has issued a put option. The holder of such an option (Individual D) becomes entitled, if Individual D so chooses, to sell the number of shares specified in the option agreement at a stated exercise price at any time prior to the expiry date of the option.
For information concerning your queries on the treatment for the transactions for Individuals C and D, we would refer you to the enclosed document 992545 issued by this Directorate on October 15, 1999. Comments in that document on whether a transaction is on income or capital account are also relevant to Individuals A and B. In addition, comments with respect to capital gains treatment in that document on subsection 49(1) of the Income Tax Act (the "Act") and the expiry of the put option may also be considered in relation to Individuals A and B.
We trust that our comments are of assistance to you.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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