27 April 1998 External T.I. 9803915 - STOCK OPTION - FOLLOW-UP

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:

Would 7(1.4) apply where old rights are cancelled and replaced by new rights having the only difference between them the exercise price;

Position: No position;

Reasons: Question of fact.

XXXXXXXXXX 		5-980391
			Fouad Daaboul
Attention:  XXXXXXXXXX 

April 27, 1998

Dear Sirs:

Re: Follow-up to Stock Option Technical Interpretation

This is in reply to your letter of February 12, 1998, wherein you requested a confirmation of technical interpretation concerning subsection 7(1.4) of the Income Tax Act (the "Act") following your technical interpretation request of September 10, 1997 and our response of October 7, 1997.

Based on the information provided in your letter, we are of the view that your enquiry does not relate to a hypothetical situation. Rather, you appear to have outlined a factual situation which involves specific taxpayers. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling which can be submitted in accordance with Information Circular 70-6R3 dated December 30, 1996. However, we provide the following general comments which may or may not apply to your client and which, in accordance with the above-mentioned Information Circular, are not binding on the Department.

Subsection 7(1.4) of the Act will apply where certain requirements are satisfied. One of these requirements is the disposition of rights under a stock option agreement.

As we have expressed in our later document and based on the court conclusion, in the case of John A. Amirault v. The Minister of National Revenue (90 DTC 1330), generally subsection 7(1.4) should not apply in a situation where the only change to a such existing stock option agreement is a reduction in the exercise price.

The determination as to whether a change to a particular option would constitute a disposition of rights or not is a question of fact and such determination can only be made after analysis of all of those facts. The manner in which a transaction is carried out can be a significant factor in determining tax consequences - as pointed out in The Queen v. Friedberg (92 DTC 6031) - "in tax law, form matters".

We trust the above comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
- 2 -

.../cont'd

- 1 -