6 August 1999 External T.I. 9910975 - STOCK OPTIONS, U.S. PARENT, 7(3)(B)

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: In the U.S., corporations are allowed to acquire their shares on the open market and hold them in a special treasury account. Will paragraph 7(3)(b) apply to deny the deduction in respect of a payment by a Canadian corporation to its U.S. Parent for its cost of shares reissued out of this special treasury account in satisfaction of the Canadian corporation’s employees stock option rights?

Position: Yes.

Reasons: It is clear that the provision was meant to apply.

XXXXXXXXXX 991097
M. P. Sarazin
Attention: XXXXXXXXXX

August 6, 1999

Dear Sirs:

Re: Paragraph 7(3)(b) and Shares of U.S. Parent

This is in reply to your internet Email dated April 23, 1999, wherein you requested clarification of our position regarding the deductibility of amounts paid by a Canadian subsidiary (Aco) to its U.S. Parent in respect of its cost of reissuing previously issued shares to the employees of Aco.

You state that it is common for companies in the United States to periodically purchase their own shares in the open market for retention in their treasury for the purpose of being reissued to the public in the future. You are of the view that Aco should not be denied any deduction under paragraph 7(3)(b) in respect of amounts paid to reimburse its U.S. Parent for its cost of acquiring the shares that were issued the employees of Aco. You are aware of the position we expressed in our document 990081 wherein we opined that paragraph 7(3)(b) would apply to deny any deduction to Aco in respect of amounts paid to its U.S. Parent but you believe the views to be inapplicable to the above scenario because Aco is only reimbursing U.S. Parent for its actual cash outlay in respect of the shares that were reissued to the Aco employees (there is no reimbursement for losses in respect of market price increases). You also suggest that a decision to apply paragraph 7(3)(b) of the Act would be inconsistent with the Department’s general position of allowing an employer to deduct its “out-of-pocket” expenses in respect of stock option plans, as expressed in paragraph 11 of Interpretation Bulletin It-113R4. In our telephone conversation on July 28, 1999 (XXXXXXXXXX /Sarazin), you advised us that, for several years, tax practitioners have been advising their clients that paragraph 7(3)(b) of the Act would not apply to the “out-of-pocket” expenses based on the comments provided in an internal memorandum dated June 28, 1990.

Comments

From a policy perspective, we are not able to differentiate your situation from the one described in our file 990081. The words of paragraph 7(3)(b) of the Act are clear and, as such, we confirm that the provisions of paragraph 7(3)(b) of the Act would apply in respect of any payments by Aco to its U.S. Parent in respect of its cost for the reissued shares. The fact that U.S. Parent chooses to satisfy its obligations under stock options through the issuance of previously issued shares instead of new treasury shares should not result in a different tax treatment for Aco.

We note that amounts paid by an employer to purchase shares on the open market for the benefit of employees may be deductible where the purchase constitutes an employee benefit plan and not a stock option plan. This determination is a question of fact. In this regard, we refer you to ATR-17.

We have reviewed the comments provided in the internal memorandum dated June 28, 1990 and we believe that they are appropriate because there may be situations where an employer should be entitled to deduct its “out-of-pocket” expenses. However, this determination can only be done on a case by case basis where all of the facts are known. In addition, since the particular document was released to the public under Access To Information Act rules and therefore does not set out all the facts of the situation, only limited reliance can be placed on the general comments provided therein.

We trust the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate