Options

The s. 7 rules did not apply where an employee of a consulting company received, as part of his compensation, stock options that had been received by the company on one of its engagements. Accordingly, the fair market value of the options was included in his employment income when received. As to determining “FMV,” CRA stated:

[T]he intrinsic value of an option is not reflective of its FMV; rather, a valuation method that is appropriate in the circumstances should be used to determine the FMV.

A consultant, but for such options being issued directly to its shareholder, would have been entitled to be granted stock options by a client which complied with the Exchange policies, i.e., at the time of grant, their exercise price was not less than the fair market value of a share of the client (a public corporation). In commenting on the option's FMV, the Directorate stated:

It is possible that no amount would have been included in Corporation's income at the time of granting the options. In fact, it is possible that the FMV of these options at the time of granting was zero given the plan's restriction that the exercise price may not be less than the FMV of the common shares at the time of grant.

Canco, a Canadian subsidiary of USCo, a publicly traded company, reimbursed USCo for the "fair value" of stock options granted by USCo to Canco's employees (valued using the Black-Scholes method). In commenting on this method, CRA stated:

It appears that many companies are using the Black-Scholes model to value employee stock options for financial statement purposes, and to compute the recharge amount. The Valuations Section, Compliance Programs Branch has advised us that the Black-Scholes options pricing model is an acceptable approach to use, assuming that it is adjusted for the differences inherent in employee stock options. However, the Black-Scholes model is not the only reasonable model. Further, if the company were subject to audit, the CRA might review the inputs to the model and the adjustments made to it for attributes specific to employee stock options.

What are the tax consequences of an employee stock option being contributed to a TFSA? CRA responded:

[T]he property must be contributed to the TFSA at its fair market value (FMV)... . The CRA is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV.

A mining exploration corporation (the "Purchaser") agreed with another mining exploration corporation (the "Vendor") to acquire an interest in the Vendor's unproven resource properties (the "Properties") in consideration for incurring specified exploration expenses. As part of this agreement, the Vendor also agreed to issue, for no significant consideration, warrants to the Purchaser to acquire treasury common shares. After indicating that the amount of the Canadian exploration expense otherwise considered to be incurred by the Purchaser was to be reduced by the value of the warrants, the Directorate commented on their valuation as follows:

In determining the portion of the total consideration for the warrants, we would consider the amount that would have been the benefit under subsection 15(1) if no consideration had been paid for the warrants. According to Interpretation Bulletin IT-96R6, that amount is the greater of the following amounts:

• the trading value of the rights received; and
• the amount by which the fair market value of the shares subject to the option at the time of the option's distribution exceeds the exercise price provided in the option.

As there would be no market for an incentive option issued to a consultant by a Canadian corporation, and the exercise price at the time of grant was equal to the fair market value of the shares at that time, there would be no benefit to the consultant at the time of grant.

The fair market value of an option "is the greater of:

• The trading value of the rights received; and
• The amount by which the fair market value of the shares subject to the option at the time of the option's distribution exceeds the exercise price provided in the option."