Cases
Imperial Stables (1981) Ltd. v. The Queen, 90 DTC 6135 (FCTD), aff'd 92 DTC 6189 (FCA)
Martin J. could find no merit in the submission of the Crown that losses sustained by the taxpayer in engaging in "straddle" transactions in Dome share options did not constitute deductible losses on the ground that the trading in those options should be treated in the same way as the taxpayer's dealings in Dome shares (which were found to have given rise to a capital loss). The taxpayer's intention was to profit from speculative trading in the options, and he had no intention of exercising the options to acquire shares.
Cook v. The Queen, 87 DTC 5231, [1987] 1 CTC 377 (FCTD)
The court found that a school teacher married to a former real estate broker purchased 17 acres of rural land in 1971 as a means of financial security and for possible use for a home, and that her husband was not the controlling mind in the transactions. Proceeds of $62,000 and $100,000 received by the taxpayer in 1980 and 1981 for granting options to purchase the property for a total $815,000 in 10 years time were capital proceeds.
Hillsdale Shopping Centre Ltd. v. The Queen, 81 DTC 5261, [1981] CTC 322 (FCA)
Proceeds from the expropriation of an option to purchase land were on income account in light inter alia of the following factors:
- although the original plan in acquiring the option was to build a shopping centre on the land, there was no firm resolve to do so - in fact, subsequent events revealed considerable indecision as to whether, or where, a shopping centre should be constructed; and
- the corporate shareholder and the manager of the taxpayer both had had an extensive involvement in real estate trading.
Thom v. The Queen, 79 DTC 5324, [1979] CTC 403 (FCTD)
The plaintiff secured an option to purchase land used in an auto-parts business carried on by a company owned by him and his wife, in order to be certain of being able to retain the premises for that business. Ten years later, he exercised the option with the intention of reselling the land at a profit, which he did.
It was held that since the proper time to determine the intention of an optionee is the time of acquiring a binding option rather than the time of exercising the option, the gain from the sale of the land acquired by him was a capital gain.
Westcon Engineering and Contractors Ltd. v. The Queen, 77 DTC 5398, [1977] CTC 567 (FCTD)
The taxpayer which had never been involved in trading aircraft, leased an aircraft for use in its business and obtained, as part of the lease agreement, the option to purchase the aircraft after making all the lease payments. When the aircraft proved no longer suitable to its business, it located a purchaser, exercised the option and sold the aircraft, realizing a capital gain. "It cannot be said that in executing the lease, containing the option to purchase clause, Plaintiff did so with an intention at that time of ultimately disposing of the aircraft for profit."
See Also
Rogers v. The Queen, 2015 DTC 1029 [at 124], 2014 TCC 348
The taxpayer, who was the CEO of a Canadian corporation ("RCI") whose voting and non-voting shares both traded on the TSX, did not deal at arm's length with RCI as he held over 90% of its voting shares. RCI issued stock options to the taxpayer in 1997 pursuant to the RCI employee stock option plan, and in 2007 attached a share appreciation right ("SAR") to all previously granted options, permitting the holder to cash surrender options for their in-the-money value. The taxpayer exercised the SAR in 2007, and reported a capital gain.
Similarly to Baird, Hogan J found that the taxpayer's conduct was inconsistent with an adventure in the nature of trade. He stated (at para. 69):
In most cases, a trader will dispose of the option when he is satisfied with the increase in the money value or profit to be realized through the sale of the option. Mr. Rogers did not behave in this manner. He held the Options right up to the last moment and surrendered them when they were about to expire.
Street v. MNR, 91 DTC 369 (TCC)
Given that at the time the taxpayer exercised his employee stock option to acquire 8,000 shares of his employer "it was his intention to dispose of a substantial portion of them early to liquidate debt" (p. 371), the resulting loss when he sold the shares seven weeks after exercise was on income account.
Administrative Policy
28 May 2003 T.I. 2003-001160 -
OEX S&P 100 index options are considered to be options, and not commodity futures, debt obligation futures or commodities, so that the determination whether transactions in such options are on income or capital account is governed by the views stated in IT-479R (securities transactions) rather than IT-346R (commodity futures).
May 1995 Executive Institute Round Table, Q. 24 (C.T.O. "Employee Stock Option")
Whether unexercised employee stock option rights become capital property to the estate of the deceased is a question of fact.
IT-479R, "Transactions in Securities", para. 25
Re character of gains or losses on share option transactions.
Articles
Ian Gamble, "Income from a Business or Property: General Principles and Current Issues", 2014 Conference Report, Canadian Tax Foundation, 5:1-32
[E]arlier decisions made in the context of option agreements are helpful and persuasive. The courts have looked to the nature of the property underlying the contract to determine whether the option itself was capital property. In other words, the question whether amounts realized on the disposition of the option contract were of a capital nature turned on whether the property underlying the option would have been capital property in the option holder's hands if the option had instead been exercised (and the underlying property acquired). [fn 113: Hill-Clark-Francis Ltd. v. MNR, [1961] Ex. CR 110; David Miller v. MNR, 62 DTC 1303 (Ex. Ct); MNR v. Aldershot Shopping Plaza Ltd., 65 DTC 5018 (Ex. Ct.); Morris Schnek…, 1984 Conference Report (…Canadian Tax Foundation…at 710-11… .]
Commentary
In determining whether a gain from the disposition of a property, which was acquired on the exercise of an option, was realized on capital or income account, it generally will be appropriate to have regard to the taxpayer's intention at the time at which the taxpayer acquired the option, rather than to have regard to the fact that at the time of exercise of the option, the taxpayer's intention was to immediately dispose of the property at a gain over the exercise price ([pin type="node_head" href="315-Thom"]Thom[/pin], [pin type="node_head" href="315-Westcon"]Westcon[/pin], [pin type="node_head" href="321-Snell"]Snell[/pin]). However, if the option is exercised a short time after it is granted, with the property acquired on exercise then being sold, this may suggest that the sale of such property was on income account (see [pin type="node_head" href="379-Hill"]Hill-Clark-Francis[/pin]). Where a direct acquisition of the optioned property would have been on income account, proceeds from the disposition of an option to acquire such property also likely will be on income account ([pin type="node_head" href="315-Hillsdale"]Hillsdale[/pin]).
The granting of an option on property that is held on capital account will also likely be a transaction on capital account ([pin type="node_head" href="315-Cook"]Cook[/pin]), whereas the disposition of an option to acquire property whose acquisition would have been an adventure in the nature of trade likely will be on income account ([pin type="node_head" href="315-Hillsdale"]Hillsdale[/pin], see also [pin type="node_head" href="315-Street"]Street[/pin]).
Options trading where there is no intention of acquiring the subject property may be on income account depending on the circumstances ([pin type="node_head" href="315-Imperial"]Imperial Stables[/pin]). Share options received as additional compensation for lending money to a high-risk borrower generally will be acquired on income account where the business of the taxpayer includes the making of such loans ([pin type="node_head" href="1430-Roynat"]Roynat[/pin]).