Subsection 6204(1)
Paragraph 6204(1)(a)
Administrative Policy
2011 Roundtable Q. , 2011-0411951C6
where a stock option agreement is modified to give the employer the right to purchase for cancellation a portion of the shares issued on the exercise of employee stock options so as to generate cash on which it can withhold and satisfy its source deduction obligations, the shares which are so issued will not be prescribed shares under Reg. 6204(1)(a)(iv) or 6204(1)(b).
7 March 2007 T.I. 2005-015738
Although it would appear that Regulation 6204(1)(a)(i) would cause shares not to be prescribed shares if a loan agreement by the corporation stipulated that it would not pay a dividend of greater than 50% of cumulative net income under the terms of the loan agreement, a different response was given at the 1989 TEI Round Table so that the Directorate would be prepared to deal conclusively with this issue in the context of advance ruling request where all the facts and definitions of terms were known. Further, the TEI response only referred to Regulation 6204 and would not apply inter alia to the definition of "taxable preferred share" in s. 248(1).
18 September 2001 T.I. 2001-007148
Under a Stock Option Plan, employees could exercise their options and pay the option price with shares the employee already owned (a feature referred to as a "Swap") Share(s) acquired under such an option that may be used under a Swap to acquire additional shares may not qualify as prescribed shares. Similarly, under Regulation 6204(1)(b) shares acquired under such options might not qualify as prescribed shares where it is reasonable to expect the employee may use the shares under a Swap within the two-year period.
Respecting the exclusion in Regulation 6204(2)(c), "subsection 6204(2) was added to the Regulations to ensure a share will not cease to be a prescribed share merely because a right or obligation exists to protect an employee against any loss with respect to the share, or to provide a market for the share. Accordingly, if it can be established that a Swap was provided for one of these reasons, the provision should apply assuming all other conditions are met. However, it is not clear to us how a Swap would satisfy either of these conditions ..."
6 August 1992 T.I. (Tax Window, No. 23, p. 5, ¶2142)
The right of a corporation to redeem shares issued under an employee stock option plan for their net book value will not satisfy the test in Regulation 6204(1)(a)(vi) unless there is a price adjustment clause for those situations where the net book value does not approximate the fair market value.
28 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 21, ¶1112)
Where a wholly-owned subsidiary of a public corporation establishes a stock option plan under which the parent is obligated to acquire the shares of the subsidiary for their fair market value on the retirement or death of the participating employee, the requirements of Regulation 6204(1)(a)(iv) will not be fulfilled.
18 October 89 T.I. (March 1990 Access Letter, ¶1150)
Shares which carried a minimum cumulative preferential dividend of $0.01 per share but which otherwise participated fully in the earnings of the corporation after the common shares had received equivalent dividends did not qualify as prescribed shares. Such shares also would be considered to be entitled to a fixed minimum liquidation amount (and, therefore to be off-side) because on the dissolution of the corporation the holders of such shares were entitled to receive at least the amount of declared but unpaid cumulative dividends on the shares.
87 C.R. - Q.23
Where the plan provides that an employee can fund his purchase of an optioned share by requiring that the corporation acquire other shares issued to the employee pursuant to the plan, then a share issued under the plan will not be prescribed.
Subsection 6204(3)
Administrative Policy
2006 Ruling 2005-0151001R3
where pursuant to an arrangement agreement that is implemented under a plan of arrangement, employee stock options previously granted by the "Target" are transferred by the employees to Target in exchange for cash amounts equal to their in-the-money value before the acquisition pursuant to the agreement and plan by the purchaser of 100% of the shares of Target for cash consideration, such purchaser will not be a "specified person" at the time the options are so transferred.