Options

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.

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."