Subsection 49(1) - Granting of options
See Also
CIR v. Scottish Provident Institution, [2004] UKHL 52
The Special Commissioners concluded that under an arrangement whereby the respondent ("SPI") granted an option to Citibank International PLC ("Citibank") to acquire governments bonds at an exercise price equal to 90% of the face amount, and Citibank granted an option to SPI to acquire identical government bonds at an exercise price of 70% of their face amount, each option should be treated as separate because there was a commercially realistic (albeit quite unlikely) possibility that the option granted by Citibank to SPI would not be exercised (i.e., that the bonds would fall in price below 90% of their face amount).
The Court concluded that in applying the Ramsay principle the composite effect of the arrangement should be considered as the scheme was intended to operate without regard to the contingency that one of the options might not be exercised. Accordingly, it was held that Citibank did not have an "entitlement" to the property covered by its option.
Mitsui & Co. Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187
Before finding that a clause in a lease giving the lessee the unilateral right to compel the lessor to sell helicopters to the lessee at their reasonable fair market value was an "option", Major J. stated his agreement with the following list of the three principal features of an option:
- exclusivity and irrevocability of the offer to sell within the time period specified in the option;
- specification of how the contract of sale may be created by the optionholder; and
- obligation of the parties to enter into a contract of sale if the option is exercised.
Kopec v. Pyret, [1987] 3 WWR 449 (Sask. C.A.)
A right of first refusal contained in a lease was not an option. An option gives to the optionee at the time it is granted a right which he may exercise in the future to compel the optionor to convey to him the optioned property. [C.R.: 251(5)(b)]
Canadian Long Island Ltd. v. Irving Industries (Irving Wire Products Division) Ltd., [1974] 6 WWR 385, [1975] 2 S.C.R. 715
A right of first refusal, unlike an option, is only a personal right rather than an interest in land, and therefore is not subject to the rule against perpetuities.
Administrative Policy
Income Tax Technical News No. 44 13 April 2011 [archived]
CRA stated:
[W]hen a holder of an exchangeable debenture exercises the right to exchange the debenture for the target shares, the holder would dispose of the debenture for proceeds equal to the FMV of the consideration received—that is, the FMV of the target shares. The adjusted cost base (ACB) of the target shares to the holder would equal the FMV of the debenture given up to acquire them which (ignoring interest rate fluctuations) would ordinarily equal the FMV of the target shares.
2004 APFF Roundtable Q. 13, 2004-008699
Discussion of CRA position that where a lease contains a bargain purchase option, a portion of each rent payment may be considered to be a payment for the right to purchase the property in the future.
92 C.R. - Q.51
Warrants issued in connection with a "poison pill" arrangement are a form of option and, therefore, are subject to the usual option rules.
IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures"
Articles
Jack Bernstein, "Canadian Tax Treatment of Index Participation Units and Exchange Traded Index Derivates", 35 Tax Notes International, 20 September 2004, p. 1107.
Watkins, "Equity Exchangeable Debentures and Appreciation Rights", 1993 Conference Report, C. 20; and Kingissepp, "Summaries of Corporate Finance Panel Discussion", 1993 Conference Report, C. 21
Discussion of whether s. 49 applied to an offering of "appreciation rights" by Canadian Pacific.
Subsection 49(2) - Expired option — shares
See Also
Garner v. Pounds Shipowners and Shipbreakers Ltd., [1997] BTC 223 (Ch. D.)
The taxpayer received £399,750 for granting an option to buy land at a sale price of over £4M, but subject to a condition that the taxpayer was to use its best endeavours to procure releases from certain restrictive covenants. The option was never exercised. In finding that £90,000 paid by the taxpayer in order to secure the release of a restrictive covenant was a permissible deduction in computing the value of the consideration received by the taxpayer for the granting of the option, Carnwath J. stated (at p. 233):
"... It is contrary to business reality to have regard only to the nominal consideration stated in the agreement, without regard to the other incidents of the transaction which materially affect the value of that consideration to the grantor. The value to which the company was entitled under the option was not £399,750. ... The need to obtain the release of the covenants ... is an essential incident of the right to consideration."
Subsection 49(3) - Where option to acquire exercised
Cases
Salt v. The Queen, 84 DTC 6395, [1984] CTC 414 (FCTD)
It was argued by a taxpayer who had granted an option to purchase his land that the Act included no provision permitting the taxation of payments received by him in consideration of extending the term of the option. It was held, however, that the amounts paid for extending the option term were characterized by the option agreement and treated by the parties as constituting payments in part of the purchase price in the event of the exercise of the option, and thus formed part of the proceeds of disposition of the land. [This result confirmed by addition of s. 49(5).]
See Also
Mitsui & Co. Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187
Major J. noted, with respect to a clause in a lease that gave the lessee the unilateral right to compel the lessor to sell helicopters to the lessee at their reasonable fair market value, that the giving of initial notice by the lessee 120 days prior to the expiry of the lease could not qualify as an "exercise" of the option (irrespective of how the giving of notice was labelled), given that the exercise of an option must lead to a binding contract of a purchase and sale. Instead, the determination by the lessor of the reasonable fair market value of the helicopters, along with the giving of the initial notice, were conditions precedent to the exercise of the option. Accordingly, "the option could only be exercised by the lessee giving its written assent to the valuation performed by the lessor" (p. 202).
Administrative Policy
28 November 2001 Memorandum 2001-009124 -
S.49(3) did not apply to deem the exercise of employee stock options held by a non-resident former employee to not be a disposition of the options, given that s. 49(3) applied only to capital property, whereas employee stock options are governed by s. 7. However, there was no liability under s. 116(5) to the Canadian corporation that had issued the options as it should not be considered to have acquired the options from the employee and, therefore, had no cost therefor.
2003 Ruling 2003-002803 -
A lease is amended to add an option to purchase and to increase the annual lease payment by an amount that would be in excess of the fair market value rent in the absence of the option. The additional lease payment are treated for purposes of s. 49(5) as payments in respect of the extension of the original option, with the result that, for purposes of s. 49(1), such amount are deemed to be proceeds of disposition in respect of the grant of the option at the time of receipt of each such payment.
Upon the exercise of the option, the vendor by virtue of s. 248(28) will not be required to include in its proceeds of disposition the amounts included as capital gains under s. 49(5) and 49(1) except to the extent that pursuant to s. 49(4) it files amended tax return to exclude such amounts from the computation of its income for those taxation years as proceeds of disposition.
6 September 1994 Memorandum 941986 and 942090 (C.T.O. "Are Special Warrants Flow-through Shares?)
Special warrants to acquire shares that if not exercised prior to the specified expiry time are deemed to be exercised at that time without any further action on the part of the holders, likely would not qualify as an "option to acquire property" given such deemed or mandatory exercise.