An employee of a corporation owns an option to purchase a share in the capital of the corporation. The corporation decides to amend the terms of the option. Does the amendment have any tax consequences? Maybe.
In IT-448 (Dispositions—Changes in terms of securities), the CRA sets out its position on when a change in the terms of a security will result in its disposition for income tax purposes. It describes the issue in the following terms:
¶4 In considering a particular fact situation, the Department endeavours to establish whether or not it is reasonable to regard the amended security being the same property as that which underwent the change. In evaluations of this nature it is obvious that no “hard and fast” rules of universal application can be formulated. The comments that follow must therefore be regarded as guidelines only and may not apply in a particular set of circumstances.
In applying this general principle, the CRA states that certain changes to debt obligations will result in a disposition of the obligation:
[¶7] The following changes in respect of the debt obligation itself (unless carried out pursuant to an authorizing provision in its original terms) are considered to be so fundamental to the holder’s economic interest in the property that they almost invariably precipitate a disposition:
(a) a change from interest-bearing to interest-free or vice versa,
(b) a change in repayment schedule or maturity date,
(c) an increase or decrease in the principal amount,
(d) the addition, alteration or elimination of a premium payable upon retirement,
(e) a change in the debtor, and
(f) the conversion of a fixed interest bond to a bond in respect of which interest is payable only to the extent that the debtor has made profit, or vice versa.
What about our employee-optionholder? For example, what if the corporation decides unilaterally to extend the expiry date of the option? Is that a disposition? If it is, will the option exchange rules in subsection 7(1.4) of the Income Tax Act (Canada) apply? It appears that the CRA believes that such a change would not result in a disposition of the option because the change “does not significantly vary the rights, liabilities or legal position of the parties as ascertained by the original stock option agreement” (technical interpretation dated June 5, 2002). A change in the strike price of an option may not result in a disposition (Amirault v. M.N.R., [1990] DTC 1330 (TCC)). Amending an option plan to require an employee to guarantee a bank loan will result in a disposition of the employee’s option (Wiebe v. The Queen, [1987] DTC 5068 (FCA)).
Interestingly, the CRA says the following about changes to share provisions in IT-448:
¶10 Where there is only one class of share issued or where the holdings of each shareholders in each class are in the same proportion, any change in the rights attaching to a class does not alter their relative interests in the corporation. Thus, no disposition is considered to arise except in circumstances described in 2 above [which refers to an actual redemption of shares].
