NO: IT-116R3
DATE: February 28, 1995
SUBJECT: INCOME TAX ACT
Rights to Buy Additional Shares
REFERENCE: Paragraph 15(1)(c) (also definition of “share”, “common share” and “shareholder” in subsection 248(1))
Application
This bulletin replaces and cancels Interpretation Bulletin IT-116R2 dated January 12, 1990 and applies to benefits conferred after December 19, 1991.
Summary
This bulletin deals with the tax treatment of benefits derived by existing owners of common shares of a corporation when the corporation grants them rights to acquire additional shares of its capital stock. If these rights have any value, the value must be included in the shareholder’s income unless identical rights to acquire shares have been offered to all owners of the corporation’s common shares.
Discussion and Interpretation
General
1. Subsection 15(1) of the Act provides that, when a corporation confers a benefit on a shareholder as a result of granting an option to acquire additional shares of its capital stock, the amount or value of the benefit is included in determining the shareholder’s income for the year, unless paragraph 15(1)(c) applies. Under that paragraph, the amount or value of the benefit is not included when determining the shareholder’s income if the corporation also confers identical rights to acquire shares of its capital stock to all owners of its common shares at that time for each common share they own. For information on the valuation of benefits conferred on shareholders when paragraph 15(1)(c) does not apply, see the current version of IT-96, Options Granted by a Corporation to Acquire Shares, Bonds or Debentures.
2. The terms “share”, “common share” and “shareholder” are defined in subsection 248(1). A share means a share or fraction of a share of a corporation’s capital stock. A common share is defined in that subsection as a share whose holder is not precluded from participating in the assets of the corporation (beyond the amount paid up on that share plus a fixed premium and a defined rate of dividend) when the corporation reduces or redeems its capital stock. Under subsection 248(1), a shareholder includes a person entitled to receive a dividend.
Identical Rights
3. Subparagraph 15(1)(c)(ii) provides that the rights are not considered to be identical if the cost of acquiring the rights differs. In addition, if at the time a corporation issues rights to acquire additional shares, it is known that certain shareholders will not, or will not be entitled to, exercise or dispose of their rights, the rights are not considered to have been conferred on all shareholders and the exception under paragraph 15(1)(c) will not apply.
Identical Properties
4. If the voting rights attached to a particular class of common shares differ from the voting rights attached to another class of common shares, subparagraph 15(1)(c)(i) provides that the shares of the particular class are deemed to be identical to the shares of the other class. However, there must be no other differences in the terms and conditions of the classes of these shares that could cause the fair market values of the shares to differ materially.
Rights and Warrants
5. If a corporation confers on all owners of its common shares identical rights that allow the shareholder to buy units consisting of additional shares of the corporation and warrants which, if exercised, allow the holder to buy additional shares of the corporation, paragraph 15(1)(c) would apply to the initial right as well as to the warrant portion of the unit at the time the corporation confers the rights.
Non-resident Shareholders
6. If a Canadian corporation issues rights to buy additional shares, certain non-resident shareholders may be barred from subscribing for such shares. This situation may be caused by restrictions in a Canadian law or because the corporation did not comply with the securities regulations in the country where the non-resident shareholders reside. In these circumstances, paragraph 15(1)(c) is still considered to apply provided that rights are in fact issued to the non-resident shareholders and they are entitled to sell such rights. If paragraph 15(1)(c) applies, non-residents will not be subject to withholding tax under Part XIII of the Act on the value of such rights issued to them.
Out-of-province Shareholders
7. As in the non-resident situation discussed above, residents of one or more provinces may be barred from buying additional shares because of restrictions in provincial law or as a result of securities regulations not having been met in a particular province. Paragraph 15(1)(c) also applies in these circumstances provided that the rights are in fact issued to the common shareholders who are barred from subscribing by provincial law or securities regulations and the shareholders are entitled to sell such rights.
Insufficient Holdings
8. It may happen that a shareholder does not receive rights to buy additional shares solely because the shareholder’s holdings are too small to entitle the shareholder to sufficient rights to purchase a full share. For example, a holding of five shares may entitle the owner to purchase one additional share and a shareholder may only own four shares. In these circumstances, paragraph 15(1)(c) is considered to be applicable if the rights so withheld are issued to a trustee who sells them and pays the proceeds, less expenses, on a pro rata basis to the shareholders concerned.
Nature of rights
9. Rights to buy additional shares are normally capital property having no cost (unless they are purchased). Thus a capital gain may arise if they are disposed of rather than exercised. However, when the underlying shares are not capital property to the holder, the rights are not considered to be capital property, and the gain on their disposition is considered to be on account of income.
If you have any comments regarding the matters discussed in this bulletin, please send them to:
Director, Technical Publications Division
Policy and Legislation Branch
Revenue Canada
875 Heron Road
Explanation of Changes for Interpretation Bulletin IT-116R3 Rights to buy Additional Shares
Introduction
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental positions.
Overview
This bulletin deals with the tax treatment of benefits derived by a shareholder of a corporation who has been offered by the corporation a right to acquire shares of its capital stock. We have revised this bulletin to incorporate the amendments to the Income Tax Act enacted by: S.C. 1994, c.7, Schedule VIII (1993 c.24 – formerly Bill C-92) and S.C. 1994 c.21 (formerly Bill C-27).
Legislative and other changes
No 1 was revised to reflect an amendment to paragraph 15(1)(c) that was introduced by Bill C-92. For the value of the shareholder benefit not to be included in income under subsection 15(1), the amendment to paragraph 15(1)(c) requires that the rights the corporations must grant to all owners of common shares be identical to every other right conferred at that time.
New No 2 was expanded to define the terms “common share” and “shareholder” in addition to the term “share” that was previously found in former No 1.
New No 3 was added to explain the requirement that the rights corporations must grant to all owners of common shares have to be identical to every other right conferred at that time. This paragraph reflects the Bill C-27 amendment introducing subparagraph 15(1)(c)(ii) that provides that rights are not identical if the cost of acquiring them differs.
New No 4 was added to discuss identical properties. It reflects the Bill C-27 amendment to paragraph 15(1)(c) that introduced subparagraph 15(1)(c)(i). Under that subparagraph, common shares with different voting rights are considered to be identical properties provided no other differences in their terms and conditions would cause their fair market values to differ materially.
New No 5 was added to explain how paragraph 15(1)(c) applies when a corporation issues to all common shareholders identical rights to buy units that consist of shares and warrants that may be exercised to acquire additional shares.
New No 9 (former No 4) was expanded to clarify that a right granted on a share is normally a capital property except if the underlying share is not capital property to the holder.
Other minor changes were made to this bulletin to improve clarity and readability.
Link to Source:https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it116r3/archived-rights-additional-shares.html