To avoid confusion, stipulate the date the agreement is to take effect into the agreement. It should also be indicated that this is the date that will be used to determine the price of the stock option.
In McAnulty v. The Queen, 2001 CanLII 909 (TCC), the Tax Court of Canada was grappling with the date of the issuance of an employee stock option plan. In this case, McAnulty (the appellant) was arguing that the relevant date was the date of the oral agreement when the President of the company told McAnulty that she would be receiving options to purchase 45,000 shares.
The respondent’s position is that the relevant date was later i.e., at the time the director’s resolution and the written agreement was signed by the appellant and the President of the company. It was important to determine the relevant date for tax purposes. Section 7 of the Income Tax Act (ITA) deals with the taxation of employee stock option plans. The ITA allows for a deduction of a portion of the amount of shares taxed. However, if the fair market value of the stock at the time the option is granted is greater than the option price, the deduction is taken away.
Therefore, if the relevant date was the date of the oral agreement, McAnulty would have been entitled to the tax deduction.
However, if the relevant date is the latter date (the time of signing), McAnulty would not be entitled to the deduction because at this time, the fair market value of the shares was greater than the option price. The court held in favour of McAnulty; the agreement need not be in writing. The court stated that to require a written agreement would defeat the purpose of this tax section. Because the oral agreement was made by a person in a position of authority, it was sufficient. The relevant date was the date of the oral agreement.
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