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II. Options

24.A14. The Committee proposes that special provisions should apply defining the tax base of the integrated estate and gift duty in relation to options. An option normally involves a right in the option holder to call on the owner of property to which it relates to convey the property to him on the option holder paying the consideration specified in the terms of the option. But for purposes of defining the tax base it should extend to rights that are the same in substance. In the following paragraphs, the term ‘option transaction’ refers to any contract or series of contracts by which a person has a right to acquire property if the completion of the contract (that is, the acquisition of the property) might occur more than six months after the making of the contract.




  ― 458 ―

24.A15. The application of any special provisions relating to option transactions should be limited. The special provisions should apply only where the parties to the option transaction are related and only where the option transaction is not an ‘ordinary commercial transaction’, by which is meant a transaction that people, dealing at arm's length in a bona fide commercial transaction, would be likely to enter into. The definition of ‘relative’ in section 6 (1) of the Income Tax Assessment Act may be used to determine if parties are related but should be supplemented so that a taxpayer is deemed to be related to a company in which he or his relatives hold shares or debentures and to a trust in which he or his relatives are beneficiaries.

24.A16. An option transaction, in the narrower sense referred to in paragraph 24.A14, may involve a gift by the person whose property is to be acquired if he receives inadequate consideration for the option. It may involve a gift by the person who takes the option if he pays an amount for it greater than its value. An option transaction amounting to a contract to buy property may constitute a gift by one or other of the parties to the contract if the amount agreed to be paid, taking into account the time at which it may be paid, is greater or less than the present value of the property. If it were sought in all cases to determine the amount of the gift at the time an option transaction is entered into, near impossible problems of valuation would arise. In the Committee's view, it is more appropriate to delay the determination until the option transaction is completed by the acquisition of the property or until the rights to acquire the property lapse. If, however, one of the parties dies before completion or lapse, the determination should be made at the time of death.

24.A17. Where property is acquired on completion of the option transaction, any gift will be calculated by comparing the total of amounts paid by the person acquiring the property with the value of the property at that time. Any amount paid before the time of completion should be treated as increased by the application of an appropriate rate of interest. (In calculations in succeeding paragraphs amounts paid for options that are allowed to lapse or are disposed of should be similarly valued.)

24.A18. If a right to acquire property under an option transaction is allowed to lapse by effluxion of time (other than by reason of a legal disability or impediment that prevents the person who has the right to acquire the property from completing the transaction), there will be a gift by the person who had the right to acquire the property. The gift will be (i) any amount by which the value of the property at the time of the lapse exceeds the amount payable by him at that time to acquire the property, plus (ii) the amount, if any, by which the value of what was paid for the option exceeds the amount in (i). The same principles should be applied when an option lapses by reason of the death of the person who had the right to acquire the property.

24.A19. If the person who has the right to acquire property under an option transaction dies and the option does not lapse on his death, the value of the right should be included in his estate plus the amount, if any, by which the value of what he paid for the option exceeds that value. The value of the right will be calculated by reference to the value of the property at the time of death.

24.A20. These principles will need modification if the person who has the right to acquire property under an option transaction disposes of his right. Where the disposition is in the course of a bona fide commercial transaction, a gift will arise if the amount received on the disposition is more or less than the value of the amount paid to acquire the option. Where it is more the gift will have been made by the person who gave the option. Where it is less the gift will have been made by the person who took the option. Thereafter, the special provisions will be inapplicable.




  ― 459 ―

24.A21. If the disposition is not in the course of a bona fide commercial transaction, the person who takes the option under the disposition will be treated as the person who originally acquired the option under the option transaction though the special provisions should not give rise to a gift by him if he completes the acquisition. They would, however, apply on completion to determine any gift made by the person who gave the option. Where the option lapses the gift by the holder of the option will be the value of the property less the amount payable at that time to acquire the property. If the option does not lapse upon death and the holder dies the value to be included in his estate will be similarly calculated.

24.A22. The disposition of the option referred to in the previous paragraph will involve a gift by the person making the disposition of the amount, if any, by which the value of the amount paid to acquire the option exceeds the value of the option at the time of disposition. There will also be a gift by that person of the amount, if any, by which the value of the option exceeds the amount of the consideration received. There will be a gift by the person who takes the option under the disposition of the amount, if any, by which the consideration given exceeds the value of the option.

24.A23. If the person whose property may be acquired by some other person by virtue of an option transaction dies, the value of the property, less any amounts already paid by that other person, should be included in his estate. Any amounts payable under the option transaction after the death of the owner should not be included.

24.A24. The gift, in each case, should be deemed to have occurred at the time of completion, lapse, disposition or death, and not at the time the option transaction was entered into.

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