Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Will we accept that an agreement to sell shares of a corporation at a certain price subject to certain vesting requirements that will, immediately thereafter, be further evidenced by a written stock option agreement when the corporation is legally entitled to provide the stock option agreement constitute one agreement to issue shares?
Position: Yes.
Reasons: The binding agreement includes the issuance of the stock option agreement which will only confirm the terms of the binding agreement already in place so we would consider them to be the same agreement for purposes of section 7.
XXXXXXXXXX 2000-005962
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Corporation") is a taxable Canadian corporation and is ultimately owned by XXXXXXXXXX (the "Parent"). The Corporation was previously known as XXXXXXXXXX The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Corporation's address is XXXXXXXXXX. The Corporation XXXXXXXXXX. The Corporation files its tax returns with the XXXXXXXXXX Taxation centre and is serviced by the XXXXXXXXXX Tax Services Office.
2. Parent is a public corporation incorporated under the laws of the XXXXXXXXXX and is resident in XXXXXXXXXX. Parent is a XXXXXXXXXX Parent's shares are listed on the XXXXXXXXXX.
3. The Corporation was acquired by the Parent on XXXXXXXXXX. As part of the acquisition, employees of the Corporation were entitled to exchange options to acquire shares of the Corporation's former parent corporation held at that time for options to acquire shares of the Parent. A ruling was provided (file #990916) in respect of the exchange of the options.
4. In order to retain its key employees and to recruit new highly qualified employees, the Parent wishes to adopt a new stock option plan or significantly amend one or more of its existing stock option plans for the employees of its XXXXXXXXXX subsidiaries, including the Corporation. In order to implement a new stock option plan, the Parent requires the approval of its shareholders which will unavoidably involve significant delays.
5. Parent currently offers to some of the key employees of its subsidiaries rights under its "XXXXXXXXXX" (the "SAR Plan"). Under the SAR Plan, an employee is entitled to a cash bonus equal to the number of phantom options being exercised multiplied by the increase in the fair market value of a share of the Parent over the exercise price under the phantom options. The SAR Plan allows the Remuneration Committee of Parent's Board of Directors to substitute stock options for phantom options provided that the substituted stock option has the same vesting date and exercise price as the phantom option.
Proposed Transactions
6. Since the Parent is not able, at this time, to issue options to acquire shares having the commercially necessary vesting rights under its existing stock option plans, the Parent will issue phantom options under its SAR Plan to the employees of the Corporation (the "Phantom Options"). The terms of the Phantom Options will include vesting rights that will help to attract and retain employees of the Corporation.
7. Immediately after the issuance of the Phantom Options under the SAR Plan, stock options ("Stock Options") will be substituted for the Phantom Options. The terms f the Stock Options will be exactly the same as the Phantom Options (i.e., the strike price, the vesting dates and the maximum exercise periods will be identical). The fair market value of a share of the Parent at the time the Phantom Options will be granted will equal the fair market value of a share of the Parent at the time the Stock Options are substituted for the Phantom Option. The SAR Plan document will contain a Canadian addendum requiring the immediate substitution of the Stock Options for the Phantom Options.
Purpose of the Proposed Transactions
8. The purpose of the proposed transactions is to have the Parent provide the key employees of the Corporation with Stock Options in order to retain and attract high-technology employees.
9. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or Parent or of a person related to either of them;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Corporation or Parent or of a person related to either of them;
(c) is under objection by the Corporation or Parent or by a person related to either of them;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Corporation or Parent.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. The SAR Plan and addendum, as described in 7 above, will constitute an agreement to sell or issue shares between the Parent and the employees of the Corporation for purposes of section 7 of the Act, such that, the immediate substitution of the stock options for the phantom options under the terms of the addendum of the SAR Plan will not, in and by itself, result in a disposition of rights for purposes of section 54 by an employee of the Corporation nor an employment benefit realized by an employee of the Corporation for purposes of paragraph 6(1)(a) of the Act.
B. The acquisition of shares of the Parent by an employee of the Corporation under the substituted Stock Options will result in the application of paragraph 7(1)(a) of the Act.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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