2002 Ruling 2002-0129803 - Reimbursement of Stock Option Benefits

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether payment from UKCO to Canco (parent) in respect of stock option benefits enjoyed by UKCO's employees taxable in Canco's hands

Position: No

Reasons: Not unreasonable for UKCO to provide "make-whole" payment to Canco

XXXXXXXXXX 2002-012980

XXXXXXXXXX, 2002

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Rulings

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above named taxpayer. We acknowledge your facsimiles of XXXXXXXXXX and the information provided during our various telephone conversations (XXXXXXXXXX) in connection with your request.

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this ruling:

(i) is in an earlier income tax return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) before the courts; or

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, statutory references in this letter are to the Act;

(b) "business" has the meaning assigned by subsection 248(1);

(c) "Canadian corporation" has the meaning assigned by subsection 89(1);

(d) "Canco" means XXXXXXXXXX;

(e) "carrying on business" includes the extended meaning under subsection 253(1);

(f) "corporation" has the meaning assigned by subsection 248(1);

(g) "paid-up capital" has the meaning assigned by subsection 89(1);

(h) "Plan" means the XXXXXXXXXX;

(i) "public corporation" has the meaning assigned by subsection 89(1);

(j) "Service Provider" as per Section XXXXXXXXXX of the Plan, means an employee or insider (as defined in the Plan) of Canco or any of its subsidiaries and any other person or company engaged to provide ongoing management or consulting services for Canco or for any entity controlled by Canco;

(k) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(l) "Treaty" means the Canada-United Kingdom Tax Convention signed on September 8, 1978, as amended; and

(m) "UKCO" means XXXXXXXXXX.

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1. Canco is a taxable Canadian corporation incorporated under the laws of the Province of XXXXXXXXXX with a fiscal year-end of XXXXXXXXXX. The head office of Canco is located at XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Taxation Centre. Canco's business number is XXXXXXXXXX.

2. Canco is a public corporation whose common shares are listed on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

3. Canco has numerous subsidiaries, XXXXXXXXXX of which are resident in the United Kingdom. UKCO is a corporation incorporated under the laws of the United Kingdom and is a resident of the United Kingdom for the purposes of the Act and the Treaty. UKCO is a wholly-owned subsidiary of XXXXXXXXXX, which in turn is wholly-owned by Canco. Of all the subsidiaries of Canco, UKCO is the only subsidiary of Canco that employs/contracts with persons eligible to participate in the Plan.

4. UKCO does not carry on business in Canada and does not have a permanent establishment in Canada for the purposes of the Act or the Treaty.

5. The Plan provides stock options benefits to Service Providers who elect to participate in the Plan. Options are granted to Service Providers to purchase common shares of Canco.

6. Generally, under the Plan:

a) the exercise price of any option granted under the Plan will be determined by Canco's Board of Directors, but, will not be lower than the closing market price of the common shares of Canco on the XXXXXXXXXX Stock Exchange on the last trading day preceding the date of grant (the "Option Price");

b) the options may be exercised during the period determined by Canco's Board of Directors, which will not exceed XXXXXXXXXX years from the date of grant; and

c) the exercise of any option issued under the Plan will be contingent upon receipt by Canco of cash payment of the full Option Price for the shares being purchased by the Service Provider.

Additional terms (not relevant to this ruling) apply to options issued to UKCO's Service Providers, as set out in Section XXXXXXXXXX of the Plan, so that a corporate tax deduction is available to UKCO under the Income and Corporation Taxes Act 1988 (UK). Section XXXXXXXXXX of the Plan provides that the foregoing stock options may only be granted to a Service Provider who is an employee or full-time director (as defined in the Plan) of UKCO, or any company controlled by UKCO (collectively, the "UK Service Providers").

7. A Service Provider/UK Service Provider who chooses to exercise a stock option under the Plan will pay to Canco the Option Price and will receive a common share of Canco, which, on the date of exercise, may have a fair market value in excess of the Option Price.

8. Prior to the date hereof, Canco issued stock options under the Plan to UK Service Providers (the "Pre-Existing Options").

PROPOSED TRANSACTIONS

9. UKCO will enter into a written agreement with Canco (the "Recharge Agreement") whereunder UKCO will agree to pay the Price Differential (as defined in paragraph 11 below) to Canco, arising from the following:

a) all future stock options granted under the Plan to UK Service Providers; and

b) the Pre-Existing Options, limited to the Price Differential that can reasonably be considered to have arisen after the Recharge Agreement is entered into.

10. Under the Recharge Agreement, stock options will be granted and common shares of Canco issued or made available wholly and exclusively as incentives to persons in respect of their employment/contracts with UKCO.

11. Upon exercise of any stock options granted under the Plan to UK Service Providers, UKCO will pay to Canco in Canadian dollars a sum equal to the difference (positive amounts only) between the market value of the Canco common shares at the time of such exercise and the amount received by Canco in respect of the Option Price paid on exercise of any such stock options (the "Price Differential"). With respect to the exercise of the Pre-Existing Options, UKCO will only pay to Canco the increase in the Price Differential that, in the circumstances, may reasonably be considered to have arisen (taking into account all relevant considerations concerning the Recharge Agreement) after the Recharge Agreement is entered into.

The Price Differential must be paid by UKCO to Canco within XXXXXXXXXX days after the exercise of the relevant stock option.

12. The Price Differential amounts received by Canco from UKCO will not be added to the paid-up capital of the common shares of Canco.

13. Under Canadian generally accepted accounting principles, the payment by UKCO to Canco will not be reflected in the consolidated income statements of Canco. There will be an addition to shareholder's equity on Canco's legal entity financial statements for an amount equal to the fair market value of the common shares on the date of exercise.

PURPOSE OF THE PROPOSED TRANSACTIONS

In order to properly reflect the costs and benefits of the Plan between Canco's operations in Canada and UKCO's operations in the United Kingdom, the Price Differential should be borne by UKCO as UKCO enjoys the services provided by the UK Service Providers who are entitled to stock option grants under the Plan.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions, and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Amounts received by Canco from UKCO under the Recharge Agreement in respect of:

a) the Price Differential on stock options granted to UK Service Providers after the Recharge Agreement is entered into; and

b) the increase in the Price Differential on the Pre-Existing Options that, in the circumstances, may reasonably be considered to have arisen (taking into account all relevant considerations concerning the Recharge Agreement) after the Recharge Agreement is entered into;

will not be included in the income of Canco under section 9 or 90, subsection 15(1) or 56(2), or paragraph 12(1)(x).

B. Section 245 will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the Recharge Agreement is implemented before XXXXXXXXXX.

COMMENTS

Nothing in these rulings should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch