2002 Ruling 2002-0148253 - OPTION IN LIEU OF BONDS

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: Will certain provisions of the Act relating to employee stock option plans apply to an employee's participation in a particular arrangement?

Position: Yes.

Reasons: The new plan satisfies the provisions pertaining to employee stock option plans. The conversion of future bonus/ director fee rights for options will not be a taxable event.

XXXXXXXXXX 								2002-014825

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Proposed Bonus Option Plan
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above-noted Corporation and our telephone conversations of XXXXXXXXXX.

Definitions and Abbreviations

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

(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Affiliate" means: an affiliate as defined by subsection 206(1) of the Act;

(c) "Annual Bonus" means: the bonus payable in accordance with the Bonus Plan;

(d) "Annual Retainer" means: the retainer payable to a member of the Board for services as a member of the Board during a calendar year and, for greater certainty, does not include any additional compensation payable to an Eligible Director for any other service, including without limitation, any chairman fees, Board committee chair fees and Board committee meeting fees;

(e) "Board" means: the board of directors of the Corporation;

(f) "Bonus Plan" means: the Corporation's annual bonus plan as described in 4 below;

(g) "Bonus Option" means: an option to purchase Shares pursuant to the terms of the Bonus Option Plan;

(h) "Bonus Option Plan" means: the proposed Bonus Option Plan as described in 8 below;

(i) "CCRA" means: the Canada Customs and Revenue Agency;

(j) "Committee" means: the compensation committee, formerly referred to as the option committee, which is a committee of the Board responsible for recommending to the Board the issuance of stock options under the Stock Option Plan;

(k) "Corporation" means: XXXXXXXXXX;

(l) "Eligible Director" means: a member of the Board of the Corporation or of an Affiliate of the Corporation who is eligible to participate in the Bonus Option Plan;

(m) "Eligible Employee" means: an employee of the Corporation or of an Affiliate of the Corporation, who deals at arm's length with the Corporation and who is eligible to participate in the Bonus Option Plan;

(n) "Option" means: an option to purchase Shares pursuant to the terms of the Option Plan;

(o) "Option Agreement" means: an agreement entered into between the Corporation and a Participant pursuant to the Bonus Option Plan;

(p) "Participant" means: an Eligible Employee or an Eligible Director who has entered into an Option Agreement with the Corporation in accordance with the Bonus Option Plan;

(q) "Regulations" means: The Income Tax Regulations;

(r) "Share" means: a common share in the capital stock of the Corporation; and

(s) "Stock Option Plan" means: the Corporation's stock option plan as described in 5 below.

In addition, in this letter:

(t) the terms "corporation", "salary deferral arrangement", "taxable Canadian corporation", and "public corporation", have the meanings assigned to them by subsection 248(1) of the Act; and

(u) the term "arm's length" has the meaning assigned by subsection 251(1) of the Act.

Facts

1. The Corporation is a taxable Canadian corporation and a public corporation that exists under the Business Corporations Act (Canada). The Corporation's XXXXXXXXXX are posted for trading on the XXXXXXXXXX Stock Exchange. The Corporation's XXXXXXXXXX are listed on the XXXXXXXXXX Stock Exchange. The Corporation is a XXXXXXXXXX.

2. Most of the Corporation's non-union employees participate in the Corporation's Bonus Plan and senior management employees participate in the Stock Option Plan.

3. The Corporation has Eligible Employees and/or Eligible Directors to which subsection 115(1) of the Act applies.

4. The relevant features of the Bonus Plan are:

(a) The Bonus Plan provides Annual Bonuses based on the financial results of the Corporation and its operating units and the personal performance of Bonus Plan participants;

(b) Each calendar year the participants are eligible to receive a cash Annual Bonus;

(c) Annual Bonuses are based on individual contributions to corporate results expressed as a percentage of base salary. Annual Bonus payments are comprised of a corporate, operating unit component, and a personal component; and

(d) The amount of the Annual Bonus is determined and paid out by the end of the first quarter of the calendar year following the calendar year to which the Annual Bonus relates.

5. The relevant features of the Stock Option Plan are:

(a) The Stock Option Plan seeks to align the interests of employees with those of the Corporation's shareholders;

(b) The participants in the Stock Option Plan are senior full-time employees of the Corporation and its Affiliates, consultants, who are not insiders, and directors of the Corporation or an Affiliate;

(c) Pursuant to the Stock Option Plan, participants may acquire Shares at XXXXXXXXXX% of the fair market value on the date of the grant. Options are granted annually and are generally exercisable as to XXXXXXXXXX in the first year, an additional XXXXXXXXXX in the second year, and are fully exercisable in the third year. Options expire up to XXXXXXXXXX years from the date of the issuance of the options; and

(d) Options may be granted in such amounts as the Committee, or the Board in the case of a grant of Options to directors, considers appropriate having regards to past and anticipated future contributions of the respective participant to the Corporation.

6 The Shares are prescribed shares as defined under section 6204 of the Regulations.

7. The Annual Bonus and Annual Retainer are not set apart or otherwise available to the Eligible Employee or Eligible Director prior to the elections described in 8 below.

Proposed Bonus Option Plan

8. The Corporation will establish the Bonus Option Plan for the benefit of Eligible Employees and Eligible Directors. The relevant features of the Bonus Option Plan are:

(a) The Bonus Option Plan will comprise a text and the Option Agreement between the Corporation and each Participant, setting out the terms of the Participant's participation in the Bonus Option Plan. For purposes of the Act, neither the text nor the Option Agreement constitute an agreement to issue Shares to the Participant;

(b) The Bonus Option Plan will be administered by the Committee, beginning with the calendar year in which the Corporation receives this ruling from the CCRA in respect of the issuance of Bonus Options under the Bonus Option Plan;

(c) Each Eligible Employee that is a Participant may elect to receive XXXXXXXXXX percent of the Eligible Employee's Annual Bonus in the form of Bonus Options, with the balance, net of withholding tax, being paid in cash. This election will be made annually prior to end of each calendar year to which the Annual Bonus relates. The employee will file the election before the Corporation has determined or paid the Annual Bonus. If no election is made in respect of a particular calendar year, the Eligible Employee will receive the Annual Bonus in cash;

(d) An Eligible Director that is a Participant may elect annually to receive XXXXXXXXXX percent of the Eligible Director's Annual Retainer, which has not been paid and is not payable at the time of the election, in the form of Bonus Options. In the case of an existing Eligible Director, before the commencement of a calendar year, the Eligible Director may elect to receive the Annual Retainer in Bonus Options for that calendar year. In the case of a new Eligible Director, within XXXXXXXXXX days after the Eligible Director's appointment, the Eligible Director may elect to receive the Annual Retainer in Bonus Options for that calendar year. If no election is made in respect of a particular calendar year, a new or existing Eligible Director will receive the Annual Retainer in cash;

(e) A Participant will be entitled to receive a Bonus Option for one Share for every $XXXXXXXXXX of Annual Bonus or Annual Retainer that the Participant has elected to receive in the form of Bonus Options;

(f) The Bonus Options will be issued on the date or dates on which the Participant would otherwise receive an Annual Bonus or Annual Retainer. For purposes of the Act, the Bonus Option constitutes an agreement to issue Shares to the Participant; and

(g) The Bonus Options issued under the Bonus Option Plan will have the same terms as the Options issued under the Stock Option Plan described in 5 above except that the Bonus Options will be fully exercisable immediately upon issuance so that a Participant may acquire Shares on the date the Bonus Options are issued. Under the terms of the Bonus Options, Participants may acquire Shares at XXXXXXXXXX% of the fair market value on the date of the issue of the Bonus Option.

9. XXXXXXXXXX.

Purpose of the Proposed Bonus Option Plan

10. The Corporation wishes to attract and retain talented senior employees and directors by allowing them to participate in the long-term success of the Corporation. The Corporation also wishes to promote a greater alignment of interest between these senior employees, directors and the Corporation's shareholders by providing Eligible Employees and Eligible Directors with additional opportunities to acquire Shares.

Additional Information

11. To the best of your knowledge, none of the issues involved in this ruling are:

i) in an earlier return of the Corporation, an Affiliate, a Participant, or any person related to the Corporation, an Affiliate or a Participant;

ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation, an Affiliate, a Participant, or any person related to the Corporation, an Affiliate or a Participant;

iii) under objection by the Corporation, an Affiliate, a Participant, or any person related to the Corporation, an Affiliate or a Participant;

iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor

v) the subject of a ruling previously issued by the Directorate to the Corporation, or an Affiliate.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the terms of the existing plans, the proposed Bonus Option Plan and the purpose of the proposed Bonus Option Plan, and provided the actual wording of the proposed Bonus Option Plan is substantially and continues to be substantially as described above, we rule as follows:

A. Section 7 of the Act will apply in respect of the Bonus Options that are granted under the Bonus Option Plan to the Participant in lieu of the amount of an Annual Bonus or Annual Retainer in respect of which the Participant has made an election in accordance with 8(c) or (d) above, and paragraph 7(3)(a) of the Act will apply to the grant of the Bonus Options such that no amount will be included, pursuant to subsection 5(1), section 6, or subparagraph 115(1)(a)(i) of the Act, in computing the income of any Participant in respect of the grant of the Bonus Options.

B. The receipt of Bonus Options in lieu of the amount of an Annual Bonus or an Annual Retainer, in respect of which the Participant has made an election in accordance with 8(c) or (d) above, will not, in and by itself, disqualify a Participant from claiming a deduction that they would otherwise be entitled to under paragraph 110(1)(d) of the Act in respect of such Bonus Options.

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 70-6R5 dated May 17 2002, and are binding on the CCRA provided that the Plan is implemented by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch