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.
XXXXXXXXXX 970302
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested 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 and proposed transactions is as follows:
Facts
XXXXXXXXXX is a taxable Canadian corporation incorporated under the Canada Business Corporations Act. XXXXXXXXXX is a public corporation and its shares are traded on The XXXXXXXXXX Stock Exchange. Its head office is located at XXXXXXXXXX. The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
XXXXXXXXXX provides its key employees with options to acquire its common shares under the "XXXXXXXXXX" (the "Plan"). The purpose of the Plan is to promote the profitability and growth of XXXXXXXXXX by enabling XXXXXXXXXX to obtain and retain key employees. The principal features of the Plan are as follows:
The Plan is administered by a committee (the "Committee") of the Board of Directors consisting of not less than XXXXXXXXXX outside directors who are not employees of XXXXXXXXXX.
Key employees of XXXXXXXXXX and its subsidiary companies are eligible to receive options under the Plan.
The aggregate number of authorized but unissued common shares of XXXXXXXXXX for which options may be granted under the Plan cannot exceed XXXXXXXXXX common shares. Common shares not delivered under an option which expires or terminates continue to be available for other options under the Plan.
The Committee determines the employees to whom options are granted (the "Optionee"), the number of shares subject to such options, the dates on which the options are granted, the exercise price under the option and the dates prior to which the options may not be exercised.
An option granted under the Plan cannot be exercised or surrendered before the first anniversary date of the grant or after the expiration of XXXXXXXXXX years from the date of grant.
The exercise price under the options granted under the Plan is equal to the closing board lot sale price per share of XXXXXXXXXX on The XXXXXXXXXX Stock Exchange on the trading day on which the option is granted or, if there were no trades on that particular day, on the last day that shares traded prior to the date on which the option was granted.
At the sole discretion of the Committee, a right to elect to receive cash or cash and shares (the "Cash Out Right") may have been included in any option, either at the time of grant or by amendment or supplement grant. An Optionee is entitled under the Cash Out Right to surrender to XXXXXXXXXX all or part of his or her options and receive from XXXXXXXXXX cash, shares or a combination of cash and shares equal to the amount that the fair market value of the shares exceeds the exercise price for such shares. The Committee has the sole discretion to consent to or disapprove the election of the optionee to receive cash on a settlement or partial settlement of any Cash Out Right.
The Committee, at its sole discretion, could provide the option holder with an interest free loan to acquire the shares under the option. The Optionee is obligated to sign a promissory note payable on the earlier of the note's XXXXXXXXXX anniversary or on the Optionee's termination of employment and the Optionee has to sign over the shares to a trustee who holds the shares as security for the loan provided to the Optionee.
The Board of Directors has the ability to alter, suspend or discontinue the Plan at any time. However, the terms of an existing option may not be altered, suspended or discontinued without the consent in writing of the Optionee.
Upon termination of employment for any reason except death or retirement, an Optionee may at any time within XXXXXXXXXX days after the date of his or her termination but not later than the date of the expiration of the option, exercise the option or Cash Out Rights to the extent he or she was entitled to do so on the date of termination.
No option granted after XXXXXXXXXX under the Plan can be designated for inclusion in the plan or arrangement known as the "Incentive Stock Option" (the "ISO"). The ISO, also referred to as the Ownership Incentive Program" is separate and distinct from the Plan and it entitles an employee to receive an option to acquire XXXXXXXXXX shares of XXXXXXXXXX under the Plan for every XXXXXXXXXX shares of XXXXXXXXXX. Every XXXXXXXXXX employee is eligible to participate in the ISO for up to XXXXXXXXXX options and senior managers are eligible for up to XXXXXXXXXX options. The only requirement is that the XXXXXXXXXX shares be registered with XXXXXXXXXX.
There are no Cash Out Rights currently outstanding under the Plan.
Proposed Transactions
The Board of Directors proposes to make several amendments to the Plan (hereinafter referred to as the "Amended Plan") with respect to options that will be issued to an employee after the date of this advance income tax ruling (hereinafter referred to as the "New Optionee"). The proposed changes to the Plan include the following:
Until otherwise determined by the Board of Directors, XXXXXXXXXX of the Board of Directors shall constitute the Committee.
The maximum number of shares of XXXXXXXXXX that may be reserved for issuance to any one New Optionee will be limited to the maximum allowed under The XXXXXXXXXX Stock Exchange Rules and Regulations.
The exercise price under the options granted under the Amended Plan will be equal to the closing board lot sale price per share of XXXXXXXXXX on The XXXXXXXXXX Stock Exchange on the trading day immediately preceding the date on which such option is granted or, if there were no trades on that particular day, the exercise price will be the last board lot sale price per share prior thereto.
The Amended Plan will allow the Committee to include, at its sole discretion, with any option to acquire shares of XXXXXXXXXX the right for the holder thereof to surrender to XXXXXXXXXX all or any part of such option which could be exercised at that time in exchange for a cash payment from XXXXXXXXXX equal to the excess of the fair market value of the shares under the option surrendered at that time over the aggregate exercise price for such shares (the "New Cash Out Right").
The Amended Plan will no longer entitle any New Optionees to interest-free loans to purchase shares under an option.
If the employment of an New Optionee with XXXXXXXXXX or a subsidiary company is terminated due to permanent disability in accordance with the then applicable disability policy or plan of XXXXXXXXXX or the subsidiary corporation while holding an option which has not been fully exercised or surrendered, such option shall immediately vest and become exercisable.
Any Incentive Stock Option granted under the Amended Plan may, if expressly stated in the agreement pertaining to a specific option, include a New Cash Out Right. No option granted under the Amended Plan after XXXXXXXXXX will be designated as an Incentive Stock Option.
For greater certainty, there will not be any changes to options existing under the Plan.
Purpose of the Proposed Transactions
The purpose of the Amended Plan is to provide that the New Cash Out Rights only permit a New Optionee to surrender to XXXXXXXXXX all or any part of an option which will then be exercised for cash rather than the cash or shares or a combination of cash and shares allowed under the Plan.
To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in the ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all of the relevant facts and proposed transactions, that the Amended Plan is not amended pursuant to paragraph 2(i) above, and that the proposed transactions are completed in the manner described herein, we rule as follows:
The New Cash Out Right, described in paragraph 4(d) above, that may be provided under the Amended Plan will not constitute a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act.
The Committee's granting of a New Cash Out Right under the Amended Plan will not result in any amount being included in the New Optionee's income under section 5, 6 or 7 of the Act at that time.
Where a New Optionee that resides in Canada exercises his or her New Cash Out Right under the Amended Plan:
the amount received by the New Optionee in respect of the economic value of the New Cash Out Right exchanged for the cancellation of certain options to acquire shares under the Amended Plan will be taxable in the New Optionee's hands in accordance with paragraph 7(1)(b) of the Act; and
provided the conditions of paragraph 110(1)(d) of the Act are satisfied, the amount received by the New Optionee will be eligible for the deduction under paragraph 110(1)(d) of the Act.
Where a non-resident New Optionee exercises his or her New Cash Out Right under the Amended Plan, the amount received by the non-resident New Optionee in respect of the economic value of the New Cash Out Right exchanged for the cancellation of certain options to acquire shares under the Amended Plan, to the extent it is attributable to services rendered in Canada, will be taxable in the New Optionee's hands in accordance with paragraph 7(1)(b) and subparagraph 115(1)(a)(i) of the Act.
XXXXXXXXXX will be entitled to claim a deduction in computing its income from business under subsection 9(1) within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act for the amount paid to a New Optionee for the New Cash Out Right under the Amended Plan.
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 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Amended Plan is implemented within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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