1999 Ruling 9827903 - EMPLOYEE SHARE PURCHASE ARRANGEMENT

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: Application of GAAR to set up of Buyco to purchase employees’ shares.

Position: GAAR not applicable

Reasons: Decision of GAAR committee consistent with past rulings practice.

XXXXXXXXXX
XXXXXXXXXX 3-982790
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sir and Madam:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge the additional information in your letters of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Unless otherwise indicated, all statutory references herein are references to provisions of the Income Tax Act (the “Act”). The terms “paid-up capital” and “taxable Canadian corporation” as referred to herein have the meanings assigned by subsection 89(1).

Facts

1. XXXXXXXXXX is a corporation governed by the Canada Business Corporations Act and maintains its registered office at XXXXXXXXXX operates a XXXXXXXXXX business throughout Canada and has approximately XXXXXXXXXX employees. XXXXXXXXXX also holds shares in a number of subsidiaries in Canada which are either inactive or carry on activities incidental to XXXXXXXXXX business.

2. The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares, of which XXXXXXXXXX are issued and outstanding. All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX.

3. XXXXXXXXXX is a taxable Canadian corporation and its fiscal year and taxation year end on XXXXXXXXXX, respectively, of each year. XXXXXXXXXX corporate tax account number is XXXXXXXXXX and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office.

4. XXXXXXXXXX is a corporation governed under the Business Corporations Act XXXXXXXXXX and maintains its registered office at XXXXXXXXXX is a holding company, substantially all the assets of which are the issued and outstanding shares of, and an amount receivable from, XXXXXXXXXX.

5. XXXXXXXXXX is a taxable Canadian corporation and its fiscal year and taxation year end on XXXXXXXXXX, respectively, of each year. XXXXXXXXXX corporate tax account number is XXXXXXXXXX and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office.

6. The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares, an unlimited number of Class I Common Shares and an unlimited number of preference shares issuable in series. The only issued and outstanding shares of XXXXXXXXXX are XXXXXXXXXX common shares which are currently held by the following shareholders:

Shareholder				    Number of
					Common Shares

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

7. XXXXXXXXXX is a direct wholly-owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation. XXXXXXXXXX fiscal year and taxation year end on XXXXXXXXXX of each year. XXXXXXXXXX corporate tax account number is XXXXXXXXXX, and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office.

8. XXXXXXXXXX, and is a taxable Canadian corporation. XXXXXXXXXX fiscal year and taxation year end on XXXXXXXXXX of each year. XXXXXXXXXX corporate tax account number is XXXXXXXXXX, and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office.

9. Pursuant to an agreement between XXXXXXXXXX purchased all the shares of XXXXXXXXXX, respectively, on XXXXXXXXXX.

10. The XXXXXXXXXX common shares of XXXXXXXXXX held in trust by XXXXXXXXXX are beneficially owned by senior management employees of XXXXXXXXXX. These shares were issued to such employees pursuant to a restricted stock plan established in XXXXXXXXXX in which only members of senior management may participate. In addition, certain management employees hold options to acquire an aggregate of approximately XXXXXXXXXX common shares. These options were granted pursuant to stock option plans established in XXXXXXXXXX and subsequent years for certain management employees of XXXXXXXXXX.

11. The paid-up capital of the issued and outstanding common shares of XXXXXXXXXX is currently significantly lower than their fair market value.

Proposed Transactions

12. The Board of Directors of XXXXXXXXXX will authorize the establishment of an employee share ownership plan (“ESOP”) in which employees at all levels of XXXXXXXXXX and its affiliates, as that term is defined in the XXXXXXXXXX (collectively, “XXXXXXXXXX Companies”), may participate. It is expected that approximately XXXXXXXXXX employees will be eligible to participate in the ESOP.

13. Under the ESOP, eligible employees will be offered the right to purchase common shares of XXXXXXXXXX once every fiscal quarter. The purchase price of each share will be determined by a formula (the “Formula”) which will be based on the adjusted book value of the share and an earnings premium, and which is intended to approximate the fair market value of the share. For every two shares purchased by an employee under the ESOP and held for one year, the employee will be given a cash bonus by XXXXXXXXXX in the amount of the subscription price of one share. The employee will be required under the terms of the ESOP to apply the full amount of the cash bonus to purchase a third common share of XXXXXXXXXX.

14. Transfers of XXXXXXXXXX shares issued under the ESOP (the “ESOP shares”) between employees or to third parties (i.e. persons other than XXXXXXXXXX Companies) will not be permitted under the terms of the ESOP except in limited circumstances as described in paragraphs 15 and 16 below. There will be no public market for the shares of XXXXXXXXXX. Rather, all sales of the shares will have to be made in accordance with the procedures outlined below. Except as otherwise described in paragraph 15 below, the purchase price for all sales will be determined by the Formula.

15. Employees will be able to require XXXXXXXXXX to purchase their ESOP shares during a specified period each fiscal quarter. If an employee shareholder leaves the employment of XXXXXXXXXX or its affiliates for any reason (voluntarily or involuntarily), including retirement and death, the employee will be required to sell all of his or her ESOP shares to the XXXXXXXXXX Purchaser, as defined below. In the event XXXXXXXXXX acquires 100% of the outstanding voting shares of XXXXXXXXXX, other than ESOP shares, XXXXXXXXXX will be entitled to require employees to sell all of their ESOP shares to XXXXXXXXXX at a price per share equal to the greater of the Formula price and the price paid by XXXXXXXXXX to acquire the other shares. In the event XXXXXXXXXX sells sufficient of its shares to result in a third party (either alone or together with the third party’s affiliates) acquiring control of XXXXXXXXXX, employees holding ESOP shares will be entitled to sell all, but not less than all, their ESOP shares to XXXXXXXXXX or the third party at a price per share equal to the greater of the Formula price and the price paid by the third party to acquire the shares held by XXXXXXXXXX. Finally, if XXXXXXXXXX sells all of its shares to a person other than an affiliate, XXXXXXXXXX will be entitled to require employees to sell all their ESOP shares to the third party purchaser at a price per share equal to the greater of the Formula price and the price paid by the third party purchaser.

16. Under the terms of the ESOP, the employees will be able to elect to sell their ESOP shares of XXXXXXXXXX to a corporation, XXXXXXXXXX, (the “XXXXXXXXXX Purchaser”) designated by XXXXXXXXXX to act as purchaser of the ESOP Shares. Any employee selling ESOP shares to the XXXXXXXXXX Purchaser will deal at arm’s length with the XXXXXXXXXX Purchaser. The XXXXXXXXXX Purchaser is a direct wholly-owned subsidiary of XXXXXXXXXX and is a taxable Canadian corporation. It is presently not engaged in any business or undertaking. The XXXXXXXXXX Purchaser's fiscal year and taxation year end on XXXXXXXXXX of each year. The XXXXXXXXXX Purchaser's corporate tax account number is XXXXXXXXXX and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office.

17. The XXXXXXXXXX Purchaser will have the right to require XXXXXXXXXX to purchase, at any time, any ESOP share which the XXXXXXXXXX Purchaser has purchased from an employee. It is expected that the XXXXXXXXXX Purchaser will exercise such right immediately after purchasing each ESOP share so that the XXXXXXXXXX Purchaser will sell such share to XXXXXXXXXX at a price equal to its purchase price.

18. The XXXXXXXXXX Purchaser will have the right to require XXXXXXXXXX to prepay it for any ESOP shares which the XXXXXXXXXX Purchaser will purchase from the employees and expects to resell to XXXXXXXXXX, and will thereby be in a position to finance its own purchase.

19. The XXXXXXXXXX Purchaser will not act as an agent of XXXXXXXXXX. More specifically, XXXXXXXXXX will not have the right to compel the XXXXXXXXXX Purchaser to purchase ESOP shares from employees. In addition, the XXXXXXXXXX Purchaser will not have any authority to legally bind, or enter into relationships on behalf of, XXXXXXXXXX with employees or any other party.

Purpose of the Proposed Transactions

20. XXXXXXXXXX purpose in establishing the ESOP is:

(a) to promote and recognize employee commitment to XXXXXXXXXX;

(b) to enhance employee loyalty, involvement and teamwork;

(c) to share XXXXXXXXXX financial success with employees; and

(d) to attract and retain employees interested in long-term commitment.

21. The XXXXXXXXXX Purchaser’s purpose in purchasing the ESOP shares is to assist in creating a market for such shares so that employees of the XXXXXXXXXX Companies will be able to sell their ESOP shares without being deemed to have received a dividend for purposes of the Act upon such sale.

Ruling

Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and of themselves, to recharacterize a sale of ESOP shares by an employee to the XXXXXXXXXX Purchaser and the subsequent purchase of such shares by XXXXXXXXXX from the XXXXXXXXXX Purchaser, as a purchase by XXXXXXXXXX of its own shares from such employee.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the Board of Directors of XXXXXXXXXX has authorized the establishment of the ESOP by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described. In particular, we make no comment as to whether the amount determined by the Formula as the purchase price for each share, as described in paragraph 15 above, is equivalent to the fair market value of each such share.

Yours truly,

Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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