CRA grants SDA ruling for SAR plan for CCPC whose FMV is determined using a simplistic formula

CRA ruled that "stock appreciation rights" of employees of a Canadian-controlled private corporation would not constitute a salary deferral arrangement before they could exercise cash-out rights. Cash-outs (based on the appreciation in their notional units from the time of grant) can occur not only on termination of employment but also when the fair market value of the CCPC passes specified thresholds. The FMV of the CCPC will be computed in accordance with a formula which starts with a weighted average of a multiple of adjusted EBITDA for various trailing reporting periods ("to ensure that the value of SAR Units is not unduly affected by a year that is exceptionally good or exceptionally bad"), and then adds cash (but not other working capital) and (in an obvious departure from valuation principles) the cumulative amount of corporate distributions, and subtracts debt (but not accrued liabilities).

The take away may be that in this context CRA is amenable to the FMV of an unlisted company being computed in accordance with an objective, but somewhat smoothed and arbitrary (and, therefore, at least somewhat inaccurate), formula.

Neal Armstrong.  Summary of 2013 Ruling 2012-0435221R3 under s. 248(1) – salary deferral arrangement.