19 January 2000 Internal T.I. 2000-0000227 - BENEFIT REIMBURSEMENT

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: 1) Will an amount that is not deductible under 7(3)(b) of the Act paid by a Canadian employer to reimburse a U.S. parent corporation for the cost the parent incurred to acquire the previously-issued shares that are reissued to the employees of the Canadian employer be subjected to taxes under Part XIII of the Act? 2) Where the Canadian corporation reimburses more than the U.S. parent corporation's cost for such shares, would the excess be subjected to taxes under Part XIII?

Position: 1) No 2) Question of Fact.

Reasons: 1) The payment would not fit any of the types that are subjected to Part XIII of the Act. 2) The facts would have to be looked at to determine whether the excess would constitute a shareholder benefit, a dividend or some other type of payment that may be subjected to taxes under Part XIII.

			January 19, 2000

	LAVAL TSO	HEADQUARTERS
	Georges H. Cloutier	M.P. Sarazin
	Director	824-5441

	Attention: Gilles Thériault
			2000-000022

Reimbursement of U.S. Parent Corporation for Stock Option Costs

We are writing to you in response to your e-mail of December 22, 1999, wherein you requested our comments regarding the application of Part XIII of the Income Tax Act (the "Act") to amounts reimbursed by a Canadian subsidiary to its U.S. parent corporation for the cost of the parent's shares that were acquired on the open market for distribution to employees of the Canadian subsidiary corporation under stock options the U.S. parent corporation has granted to such employees. In addition, you have asked us to comment on our technical interpretation #991660 (the "Letter") issued on October 14, 1999.

In our Letter, we stated:

"The determination of whether a specific payment made by a Canadian employer to its U.S. parent corporation will be subjected to taxes under Part XIII of the Act can only be determined after a review of all of the relevant facts pertaining to the specific payments. However, we would not expect that a reimbursement by a Canadian employer to its U.S. parent corporation for the value of benefits provided to the Canadian employer's employees under a stock option plan would constitute a type of payment that would be subjected to taxes under Part XIII of the Act."

Comments

In the U.S., corporations (USCo.) are allowed to acquire their own shares on the open market and the shares are not returned to treasury but are held in a separate equity account. These previously-issued shares may be reissued by USCo. in the future. In some cases, USCo. will use these previously-issued shares to satisfy its obligations under stock options it has granted to its employees and employees of its subsidiary corporations. Generally, USCo. will then charge its subsidiary corporation for the cost it incurred to acquire the previously-issued shares that were redistributed to the employees of the particular subsidiary corporation.

Where the particular subsidiary corporation is a corporation resident in Canada (Canco), we would have to make a determination of whether the reimbursement by Canco of the cost incurred by USCo to acquire the previously-issued shares which were distributed to the employees of Canco would be subjected to taxes under Part XIII of the Act. We concluded in our Letter that the reimbursement of the actual cost incurred by USCo. by Canco would not qualify as one of the types of payments that would be subjected to taxes under Part XIII of the Act. This interpretation is consistent with the exception provided under 212(4)(b) of the Act for the payment of specific expenses incurred by a non-resident person for the performance of a service that was for the benefit of the payer.

In cases where USCo. charges its subsidiary corporations for the fair market value of any previously-issued shares USCo. distributes to the employees of the subsidiary corporations, we would have to review all of the facts to make a determination of whether the amount paid by Canco to USCo. that exceeds the amount paid by USCo. for the previously-issued shares would constitute an amount that would be subjected to Part XIII of the Act. Because this determination is a question of fact, our Letter did not address this situation. You expressed the view that this excess payment could constitute a benefit under subsection 15(1) of the Act which would be subjected to taxes under Part XIII. This may, in fact, be the case but we are unable to make such a determination without a review of all of the facts related to a specific case.

We trust these comments will be helpful.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate