2000 Ruling 2000-0037133 - EMPLOYEE SAVINGS PLAN AND FUND

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:

The arrangement is an employees' share purchase plan where shares will be acquired with employee contributions and funds obtained through bank financing. Tax issues concerning the various components of the arrangement are:

1. Does the arrangement constitute a trust?

2 Does section 7 apply?

3. Will the shares be capital property for the purposes of the Act and as a consequence, will the financing be treated on capital account?

4. The arrangement requires a payment of an amount equal to the dividends paid on the shares to the financial institution Will the Dividends be taxable to the employees? Will other income be taxable to the employees?

5. The employer will pay all costs for the operation of the plan. Will this result in a taxable benefit to the employees?

6. Can the financing arrangement be characterized as a loan?

Position:

1. No. Individual employees hold the property under the arrangement.

2. Section 7 of the Act applies to the transactions but a benefit will only arise if the cost to the employee of the shares is less than the value of the shares at the time of their acquisition.

3. The nature of the gains or losses on the shares is a question of fact. There will be a linkage between the shares and the financing.

4. The dividends and other income will be income to the employee/shareholders.

5. Payment of the expenses of the arrangement by the employer are taxable benefits.

6. No.

Reasons:

1. There is no intention to hold property in trust and under French law it is not a trust.

2. The arrangement encompasses an agreement by the employer or related company to sell shares to employees.

3. Normally an employee acquires shares of an employer as capital property but there could be circumstances where an employee acquires the shares on income account. It is generally considered that the treatment of the financing costs will be on the same basis.

4. The right to the dividends rests with the shareholders. The near cash investments of the arrangement are also owned by the employees.

5. The arrangement is designed to facilitate the employees acquisition and holding of shares. Employer payment of these amounts will be taxable benefits. This is consistent with our position on group RRSPs and similar plans.

6. The necessary elements for a swap/hedge exist.

XXXXXXXXXX 								2000-003713

Attention: XXXXXXXXXX

XXXXXXXXXX 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letters and submissions of XXXXXXXXXX, in relation to your request for an advance income tax ruling in respect to the above noted arrangement.

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) "Arrangement" means the arrangement as described in this ruling including its component parts referred to herein as the "Plan" the "Fund" and the "Offering";

(c) "Bank" means XXXXXXXXXX;

(d) "Depositary" means XXXXXXXXXX;

(e) "Employer" means: Canadian subsidiaries of the Parent as set out in Schedule A of this ruling each of which is a taxable Canadian Corporation within the meaning of subsection 89(1) of the Act (collectively the "Employers");

(f) "Fund" means one component of the Arrangement which is the subject of this ruling and is generally described as a collective employee fund (known in France as a "Fonds Commun de Placement D'entreprise" ("FCPE")), to be established by the Board of directors of the Parent under the terms of the Plan and as more particularly described below and in the documentation provided with your request;

(g) "Group" means the Parent and its subsidiaries;

(h) "Management Company"means XXXXXXXXXX;

(i) "Parent" means XXXXXXXXXX;

(j) "Participant" means an employee of an Employer who is a "Qualifying Employee" and participates in the Plan;

(k) "Plan" means the group savings plan established effective XXXXXXXXXX under the authority of Chapter IV of Book IV of the French Employment Act under which the Board of directors of the Parent may, subject to shareholder approval, from time to time and under various arrangements, make Shares available to Qualifying Employees of the Employers;

(l) "Qualifying Employee" means an employee of an Employer who is eligible to participate in the Arrangement in accordance with the terms of the Arrangement;

(m) "Shares" means the common shares of the Parent (which are reserved under the Plan for Qualifying Employees);

(n) "Swap Agreement" means the agreement entered into with the Bank as described in 26(d) below;

Proposed Arrangement

1. The Board of directors of the Parent propose to establish arrangements under the terms of the Plan for employees of the Parent and its subsidiaries throughout the world, and in particular, propose to establish the Fund and related Swap Agreement for Qualifying Employees of the Employers under the Arrangement described herein.

2. The Arrangement is being offered together with another stock purchase plan that is not the subject of this ruling.

3. Participation in the Fund will be offered (the "Offering") to Qualifying Employees in XXXXXXXXXX subsequent to the receipt of this ruling.

4. Qualifying Employees may elect to participate in the Fund.

5. The draft rules and bylaws of the Fund (the "Fund Rules") were provided as schedule B to your submission. The principal features of the Fund are as follows:

Application of French Laws

6. The Fund is structured in accordance with French securities laws that apply to FCPEs. Under these laws, an FCPE may only be established in connection with a company's or corporate group's employee savings plan ("Plan d'Epargne d'Entreprise") and/or profit-sharing plan ("Participation des salariés") which involves the issue of the company's shares.

7. Under French law, the Fund is defined as a co-ownership of securities which has no separate legal existence or assets, the purpose of which is the management of employee-investors' portfolios. In a typical employee stock offering involving an FCPE, the shares of the employees' company are directly acquired or subscribed by the FCPE acting on behalf of the employee and each employee is a co-proprietor (with the other employees) of the company shares held and managed by the FCPE.

8. Units (the "Units"), represented by book entries in a register maintained by the manager of the Fund, will be issued to Participants and will represent the Participants' interest in the investments held under the terms of the Fund including Shares held by the Fund on behalf of the Participants. The number of Units issued to a Participant will be equal to the number of Shares that can be acquired using only the Participant's contributions under the Plan. French law expressly stipulates that the Units are separate securities. However, Units may not be publicly traded or listed on a stock exchange.

9. The Fund will receive the approval ("agrément") of the Commission des Opération de Bourse (the French Securities and Exchange Commission or "COB") at the time of its creation. Throughout its existence, the Fund will remain subject to the regulatory and supervisory authority of the COB. Amendments to the Fund Rules as well as any transformation, merger or liquidation of the Fund will require COB approval.

10. Units received by Participants are subject to an approximately five-year holding period from the date of issue subject to certain early redemption provisions.(described in 26(i) below). This holding period is a requirement of French employee savings plans. At the end of the holding period, the Participants must request the Fund to "redeem" their Units and receive cash, take full unrestricted possession of their shares, or remain in the Fund or a successor to the Fund, as applicable.

11. Under French tax law, the Fund is not subject to French corporation tax and, by virtue of its nature as a co-ownership, it is treated as a tax transparent entity for French tax purposes. Accordingly, and insofar as its Units are subject to the holding period described in paragraph 10 above, income received and retained by the Fund is not subject to French taxation. Income earned on investments held through the Fund as described in 13 below will be included as income of the Participants for Canadian tax purposes in accordance with the appropriate provisions of the Act. For greater clarity this includes any interest or dividends received by each Participant in respect of the Participant's interest in the Shares and any other investments held by the Participant under the Fund.

Structure of the Fund

12. The Fund will be established, at the Parent's request, by the "Management Company" which is unrelated to any member of the Group and which is authorized by the COB to create and manage the Fund. The Management Company has selected the Depositary for the investments held through the Fund from the list of French-based banks and other financial institutions established for this purpose by the French Minister of the Economy, Finance and Industry. In addition, an auditor for the Fund (the "Auditor") will be appointed by the Management Company for a specified term, subject to the approval of the COB.

13. The Fund's portfolio of investments will consist mainly of Shares and rights under the Swap Agreement as described in 26(d) below. Investments will also include a certain amount of cash and cash equivalents, expected to represent not more than 10% of the investments held through the Fund, which shall be held for the purpose of facilitating redemptions of Units.

14. The objective of the Fund (through the offering and by operation of the Swap Agreement) is to provide Participants with an appreciation entitlement in the value of the Shares. The Fund will exist for a maximum term of approximately XXXXXXXXXX years.

15. The "Supervisory Board" of the Fund will be composed of representatives of employees of the Group that participate in the arrangement as to XXXXXXXXXX% and representatives of the Group as to XXXXXXXXXX%. Executive positions in the Supervisory Board will include a Chairman and a Secretary.

Meetings of the Supervisory Board will occur as and when necessary and at a minimum, at least once per annum to examine and approve the Fund's annual report and financial statements prepared by the Management Company and certified by the Auditor.

16. The Management Company will be responsible for the establishment of the Fund and its day-to-day management, including the purchase and sale of securities included in the investment portfolio and the redemption of Units. Without prejudice to the rights of the Supervisory Board, the Management Company will act on behalf of the Participants and represent them with regard to third parties in transactions relating to the Fund and in any legal proceedings to which the Fund is a party. The Management Company will enter into the Swap Agreement and will have the power to borrow on the Fund's behalf. Under the Fund Rules such borrowings cannot exceed XXXXXXXXXX% of the value of Fund's portfolio and may not involve a pledge of the investments held through the Fund.

17. The Management Company will make decisions, with the approval of the Supervisory Board and in specific instances, with the approval of the COB, as to any changes in the Fund Rules.

18. The Management Company may only be replaced once the Supervisory Board has appointed a new corporation to assume the Management Company's duties and responsibilities and following prior approval of the COB Board.

19. The Management Company will report to and be subject to the control of the Supervisory Board and may be replaced by the Supervisory Board.

20. The Supervisory Board will exercise the voting rights attached to the Shares held through the Fund by the Participants.

21. The Supervisory Board will decide upon any transformation (i.e. merger, division, and liquidation) of the Fund and will be required to approve any change in the Fund Rules, which transformation and changes may only be implemented upon the COB's authorization.

22. The Depositary will receive and execute all orders from the Management Company to purchase, sell and trade securities in the investment portfolio. It will also ensure that all actions necessary to enable the Fund to exercise the rights attached to the securities held in the portfolio are taken.

23. The Depositary will oversee the compliance of all transactions conducted by the Management Company with the legal provisions governing the Fund and FCPEs in general.

24. The Depositary may not be changed until the Management Company, with the Supervisory Board's agreement, has appointed a new Depositary and received the COB's authorization.

25. The Auditor's responsibilities will include certifying the annual report of the Fund's activities which is drawn-up by the Management Company. This report will contain the results of the Fund's operations, an inventory of the Fund's investments and an explanation of the general policy of the Fund implemented throughout the year. The report will be made available to Participants and the COB.

The Offering

26. The principal terms and mechanics of the Offering will be as follows:

(a) Subject to the limitations described in (b), Participants will be given an opportunity to subscribe for Shares through the Fund at a price per share (the "Subscription Price") equal to the price determined by the Parent's Board of directors (the "Reference Price") less a discount of XXXXXXXXXX%. The Reference Price determination will be made shortly before the commencement of the subscription period for the Offering and will be based on the average trading price for the Shares over the twenty trading days preceding the determination.

(b) The aggregate Subscription Price for a Participant (the "Subscription Amount") determined under (a) will be restricted to an amount not exceeding the lesser of approximately XXXXXXXXXX% of a Participant's gross annual compensation and the Subscription Price for XXXXXXXXXX Shares or such lower limit as may be set by the Employers. In addition, the Subscription Amount for a particular Participant may be reduced depending on the aggregate Subscription Amounts of all Participants under the Offering (the "Aggregate Subscription Amount").

(c) After the determinations under (a) and (b) above, and following the completion of the subscription period for the Offering, each Participant will pay into the Fund an amount equal to XXXXXXXXXX% of the Participant's Subscription Amount (the "Original Contribution") and receive Units in the Fund.

(d) Immediately after receiving the Original Contribution from each Participant (collectively, the "Aggregate Original Contribution Amount"), the Management Company, on behalf of the Fund, will enter into the Swap Agreement with the Bank under which the Bank will contribute to the Depositary an amount equal to the difference between the Aggregate Subscription Amount and the Aggregate Original Contribution Amount (the "Bank Contribution"). A draft copy of the Swap Agreement was provided with your submission as Schedule C.

(e) The cash received from the Participants and the Bank (ie., the Aggregate Original Contribution Amount plus the Bank Contribution) will be used by the Fund to subscribe for Shares from the Parents' treasury at a price per share equal to the Subscription Price.

(f) By operation of the Swap Agreement and the Fund Rules, a Participant will not be liable to the Fund (or the Bank) for any amounts in excess of the Participant's Original Contribution.

(g) An amount equal to any dividends paid on Shares held by the Fund during the term of the Swap Agreement will be remitted to the Bank.

(h) Subject to (i) below, each Unit will be redeemable for cash or cash equivalents equal to the Net Asset Value Per Unit of the Fund (as discussed in paragraph 26(j) below).

(i) Subject to certain exceptions provided under French law (such as death or termination of employment) ("Acceleration Events"), Participants will not be entitled to redeem or otherwise dispose of their Units until XXXXXXXXXX (the "Holding Period").

(j) Under Articles XXXXXXXXXX of the Fund Rules, the redemption amount for each Unit at a particular date (a "Redemption Date"), including the Redemption Date occurring on termination of the Swap Agreement (which takes place immediately before the wind-up of the Fund) (the "Maturity Date"), will be equal to the Net Asset Value Per Unit in effect on such date. Pursuant to the terms of the Swap Agreement and a guarantee agreement between the Bank and the Management Company, a draft copy of which was attached as Schedule D (the "Guarantee Agreement"), the Net Asset Value Per Unit on a particular Redemption Date will not be less than the Unit's "Guaranteed Net Asset Value"(GNAV") as described in 26(k).

(k) The determination of the GNAV of a Unit is set forth in Article XXXXXXXXXX of the Fund Rules. In general (and subject to various adjustments required for splits, consolidations or similar transactions affecting the Shares, market disturbances and certain legislative amendments), the GNAV of a Unit on a Redemption Date will be calculated by way of a formula where the GNAVof a unit is equal to the value of a Share "Financed by Personal Contributions" plus the corresponding "Participation" as those terms are defined in the Fund Rules. More particularly the GNAV per Unit is equal to:

the value of a Share on the applicable Redemption Date plus the greater of

(i) nil and

(ii) The Participation Percentage XXXXXXXXXX (CF-Reference Price)

Where CF is the average price of a Share based on a specified number of trading days preceding the applicable Redemption Date (the "Applicable Share Price").

Accordingly, the GNAV of a Unit is equal to the sum of two components - the first component representing the value of one Share on the applicable Redemption Date and the second component representing a share appreciation entitlement of the Unit, namely, the Participation Percentage (presently XXXXXXXXXX%) of the appreciation in XXXXXXXXXX Shares (the "Share Appreciation Entitlement"). The Share Appreciation Entitlement calculation can never result in a negative amount and will be positive if, on the applicable Redemption Date, the Applicable Share Price exceeds the Reference Price. Conversely, Participants will only be entitled to receive an amount in respect of a Unit equal to the value of one Share in the event the Applicable Share Price (on the applicable Redemption Date) is less than the Reference Price. Based on the provisions in the Swap Agreement described in paragraph 26(l) below, the Net Asset Value Per Unit at a particular time will, in general, not vary materially from the GNAV of the Unit at that time.

(l) Under the terms of the Swap Agreement, the Fund will pay to the Bank, on each Redemption Date, including the Maturity Date (which occurs on termination of the Swap Agreement), an amount equal to the difference between the market value of Shares in the Fund's portfolio corresponding in number to the Units being redeemed on such Redemption Date and the aggregate GNAV of such Units provided, however, that if the market value of such Shares is less than the aggregate GNAV of the subject Units (a "shortfall") the Bank will:

(i) not be entitled to any payment from the Fund and

(ii) pay to the Fund the amount of such shortfall.

Payments by the Fund to the Bank under the arrangement described in this paragraph will generally be effected by way of a transfer by the Fund to the Bank of Shares equal in value to the amount of the payment. Payments by the Bank to the Fund under the arrangement described in this paragraph will generally be made in cash.
(m) Following the completion of the payments described in 26(l) above, the Swap Agreement will terminate and the Fund will be wound-up and/or merged with another FCPE ("Successor Fund"); a Participant holding Units at that time may elect to:

(i) redeem Units in consideration for an amount per Unit equal to the Unit's Net Asset Value Per Unit; or

(ii) receive units in the Successor Fund.

(d) Other Relevant Information

27. The Offering will be registered in France with the COB.

28. The Net Asset Value Per Unit will be calculated and reported to the COB on a monthly basis, based on the net assets of the Fund divided by the number of Units outstanding.

29. Pursuant to Article XXXXXXXXXX of the Fund Rules, annual financial and administration fees will be paid by the Parent on behalf of the Fund to the Management Company and the Auditor in an amount not exceeding XXXXXXXXXX% of the net assets of the Fund. Brokerage fees, commissions and expenses on sales and acquisitions of Shares in the Fund's portfolio shall be borne by the Parent.

30. In case of exceptional circumstances and in order to protect the rights of Participants when requests for Unit redemptions require the liquidation of a significant part of the Fund's portfolio, the Management Company may decide to temporarily suspend the redemption of Units. The Management Company shall give prior notice of the decision to the COB and shall inform the Supervisory Board, the Depositary and the Auditor as soon as practicable.

31. A Canadian-resident employee's participation in the Offering is optional. The acquisition of Units by a Canadian-resident Qualifying Employee is not intended to, and will not, replace any rights the employee may have to earnings for services rendered up to and including the date the Units are issued.

Purpose of the Proposed Transaction

32. The purpose of the proposed transactions is to:

(a) align the interests of Participants (including Canadian-resident Qualifying Employees) with those of the Parents' shareholders,

(b) promote entrepreneurship in Participants and

(c) motivate Participants to maximize the long-term value of the Shares.

Additional Information

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

i) are in an earlier return of an Employer or a person related to the Employer;

ii) are being considered by a tax services office or tax centre in connection with a previously filed tax return of an Employer or a person related to the Employer;

iii) are under objection by an Employer or a person related to the Employer;

iv) are before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and

v) are the subject of a ruling previously issued by the Directorate.

Rulings

Provided the above statement of definitions and abbreviations and proposals are accurate and constitute a complete disclosure of all relevant details and provided the Fund and the Swap are established and the Offering made as proposed, we rule as follows:

A. For the purposes of the Act, a Participant will be considered to acquire the Shares for which he or she has subscribed through the Fund, including the Participant's pro-rata portion of the Shares that are acquired with funds provided by the Bank through the Swap Agreement;

B. A redemption by a Participant of a Unit in and of itself will not be a "disposition" as that term is defined in section 54 of the Act;

C. Subsection 7(1) of the Act will apply with respect to the sale or issue of any Shares to a Participant in accordance with the terms of the Offering, to include in the Participant's income the amount of the benefit, if any, determined in accordance with the provisions of section 7 of the Act;

D. Except for the income inclusions identified in 11 above, the amounts paid by an Employer or the Parent in accordance with paragraph 29 above, and the gain or loss described in Rulings E and F below, no amount will be included in the income of a Participant under the Act as a consequence of the terms or operation of the Swap Agreement;

E. Where the Shares acquired under the Offering are held by a Participant on capital account, any gain or loss realized or sustained on the settlement of the Swap Agreement, will be treated on capital account to the extent the Swap Agreement relates to those Shares; and

F. Where the Shares acquired under the Offering are held by a Participant on income account, any gain or loss realized or sustained on the settlement of the Swap Agreement, will be treated on income account to the extent the Swap Agreement relates to those Shares.

These rulings are given subject to the limitations and qualifications set forth in Canada Customs & Revenue Agency (the "Agency") Information Circular 70-6R3 dated December 30, 1996, Canada, and are binding upon the Agency provided the Offering is implemented by XXXXXXXXXX.

Yours truly,

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

XXXXXXXXXX