9 January 2001 External T.I. 2000-0050505 - REIMBURSEMENT ON ISSUING SHARES

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:

Whether paragraph 12(1)(x) will apply to a Canadian corporation ("Parentco") as a consequence of a reimbursement received by it from a foreign subsidiary ("Foreignco") where shares of the capital stock of Parentco are issued by it under the terms of Foreignco's employee stock option plan.

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

An amount reimbursed by Foreignco to Parentco (for shares of Parentco issued by it under the terms of Foreignco's employee stock option plan) would not constitute an amount received by Parentco "in the year, in the course of earning income from a business or property" such that the provisions of paragraph 12(1)(x) would not apply.

XXXXXXXXXX 2000-005050
P. Diguer CGA
Attention: XXXXXXXXXX

January 9, 2001

Dear Madam:

Re: Reimbursement received by a corporation on issuing shares of its authorized capital

This is in reply to your letter dated October 6, 2000 which was in response to our letter dated July 13, 2000 (file # 2000-002946) which was written in response to your letter dated May 29, 2000 in which you requested the Canada Customs & Revenue Agency's (the "Agency") views on the tax consequences to a Canadian corporation ("Parentco") of a reimbursement received from a foreign subsidiary ("Foreignco") where shares of the capital stock of Parentco are issued by it under the terms of Foreignco's employee stock option plan.

Specifically, in your letters you describe two situations where the employees of Foreignco are provided with stock options in Parentco as part of their compensation package. Foreignco has, as a condition of Parentco issuing stock options to employees of Foreignco, agreed to reimburse Parentco for the difference between the fair market value ("FMV") of the shares at the time of exercise and the exercise price. The two situations are as follows:

i) An employee exercises an option for $30 per share at a time when the fair market value of the share is $100. The employee will pay $30 per share to the Parent in return for each share with an FMV of $100. The subsidiary will reimburse the Parent for the $70 cost of providing the share to the employee.

ii) The exercise of the option takes place on a "cash-less" basis. In this situation, the employee never takes possession of the shares or pays the exercise price directly. The shares are provided by the Parent to a broker who sells the shares in the open market. The broker in this example would, for each share sold, remit $70 to the employee (directly or through the Foreignco) and $30 to the Parent. As in the first situation, the subsidiary would reimburse the Parent for the $70 cost of providing the share to its employee.

In your letter of October 6, 2000 you indicate that the $70 payment from the subsidiary to the Parent would probably not be added to the Parent's stated capital under the relevant corporate law statute. However, the entire $100 received by the Parent will be added to the Parent's shareholders' equity for accounting purposes.

In particular you ask:

That the Agency confirm that paragraph 12(1)(x) would not operate to bring such a reimbursement into Parentco's income notwithstanding the additional information concerning the accounting treatment by Parent of the payment received.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.

It continues to be our view that the $70 reimbursement by Foreignco to Parentco would not constitute an amount received by Parentco "in the year, in the course of earning income from business or property" such that the provisions of paragraph 12(1)(x) would not apply. This view applies whether or not the amount is added to the stated capital.

We trust that our comments will be of assistance to you.

Yours truly,

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