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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether employees who sit on the board of directors of corporations on behalf of their employer are required to report directors' fees and stock options paid to them as directors of the company.
Position: No. The director's fees and stock options would be business income of the entity for which the services were ultimately provided. In this case the services were provided ultimately for the partnership for which the employer provided management services. With respect to the stock option, the amount to be reported by the partnership at the time the option is granted would be nil since the options have no trading value and the fair market value of the shares is less than the exercise price when the option is issued. At the time the option is exercised, the partnership must report the excess of the FMV of the underlying security over the exercise price of the option.
Reasons: The employees are not entitled to benefit from the directors fees of stock options. They receive these as agents of the partnership.
XXXXXXXXXX 2001-007775
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling. We also acknowledge the additional information provided on XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayers or related persons,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) the subject of a ruling previously issued by the Directorate.
DEFINITIONS
In this ruling, unless otherwise expressly stated:
"The Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
"CCRA" means the Canada Customs and Revenue Agency;
"Committed capital" has the meaning set out in Article XXXXXXXXXX of the LP1 Agreement and LP2 Agreement;
"Employees" means the employees of Xco who sit as directors of Investco as part of their employment duties with Xco;
"Investco" means, collectively, the companies in which LP1 or LP2 have made investments;
"Investment committee" has the meaning set out in Article XXXXXXXXXX of the LP1 Agreement and LP2 Agreement;
"LP1" means XXXXXXXXXX;
"LP1 Agreement" means XXXXXXXXXX Agreement;
"LP2" means XXXXXXXXXX;
"LP 2 Agreement" means XXXXXXXXXX Agreement;
"Parentco" means XXXXXXXXXX;
"Public corporation" has the meaning assigned by subsection 89(1) of the Act;
"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"XCo" means XXXXXXXXXX;
"Yco" means XXXXXXXXXX.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions, is as follows:
FACTS:
1. Xco is incorporated under the laws of Canada and is a taxable Canadian corporation with its head office located in XXXXXXXXXX. The respective shares of Xco are owned XXXXXXXXXX% by Yco, which itself, is directly controlled by Parentco, a public corporation. The common shares of Parentco are traded on XXXXXXXXXX All of these companies have a year-end of XXXXXXXXXX.
2. Xco is a management company engaged in the management and administration of LP1 and LP2. Xco was appointed as manager of LP1 and LP2 pursuant to the LP1 and LP2 Agreements respectively.
3. The object of LP1, as specified in clause XXXXXXXXXX of the LP1 Agreement, is to invest primarily in XXXXXXXXXX. The General Partner of LP1 is XXXXXXXXXX which is XXXXXXXXXX% owned by Yco.
4. The object of LP2, as specified in clause XXXXXXXXXX of the LP2 Agreement, is to invest primarily in XXXXXXXXXX. The General Partner of LP2 is XXXXXXXXXX which is XXXXXXXXXX% owned by Yco.
5. In its capacity as manager of LP1 and LP2, Xco has entered into a Management Agreement to provide, or under its supervision and direction cause to be provided advisory, investment and management services to LP1 and LP2 pursuant to clause XXXXXXXXXX of the LP1 and LP2 Agreements.
6. Clause XXXXXXXXXX of the LP1 and LP2 Agreements specifies the investment activities that will be carried out by the General Partner, or Xco. The specific provisions are reproduced below:
"XXXXXXXXXX."
7. The remuneration described in clause XXXXXXXXXX of the LP1 and LP2 Agreements paid by Investco to the Employees, acting on behalf of Xco, would include directors' fees and options to purchase securities of Investco. When stock options are granted to the Employees, they have no trading value, and the exercise price of the options is never less than the fair market value of the underlying securities at that time.
8. Any directors' fees, stock options, or other remuneration paid by Investco to the Employees represents payments for services rendered by LP1 or LP2, as the case may be, either directly or through Xco.
PROPOSED TRANSACTIONS
9. The Employees, in the course of their employment with, and on behalf of Xco, will act as directors of Investco.
10. The Employees who will sit on the Board of Directors of Investco will be acting as representatives of Xco. Xco, in turn, will be representing LP1 or LP2 by providing its employees to sit as directors of Investco.
11. The Employees were hired by Xco because of their financial and investment experience and knowledge, and they deal at arm's length with Xco, LP1, LP2, and Investco.
12. In the course of providing services as directors of Investco, the Employees may be paid directors' fees, and may be granted stock options to purchase additional shares of Investco. This compensation is required to be remitted back to LP1 or LP2, pursuant to clause XXXXXXXXXX of the LP1 or LP2 Agreements because the Employees are acting as representatives of Xco, who, in turn, is representing LP1 or LP2.
13. The Employees will be required to sign over any director's fee cheques received from Investco to Xco, who, in turn, will forward a cheque to LP1 or LP2, as the case may be, for an amount equal to the director's fee.
14. With respect to the stock options granted by Investco to the Employees, the Employees will hold these options on behalf of LP1 or LP2 as the case may be. When the Employees consider it to be a good time to exercise the option based on the value of the underlying security, they will recommend to the chair of the Investment committee that the stock option be exercised. If their recommendation is approved, LP1 or LP2, as the case may be, will issue a cheque to Investco to cover the exercise price of the option, and the option will be exercised. The shares will then be sold as soon as possible, and the proceeds deposited to the account of either LP1 or LP2.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to allow LP1 or LP2 to benefit in the same manner as other directors of Investco, from the payment of directors' fees or the issue of stock options.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described in paragraphs 9 to 14 above, our rulings are as follows:
A. We confirm that:
i. the directors fees described in paragraph 12 above will not be considered employment income of the Employees, and will not be included in their income pursuant to subsection 5(1) or paragraph 6(1)(c) of the Act, and
ii. the directors fees described above will be included in the business income of LP1 or LP2, as the case may be, when paid to the Employees by Investco, pursuant to subsection 9(1) of the Act.
B. We further confirm that:
i. the stock options described in paragraph 12 above will not be considered employment income of the Employees, and will not be included in their income under subsection 5(1) or section 7 of the Act, and
ii. when the stock options described above are exercised, LP1 or LP2, as the case may be, will be considered to have received business income pursuant to subsection 9(1) of the Act equal to the excess of the fair market value of the underlying securities at the time the option is exercised, over the exercise price of the option.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the CCRA provided the transactions are completed by XXXXXXXXXX.
The rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Yours truly
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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