2001 Ruling 2001-0082983 - reimbursement of stock option benefit

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: Where PARENT enters into an agreement with its subsidiary, UKSub, whereunder UKSub pays PARENT am amount equal to the stock option benefit enjoyed by the employees of UKSub, is the payment included in the income of PARENT under section9 or 90, subsection 15(1) or 56(2) or paragraph 12(1)(x)?9

Position: Amounts received in respect of stock options granted after the Agreement is entered into and increase in benefits that may reasonably be considered to have arisen after the Agreement is in place in respect of stokc options granted prior to the date that the Agreement is entered into will not be included in income of PARENT.

Reasons: It would not be unreasonable for USSub to reimburse PARENT for that portion of the employment benefit that has effectively been borne by PARENT on USSub's behalf.

XXXXXXXXXX 								2001-008298

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("PARENT")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

To the best of your knowledge, none of the issues raised in this ruling request is or has been considered by a Tax Services Office or a Taxation Centre in connection with a previously filed income tax return of PARENT or a related person, is under objection or appeal, or is the subject of a ruling previously issued by the Directorate.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act;

"adjusted cost base" ("ACB") has the meaning assigned by section 54;

"Bargain Element Amount" in respect of an Executive means the excess of the fair market value of the shares of PARENT at the time the shares are acquired by the Executive under the Plan over the option price to the Executive of such shares;

"Executive" means an employee of USSubco;

"IRC" means the Internal Revenue Code, 1986 as amended;

"paid-up capital" has the meaning assigned by subsection 89(1);

"PARENT Group" means all the companies that are controlled by PARENT;

"Plan" means the XXXXXXXXXX which was adopted effective XXXXXXXXXX;

"public corporation" has the meaning assigned by subsection 89(1);

"Regulations" means the Income Tax Regulations; and

"taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:

FACTS

1. PARENT is a public corporation and a taxable Canadian corporation governed by the XXXXXXXXXX .

2. The Plan provides stock option rights for executives of the PARENT Group of companies in Canada, the United States and other territories where the PARENT Group of companies has operations. Under the Plan, options are granted to executives to purchase the share of PARENT at a price (the "option price") equal to the fair market value of the shares on the date of grant. The executives may purchase up to XXXXXXXXXX% of the shares covered by the option plan at each anniversary date of the option grant.

3. An executive who chooses to exercise a stock option under the Plan will pay to PARENT the option price but will receive a share of PARENT which, on the date of exercise, may have a fair market value in excess of the option price.

4. Executives who are employees of USSubco and who are citizens or residents of the United States under U.S. tax law will include the Bargain Element Amount in income for U.S. income tax purposes as the options are "non-statutory" or "non-qualified" options as that term is used in U.S. tax law. This income inclusion is triggered by the exercise of the option.

5. At the time of exercise, a U.S. resident corporate employer is entitled to a tax deduction in computing income for U.S. tax purposes equal to the Bargain Element Amount included in the income of the U.S. resident employee, pursuant to IRC section 83(h).

6. USSubco will reduce its earnings and profits by an amount equal to the cumulative Bargain Element Amounts. This reduction to earnings and profits occurs whether or not there is a payment made from USSubco to PARENT.

7. Under Canadian generally accepted accounting principles ("Canadian GAAP"), the payment by USSubco to PARENT will not be reflected in the consolidated income statements of PARENT. There will be an addition to shareholders' equity on PARENT's stand-alone financial statements for an amount equal to the fair market value of the shares on the date of exercise.

PROPOSED TRANSACTIONS

8. PARENT will enter into a written agreement with USSubco (the "Agreement") whereunder USSubco will agree to pay to PARENT the Bargain Element Amount resulting from the exercise of a stock option by an Executive under the Plan.

9. Under the Agreement, USSubco will pay, to PARENT, an amount equal to the Bargain Element Amount on stock options exercised by the Executives.

10. Amounts received under the Agreement will not be added to the paid-up capital of the shares of PARENT.

PURPOSES OF THE PROPOSED TRANSACTIONS

To properly reflect the costs and benefits of executive stock option plans between the PARENT Group operations in Canada and the United States, the Bargain Element Amount should be borne by USSubco. The payment of the Bargain Element Amount from USSubco to PARENT puts PARENT in the same financial position whether the share is issued at the current market price or sold to an employee of USSubco at a below current market price pursuant to a stock option agreement. USSubco enjoys the services provided by the executives who are employees of USSubco and who are entitled to stock option grants under the Plan.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:

A. Amounts received by PARENT from USSubco under the Agreement in respect of stock options granted after the date that the Agreement is entered into, will not be included in the income of PARENT under section 9 or 90, subsection 15(1) or 56(2), or paragraph 12(1)(x). Further, amounts received by PARENT from USSubco in respect of the increase in the Bargain Element Amount that, in the circumstances, may reasonably be considered to have arisen (taking into account all relevant considerations concerning the Agreement) after the Agreement is in place on stock options that were granted prior to the date that the Agreement is entered into, will not be included in the income of PARENT under section 9 or 90, subsection 15(1) or 56(2), or paragraph 12(1)(x).

B. Section 245 will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, by the Canada Customs and Revenue Agency and are binding provided that the proposed Agreement is implemented on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments which, if enacted, could have an effect on the rulings given.

COMMENTS

Nothing in these rulings should be construed as implying that the Canada Customs and Revenue Agency has reviewed, accepted or otherwise agreed:

(a) to the determination of the adjusted cost base, the fair market value, or the paid-up capital of any shares referred to herein; or

(b) to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

OPINION

If the amounts paid or payable in accordance with paragraph 9 above are in respect of an active business carried on by USSubco for a particular taxation year ending before a particular time, for the purposes of computing the "exempt surplus", "exempt deficit", "taxable surplus", or "taxable deficit" (as those terms are defined in subsection 5907(1) of the Regulations) at the particular time of USSubco in respect of PARENT, the amount so paid or payable for the particular taxation year to the extent it was not otherwise deducted in the computation of the "earnings" of USSubco as defined in subsection 5907(1) of the Regulations for that taxation year, will be deducted in the computation of such "earnings" for such taxation year.

The foregoing opinion is not a ruling, and, in accordance with the practice referred to in Information Circular 70-6R4, is not binding on the Canada Customs and Revenue Agency.

Yours truly;

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch