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 a change to the vesting of options granted under a stock option plan result in a new plan being created for income tax purposes?
2. Is an exercise price for a grant issued on the last day of a month which is equal to the average closing price on the Nasdaq National Market of the trading days from the 15th day of the preceding monthly period through the 15th day of the monthly period in which the grant is made acceptable for the meaning of "fair market value" for the purposes of paragraph 7(1) and paragraph 110(1)(d) of the Act?
3. Will the taxpayers who exercise options under the Plan be permitted to defer recognition of the section 7 benefit until the shares are disposed of?
Position:
1. No.
2. Cannot answer definitively.
3. Yes, provided taxpayer is entitled to a paragraph 110(1)(d) deduction.
Reasons:
1. The change is not sufficient to cause a new Plan to be considered to have been created.
2. Question of fact.
3. Paragraph 7(9)(b).
XXXXXXXXXX 2001-008401
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company")
XXXXXXXXXX (the "Employer")
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the Company and the Employer.
The facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. The Company is a public corporation incorporated under the laws of the State of XXXXXXXXXX. The Company went public in XXXXXXXXXX.
2. The Company's stocks are traded on the Nasdaq.
3. The Employer is a Canadian resident corporation and is a direct wholly-owned subsidiary of the Company.
4. The Company has a stock option plan (the "Plan") called the "XXXXXXXXXX" (amended and restated as of XXXXXXXXXX). Under the Plan, any person employed by the Company, a parent company or a subsidiary of the Company is eligible to participate in the Plan.
5. The Plan was originally drafted for United States residents; however, Canadian resident employees are eligible to participate in the Plan.
6. Under the Plan, an eligible employee may be granted an option to acquire common stock of the Company.
7. The Plan includes the following definitions:
(a) "Board" means the Board of Directors of the Company.
(b) "Administrator" means the Board or any of its committees as shall be administering the Plan, in accordance with the Plan.
(c) "Fair Market Value" means, as of any date, the value of common stock determined as follows:
i. If the common stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or the Nasdaq Small Cap Market of the Nasdaq Stock Market, its fair market value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such stock exchange or system for the last market trading day prior to the time of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable;
ii. If the common stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the fair market value of common stock shall be the mean between the high bid and low asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable.
iii. In the absence of an established market for the common stock, the fair market value shall be determined in good faith by the Administrator.
(d) "Option agreement," means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual option grant. The option agreement is subject to the terms and conditions of the Plan.
(e) "Optionee" means the holder of an outstanding option granted under the Plan.
8. The exercise price under the Plan is equal to:
In the case of options that qualify as Incentive Stock Options under the U.S. Internal Revenue Code, the per share exercise price shall be no less than 100% of the Fair Market Value per share on the date of grant.
In the case of non-statutory stock options, the per share exercise price shall be determined by the Administrator.
9. The Plan also indicates that subject to the provisions of the Plan, the Administrator shall have the authority to determine the Fair Market Value of common stock.
10. As part of their remuneration, the Employer's employees are granted options to acquire common stock of the Company under the Plan. Canadian resident employees are granted non-statutory stock options.
11. Currently, the per share exercise price determined by the Administrator for non-statutory stock options is equal to the closing sales price of the Company's common stock as quoted on the Nasdaq for the last market-trading day prior to the time of determination, as reported in the Wall Street Journal or such other source, as the Administrator deems reliable.
12. The common shares that can be acquired upon the exercise of a stock option provide no limit to a shareholder's right to participate in dividends or in the assets distributed on winding-up of the Company.
13. The shares that can be acquired under the stock options cannot be converted into any other security.
14. The shares that can be acquired under the stock options cannot be purchased, redeemed, or canceled by the Company at the shareholder's demand.
15. The Company does not have the right to acquire or cancel the shares that can be acquired under the stock options except at Fair Market Value or less.
16. There is no obligation to reduce the paid-up capital with respect to the shares that can be acquired under the stock options.
Proposed Transactions
17. Subject to the receipt of a favorable advance income tax ruling, the Administrator of the Plan intends to implement the following with respect to the administration of the Plan:
(a) New grants under the Plan would have a vesting schedule whereby XXXXXXXXXX% of the grant would vest on the first anniversary of the grant date and XXXXXXXXXX of the amount granted would vest at the end of each quarter thereafter.
(b) New grants would be made only at two times during a month: on the 15th day of each month or on the last day of each month. With respect to grants on the 15th day of the month, the exercise price would be the average closing price of the Company's common stock on the Nasdaq National Market for the trading days in the preceding monthly period. With respect to grants on the last day of the month, the exercise price would be the average closing price on the Nasdaq National Market of the trading days from the 15th day of the preceding monthly period through the 15th day of the monthly period in which the grant is made.
Purpose of the Proposed Transactions
18. The vesting provisions are to encourage recipients of stock option benefits to remain with the Company or the Employer.
19. The method of determining the exercise price will make the Plan conform to the industry standard in this regard.
20. With the introduction in XXXXXXXXXX of new measures allowing shareholders of public corporations to defer the payment of tax on stock option benefits upon the exercise of employee stock options, the Company and the Employer want to ensure that Canadian resident employees will be entitled to benefit from these new deferral measures. These measures became law on June 14, 2001. Since shareholders who would like to benefit from the new deferral measures must, among other things, be entitled to the stock option deduction under paragraph 110(1)(d) of the Act, the Company and the Employer want to ensure that Canadian resident employees will also be entitled to this deduction.
21. In light of the new deferral measures, the Company and the Employer would like to ensure that they comply with the withholding and reporting obligations applicable to an issuer of shares following the exercise of an employee stock option.
22. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for an advance income tax ruling is:
(a) in an earlier return of the Employer or of a person related to the Employer;
(b) being considered by a tax services office or tax centre in connection with a previously-filed return of the Employer or of a person related to the Employer;
(c) under objection by the Employer or by a person related to the Employer;
(d) before the courts; nor
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Employer.
23. The tax account number of the Employer is XXXXXXXXXX. The Employer files its income tax returns at the XXXXXXXXXX Tax Services Office.
24. The mailing address of the Employer is:
XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and plan and purpose of the proposed plan, and provided that the terms of the Plan are as described above, we rule as follows:
A. The amendments to the Plan, described in the "Proposed Transactions" above, will not result in the disposition of any rights under the Plan by an employee of the Employer for purposes of paragraph 7(1)(b) of the Act nor the inclusion of any benefit in the hands of the employee under paragraph 6(1)(a) of the Act.
B. Provided that the conditions in paragraph 110(1)(d) of the Act are satisfied and provided that the exercise price defined in 17(b) of the "Proposed Transactions" above represents the fair market value of the shares of the Company at the time the options were granted under the Plan, an employee of the Employer who exercises an option under the Plan will be entitled to a deduction under paragraph 110(1)(d) of the Act and will satisfy the condition in paragraph 7(9)(b) of the Act.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the changes to the Plan are implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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