2001 Ruling 2001-0105883 - 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: PARENT and its UK subsidiary, UKSUB, will enter into an agreement whereunder UKSUB will pay to PARENT an amount equal to the stock option benefit enjoyed by UKSUB's employees on the exercise of options to acquire shares of PARENT. The issue is whether this amount would be included in the income of PARENT under subsection 15(1) or paragraph 12(1)(x).

Position: No.

Reasons: It would not be unreasonable for the subsidiary to reimburse the parent for that portion of the employment benefit that has been effectively borne by the parent on the subsidary's behalf. For an in-depth analysis, see the SPI for file 2000-003491.

XXXXXXXXXX 								2001-010588

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

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, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) the subject of a previous ruling issued to the taxpayer by the Income Tax Rulings Directorate; or

(v) before the courts.

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, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision;

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

"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) and subsection 248(1);

"CBCA" means the Canada Business Corporations Act;

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

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

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

"PARENT" means XXXXXXXXXX. PARENT's account number is XXXXXXXXXX. Its address is: XXXXXXXXXX. PARENT is served by the XXXXXXXXXX Tax Services Office and files its tax return at XXXXXXXXXX Taxation Centre;

"UKSUB" means XXXXXXXXXX;

"Agreement" means an agreement that will be entered into by PARENT and UKSUB under which UKSUB will, as a condition of PARENT's issuing stock options to employees of UKSUB, agree to compensate PARENT at the time the employees exercise their options, for the Amount;

"Amount" is the amount paid by UKSUB to PARENT and is calculated as the product of the number of shares acquired by an employee through stock options multiplied by the difference between the fair market value of a share of PARENT at the time an employee acquires shares of PARENT under the Plan and the employee's option strike price;

"Option strike price" means the amount that an employee of UKSUB must pay to acquire a share of PARENT under the Plan; and

"Plan" means the stock option plan of PARENT, whereunder the employees of UKSUB will be granted options to acquire shares of PARENT at the Option strike price.

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

FACTS

1. PARENT is a Canadian-controlled private corporation and a taxable Canadian corporation incorporated under the CBCA. XXXXXXXXXX.

2. UKSUB is a private corporation incorporated under the laws of the United Kingdom. UKSUB is a wholly-owned subsidiary of XXXXXXXXXX, a corporation incorporated under the laws of the United Kingdom, which is a wholly-owned subsidiary of PARENT. UKSUB is in the business of XXXXXXXXXX.

PROPOSED TRANSACTIONS

3. The directors of PARENT will approve resolutions authorizing PARENT to issue to the employees of UKSUB stock options of PARENT under the Plan.

4. An agreement will be entered into between PARENT and UKSUB, under which UKSUB will agree to pay the Amounts to PARENT as a condition of PARENT's issuing stock options to the employees of UKSUB.

5. The payments made by UKSUB to PARENT pursuant to the Agreement will not increase PARENT's stated capital under the CBCA and will not be added to paid-up capital under subsection 89(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to allow UKSUB to provide an incentive to its employees whereby they will be entitled, under a stock option plan, to participate in the success of the corporate group through the purchase of PARENT shares.

RULING

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. The Amounts received by PARENT from UKSUB under the Agreement in respect of the stock options granted under the Plan will not be included in the income of PARENT under subsection 15(1) or paragraph 12(1)(x).

This ruling is 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 is binding provided that the proposed Agreement is implemented on or before XXXXXXXXXX.

The above ruling is based on the Act in its present form and does not take into account any proposed amendment which, if enacted, could have an effect on the ruling given.

COMMENTS

Nothing 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 ruling given above.

Yours truly,

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