2002 Ruling 2001-0107613 - EMPLOYEE OPTION TRANSFERS

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: Rulings were requested in respect of a transfer of employee stock options to a corporation for estate planning purposes.

Position: Only limited rulings on the initial transfer could be

provided.

Reasons: We could not provide all of the rulings requested because they are based on alternative transactions that will occur (death) or may occur, in the future. Some limited comments were provided.

XXXXXXXXXX 							2001-010761

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above-noted individual and corporation.

Definitions and Abbreviations

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

(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "CCRA" means: the Canada Customs and Revenue Agency;

(c) "Corporation " means: XXXXXXXXXX;

(d) "Corporation A" means XXXXXXXXXX, which is a taxable Canadian corporation for purposes of the Act;

(e) "Corporation B" means XXXXXXXXXX, the U.S. parent of Corporation A;

(f) "Employee" means: XXXXXXXXXX;

(g)"Options" means the outstanding options issued to the employee by Corporation B in accordance with the terms of the Plan;

(h) "Plan" means: means the XXXXXXXXXX;

(i) "Regulations" means: The Income Tax Regulations; and

(j) "Share" means: means a common share of Corporation B.

Facts

1. The Employee is employed by Corporation A and has been employed by Corporation A at all material times.

2. The Employee currently holds the following Options issued to him by Corporation B in respect of his employment with Corporation A.

Shares Date of Exercise Expiry
Acquirable Grant Price Date

XXXXXXXXXX

The first XXXXXXXXXX units listed above are the subject of this request.

3. The Employee did not pay an amount to acquire any of the Options.

4. The Shares acquirable and the exercise price for these Options have been adjusted to reflect a stock split of the Shares on XXXXXXXXXX and a second stock split of the Shares on XXXXXXXXXX. There was no exchange of shares as a result of the splits. However, all of the conditions of subsection 7(1.4) of the Act were satisfied.

5. The exercise price payable to acquire the Shares at the time the Options were granted was the fair market value of the Shares. On the stock splits, for purposes of paragraph 7(1)(c), the exercise price of the Options was set at an amount that meets the requirements of paragraph 110(1)(d)(iii) of the Act.

6. The Employee was dealing at arm's length with Corporation A and Corporation B and persons with which Corporation B was not dealing at arm's length at all material times and, in particular, immediately after each of the Options were granted and immediately after each stock split.

7. At all times since its incorporation, the Corporation has dealt at arm's length with Corporation A and Corporation B and persons with whom Corporation A and Corporation B were not dealing at arm's length.

8 The Plan provides that the Options otherwise exercisable on the date of the Employee's death may be exercised after death until the earlier of the expiration of the Option or one year after the Employee's death.

9. Under the Plan, a transfer of the Options is permitted to the Employee's family members "or other persons or entities" according to such terms as determined by the committee (the "Committee") appointed by the board of Corporation B under the terms of the Plan, provided the Employee receives no consideration for the transfer.

10. On XXXXXXXXXX, the Employee acquired all of the issued and outstanding shares of the Corporation from an arm's length vendor.

11. The Employee is and will continue to be related to the Corporation at all relevant times.

Proposed Transactions

12. The Employee will ask the Committee to confirm that under the Plan:

(a) the Employee will be permitted to transfer the Options to the Corporation;

(b) the Corporation will be permitted to exercise the Options before the death of Employee; and

(c) the Corporation will be permitted to exercise the Options after the death of the Employee at any time before the earlier of the expiration of the Options or one year after the Employee's death.

13. The Employee will transfer all of the Options to the Corporation for no consideration.

Purpose of the Proposed Transactions

14. The sole purpose of the proposed transactions is to protect the value of the Options from U.S. estate tax on the death of Employee.

Additional Information

15. During the Employee's lifetime, and on or before the expiry date of one or more of the Options (the "Particular Options"), the Corporation will either:

(a) exercise the Particular Options and acquire the underlying shares of Corporation B; or

(b) transfer the Particular Options to the Employee for no consideration, in which case the Employee will exercise the Particular Options and directly acquire the underlying shares of Corporation B.

16. To the best of your knowledge, none of the issues involved in this ruling are:

(a) in an earlier return of the Corporation, the Employee, or any person related to the Corporation or the Employee;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation, the Employee, or any person related to the Corporation or the Employee;

(c) under objection by the Corporation, the Employee, or any person related to the Corporation or the Employee;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor

(e) the subject of a ruling previously issued by the Directorate to the Corporation, the Employee, or any person related to the Corporation or the Employee.

Rulings

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

A. Paragraph 7(1)(c) of the Act will apply to the rights of the Employee under the Options transferred by the Employee to the Corporation.

B. Paragraph 7(3)(a) of the Act will apply to the Options transferred by the Employee to the Corporation such that, except as provided by section 7, the Employee will be deemed to have neither received nor enjoyed any benefit under or because of the Options or the transfer of the Options in and of itself.

Comments

Rulings cannot be provided where they are in respect of alternative proposed transactions or are dependent on future events that are uncertain or too distant. However, the following general comments can be provided based on the Act as it currently reads in respect of an employee that might undertake transactions similar to those proposed:

(a) If, during the lifetime of the employee, the corporation exercises the options and acquires shares, a benefit equal to the excess of the value of the shares at the time they are acquired by the corporation over the amount paid or to be paid by the corporation for the shares will be deemed to have been received by the employee, in the taxation year in which the corporation acquires the shares, pursuant to paragraph 7(1)(c) of the Act, and the amount of the benefit will be added to the adjusted cost base of the shares by virtue of paragraph 53(1)(j) of the Act. Provided that the shares are prescribed shares at the time they are acquired by the corporation, where the corporation exercises the options and acquires shares during the lifetime of the employee, the employee will be eligible for the deduction under paragraph 110(1)(d).

(b) If, during the lifetime of the employee, the corporation transfers unexercised options to the employee for no consideration:

(i) paragraph 7(1)(a) of the Act would apply to the options transferred back to the employee, and

(ii) paragraph 7(3)(a) of the Act would apply to the options transferred, such that, except as provided by section 7, the employee would be deemed to have neither received nor enjoyed any benefit under or because of the options or the transfer of the options in and of itself.

(c) No benefit in respect of the options held by the corporation at the time of the employee's death would be included in the income of the employee because of his death.

(d) If, following the death of the employee, the corporation exercised the options and thereby acquired shares, then pursuant to paragraph 7(1)(c) of the Act, a benefit equal to the excess of the value of the shares at the time they are acquired by the corporation over the amount paid or to be paid by the corporation for the shares would be deemed to have been received by the corporation as income from employment in the year in which the corporation acquires the shares, and the amount of the benefit would be added to the adjusted cost base of the shares by virtue of paragraph 53(1)(j) of the Act. Provided that the shares are prescribed shares at the time the shares are acquired by the corporation, where the corporation exercises the options and acquires shares following the death of the employee, the corporation would be eligible for the deduction under paragraph 110(1)(d).

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 CCRA provided that the proposed transactions are completed by XXXXXXXXXX. The above comments are not binding on the CCRA and may or may not apply to the transactions described.

Yours truly,

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