2002 Ruling 2002-0131133 - STOCK OPTION PLAN AMENDMENT-SAR

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: Will an amendment to provide a cash-out right, at the discretion of the employee, to a stock option plan have any immediate tax consequences?

Position: No.

Reasons: The amendment to the plan will not cause a disposition of rights under the plan.

XXXXXXXXXX 2002-013113

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company")

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your letter dated XXXXXXXXXX.

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

Definitions

1. For the purposes of this request for an advance tax ruling, the relevant definitions are the following:

(a) "Act" means the Income Tax Act (Canada), as amended from time to time.

(b) "Board" means the Board of Directors of the Company.

(c) "Exchange" means XXXXXXXXXX Stock Exchange.

(d) "Exercise Price" means the price at which a Share may be purchased pursuant to the exercise of an Option.

(e) "Option" means a right that may be granted to a Participant pursuant to the terms of the Plan which allows the Participant to purchase Shares at a set price for a future period which does not exceed XXXXXXXXXX years.

(f) "Option Agreement" a signed written agreement, in the form attached hereto, evidencing the terms and conditions upon which an Option is granted under the Plan.

(g) "Participants" has the meaning ascribed thereto in 5 below.

(h) "Plan" means the XXXXXXXXXX Stock Option Plan.

(i) "Proposed Amendment" means the amendment to the Plan as it exists at the date of this letter to give Participants the right, at the discretion of the Company, to receive SARS enabling the Participant to elect to realize the economic value of their Options in cash, as more particularly described in 10 below.

(j) "SAR" or "SARS" has the meaning ascribed thereto in 10 below.

(k) "Shares" means the authorized and unissued Class A Subordinate Voting Shares of the Company.

Facts

2. The Company is incorporated under the laws of Canada. The Company is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. The Shares of the Company are principally traded on the XXXXXXXXXX. The Company's fiscal year-end is XXXXXXXXXX in each year.

3. The Company's address is XXXXXXXXXX. The Company files its income tax returns at the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

4. XXXXXXXXXX.

5. The Company currently provides certain directors, officers and key employees of the Company ("Participants") with Options in accordance with the terms of the Plan and individual Option Agreements. An Option permits a Participant to acquire Shares upon the payment of the Exercise Price prior to the expiration of the Option, subject to compliance with any vesting requirements attached to the Option under the applicable Option Agreement.

6. A number of Options have been granted and remain outstanding under the Plan. Some of the outstanding Options have vested in accordance with the terms of the applicable Option Agreements and are currently exercisable and some are not yet vested.

7. The closing price for a Share on the Exchange on XXXXXXXXXX exceeded the highest Exercise Price under any outstanding Option.

8. Section XXXXXXXXXX of the Plan as it reads at the date of this letter provides as follows with respect to amendments:

"XXXXXXXXXX".

Proposed Transactions

9. Pursuant to the amending power under the Plan cited in 8 above, the Company will add a provision (the "Proposed Amendment") to the Plan that will permit Participants to elect to receive cash instead of Shares in respect of their Options. It is intended that the Proposed Amendment be effective on XXXXXXXXXX. This is the anticipated date of the shareholder approval of the Proposed Amendment required by the Exchange (the primary regulatory authority applicable to the Shares). The Company is also proposing to make several other amendments to the Plan as at XXXXXXXXXX in order to clarify and modernize certain aspects of the Plan's operation in light of recent changes in the law and practice relating to stock option plans. These other amendments are not the subject of this ruling but are reflected in the XXXXXXXXXX restatement of the Plan containing the Proposed Amendment.

10. The terms of the Proposed Amendment are as follows:

"XXXXXXXXXX".

11. Where the Company exercises its discretion to add SARS to a previously granted Option that remains outstanding under the Plan at the date on which the SARS are to be added, the Participant to whom the Option has been granted will be issued an amended Option Agreement confirming the addition of the SARS. Such amended Option Agreement shall require the Participant's consent to the addition of the SARS as of the date of the amended Option Agreement within XXXXXXXXXX business days after the date on which the amended Option Agreement is transmitted to the Participant, or the SARS referred to in the amended Option Agreement will not be added to the Participant's outstanding Options.

Purpose of Proposed Transactions

12. The purpose of the Proposed Amendment is to provide Participants who are granted SARS with greater flexibility in realizing the value of their Options. Specifically, the addition of SARS to Options will provide those Participants who receive the SARS with the opportunity to elect to exercise their Options in the normal course, paying the Exercise Price and receiving Shares, or to exercise their SARS and receive the economic value of their Options in cash. Moreover, as the exercise of a SAR does not require an actual payment by a Participant, or the payment of brokerage fees to sell Shares acquired on the exercise of an Option, SARS are a more cost-effective and administratively easier method of realizing the economic value of an Option than exercising the Option and selling the Shares. It is expected that this additional flexibility, cost effectiveness and administrative ease will increase the perceived benefits associated with the Options, thereby enhancing their utility as incentive compensation for Participants. Finally, the Shares are thinly traded on XXXXXXXXXX. Thus, the addition of the SARS is also intended to provide Participants with additional liquidity for their Options.

Additional Information

13. To the best of your knowledge and that of the Company, none of the issues in respect of which rulings are herein requested is:

(a) in an earlier return of the Company or of a person related to the Company;

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

(c) under objection by the Company or by a person related to the Company;

(d) before the courts in respect of the Company or a person related to the Company; nor

(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Company or a person related to the Company.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the wording of the Proposed Amendment is as described above, we rule as follows:

A. Neither the implementation of the Proposed Amendment nor the addition of a SAR to an existing Option held by a Participant at the effective date of the Proposed Amendment will result in a disposition by the Participant of rights or other property under the Plan or the existing Option for the purposes of paragraph 7(1)(b) of the Act or under the definition of "disposition" in subsection 248(1) of the Act.

B. No amount will be included in the income of any Participant under section 5, 6 or 7 of the Act as a result of the implementation of the Proposed Amendment or the addition of a SAR to an existing Option held by a Participant at the effective date of the Proposed Amendment.

C. The SARS that may be provided to Participants under the Proposed Amendment will not constitute a salary deferral arrangement as defined in subsection 248(1) of the Act (an "SDA").

D. In the case of a Participant who is a resident of Canada, a cash payment paid to such Participant under the Plan in accordance with the Proposed Amendment upon the exercise of a SAR, including any amount withheld in respect of taxes and other source deductions, will be included in such Participant's income for the year in which the payment is received pursuant to paragraph 7(1)(b) of the Act.

E. In the case of a Participant who is not a resident of Canada, a cash payment paid to such Participant under the Plan in accordance with the Proposed Amendment upon the exercise of a SAR, including amounts withheld on account of taxes and other source deductions, will be included in such Participant's income for the year in which the payment is received pursuant to paragraph 7(1)(b) and subparagraph 115(1)(a)(i) of the Act to the extent that such payment relates to services rendered by the Participant in Canada.

F. Where the conditions of paragraph 110(1)(d) of the Act are satisfied with respect to an Option that includes a SAR that has been provided on the terms set out in the Proposed Amendment, such that the Participant who holds the Option would be eligible for the deduction under paragraph 110(1)(d) if the Participant exercised the Option and received Shares, such Participant will be eligible, pursuant to paragraph 110(1)(d) of the Act, to deduct 50% of the cash payment the Participant receives upon exercising the SAR included with the Option in computing the Participant's taxable income for the year in which the Participant receives such payment.

G. Subject to section 67 and paragraph 18(1)(a) of the Act, the Company will be entitled to deduct the gross amount of a cash payment made to a Participant pursuant to the Proposed Amendment in respect of the Participant's exercise of SARS, including any amount withheld in respect of taxes and other source deductions, in calculating its income in respect of the year in which the cash payment was made, in accordance with section 9 of the Act. For greater certainty, paragraph 7(3)(b) of the Act will not apply to deny the deduction for the amount paid by the Company to a Participant in respect of the exercise of a SAR by the Participant.

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 proposed transactions are completed implemented by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate