2002 Ruling 2002-0145983 - EMPLOYEE STOCK OPTION PLAN

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 a proposed amendment to the terms of an employee stock option plan result in the application of paragraph 7(1)(b) or subsection 7(1.4) of the Act?

Position: No.

Reasons: The amendment will not be so fundamental as to cause the rescission and replacement of the existing plan..

XXXXXXXXXX 							2002-014598

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Employee Incentive Stock Option Plan
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 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) "Board" means: the Board of Directors of the Corporation;

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

(d) "Committee" means: a committee of directors appointed by the Board in accordance with the Plan;

(e) "Corporation" means: XXXXXXXXXX;

(f) "Employee" means: an employee of the Corporation or one of its Subsidiaries and includes officers and directors who are full time employees of the Corporation or a Subsidiary and employees of partnerships and joint ventures in which the Corporation or any of its Subsidiaries are participants;

(g) "Market Price" means: (i) the last reported sale price at which Shares traded on the XXXXXXXXXX Stock Exchange (the "XXXXXXXXXX") on the day the Option Agreement and Options with or without SARs or XXXXXXXXXX SARs are granted to a Participant (the "Option Date"); or

(ii) if there is no reported sale price at which Shares traded on the XXXXXXXXXX on the Option Date, the last reported sale price at which Shares traded on the XXXXXXXXXX prior to the Option Date; and

(iii) in the event that the Shares are not listed on the XXXXXXXXXX but are listed on another exchange or stock exchanges in Canada, the forgoing references to the XXXXXXXXXX shall be deemed to be references to such other stock exchange or, if more than one, to such one as shall be designated by the Board;

(h) "Option" means: an option to purchase Shares pursuant to the terms of the Plan;

(i) "Option Agreement" means: an agreement entered into between the Corporation and a Participant pursuant to which an Option with or without SARs or a XXXXXXXXXX SAR is granted to the Participant, which agreement shall contain such provisions not inconsistent with the Plan as the Board or Committee may determine.

An Option Agreement will only be entered into between the Corporation and an Employee of the Corporation or an Employee of a Subsidiary that is not dealing with the Corporation at arm's length at the time of the agreement;

(j) "Participant" means: an Employee who has entered into an Option Agreement with the Corporation; also referred to as an "Optionee" in the Plan;

(k) "Plan" means: the XXXXXXXXXX as amended, a copy of which was provided with the advance income tax ruling request;

(l) "Regulations" means: The Income Tax Regulations;

(m) "SAR" means: a "share appreciation right" which may be granted under paragraph XXXXXXXXXX of the Plan in conjunction with the grant of an Option;

(n) "Share" means: a common share in the capital stock of the Corporation as constituted at XXXXXXXXXX or as subsequently consolidated or subdivided and any other share resulting from redemption or change of such share or from amalgamation, consolidation or merger;

(o) "XXXXXXXXXX SAR" means: a "share appreciation right" which may be granted under paragraph XXXXXXXXXX of the Plan but not in conjunction with the grant of an Option;

(p) "Subsidiary" means: another corporation more than 50% of the outstanding Voting Shares of which (as defined in the Plan) are owned or controlled directly or indirectly by the Corporation or by one or more Subsidiaries of the Corporation or by the Corporation and one or more of its Subsidiaries; and

(q) "Surrender Price" means: (i) the closing trade price at which Shares traded on the XXXXXXXXXX on the last trading day immediately prior to the day the Option is surrendered (the "Surrender Date"); or

(ii) if the Shares are not then listed on the XXXXXXXXXX but are listed on another exchange or stock exchanges the forgoing references to the XXXXXXXXXX shall be deemed to be references to such other stock exchange or, if more than one, to such one as shall be designated by the Board for the purpose of establishing the Market Price.

Facts

1. The Corporation is a taxable Canadian corporation.

2. The Corporation carries on its business directly and indirectly through Subsidiaries.

3. The Plan is an incentive program for the benefit of Employees of the Corporation and its Subsidiaries.

4. The Board or, at the Board's direction, the Committee administers the Plan. The Board determines those Employees to whom Options with or without SARs, and XXXXXXXXXX SARs should be granted, the expiry date of the Options, SARs and XXXXXXXXXX SARs and the number of Shares to be optioned from time to time to any employee.

5. The grant of an Option, with or without a SAR, or XXXXXXXXXX SAR is evidenced by the Option Agreement.

6. The Board fixes the purchase price per Share under an Option on the Option Date. The purchase price cannot be less than the Market Price of a Share.

7. A SAR is granted to a Participant in accordance with paragraph XXXXXXXXXX of the Plan. A SAR may be granted in conjunction with an Option. To date, in accordance with paragraph XXXXXXXXXX of the Plan, the Options granted to Participants have automatically included a number of SARs equal to the number of Shares subject to the Option so that each Option may be exercised by the holder as a SAR, rather than as an Option, with respect to all or part of the Shares to which such Option applies. The purchase price of a SAR shall be equal to the purchase price of a Share under the related Option unless the Board determines otherwise.

8. On the exercise of each SAR, a Participant is entitled to receive the amount of the Share appreciation, referred to in the Plan as the "Option Premium", measured as the difference between the Purchase Price and the Surrender Price of a Share on the Surrender Date.

9. A XXXXXXXXXX SAR may be granted to a Participant in accordance with paragraph XXXXXXXXXX of the Plan. The purchase price of a XXXXXXXXXX SAR shall be as fixed by the Board on the date of the grant but shall not be less than the Market Price.

10. On the exercise of each XXXXXXXXXX SAR, a Participant is entitled to receive the amount of the Option Premium, measured as the difference between the Purchase Price of a Share at the Option Date and the Surrender Price of a Share on the Surrender Date.

11. When a SAR or a XXXXXXXXXX SAR is exercised, the holder is entitled to receive a number of Shares which when multiplied by the Surrender Price is equal to the Option Premium determined in respect of the SAR or XXXXXXXXXX SAR, as the case may be.

12. Notwithstanding 11 above, in accordance with paragraph XXXXXXXXXX of the Plan:

"The Board may, in its discretion at the time of grant or at any time thereafter, upon the exercise of an SAR, may require a holder, other than a holder that is subject to tax under the Income Tax Act (Canada) in respect of such SAR, electing to exercise an SAR to receive cash in lieu of Common Shares."

In such case, the cash payment is equal to the Option Premium.

13. The exercise of any SAR or XXXXXXXXXX SAR must be conducted in accordance with the manner in which an Option is exercised except that no cash payment is required upon the exercise of SARs. For greater certainty, the exercise of a SAR will result in the cancellation of any related Option and vice versa.

14. No XXXXXXXXXX SARs have been granted under the Plan as of the date of this ruling.

15. In accordance with paragraph XXXXXXXXXX of the Plan:

"The Board may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, and make all other determinations necessary or advisable for its administration. The Board may from time to time alter, suspend or discontinue the Plan provided that such alteration, suspension or discontinuance shall not divest any Optionee of any rights such Optionee may have under any Option Agreement theretofore executed and delivered by the Corporation and such Optionee and provided further that any amendments required by applicable law to be approved by Shareholders shall not become effective until so approved. Subject to the foregoing provisions of this Clause 12, the Board may terminate the Plan at any time."

Proposed Amendments to the Plan

16. Pursuant to the power granted it under paragraph XXXXXXXXXX of the Plan, as described in 15 above, the Board proposes to amend the first sentence of paragraph XXXXXXXXXX of the Plan as described in 12 above, by deleting the words ", other than a holder that is subject to tax under the Income Tax Act (Canada) in respect of such SAR," as well as the word "may" where it currently appears before "require", so that the sentence would read as follows:

"The Board may, in its discretion at the time of grant or at any time thereafter, upon the exercise of an SAR, require a holder electing to exercise an SAR to receive cash in lieu of Common Shares."

The amendment to paragraph XXXXXXXXXX of the Plan will apply to all existing Option Agreements.

17. XXXXXXXXXX.

18. The Board's approval of the amendment to paragraph XXXXXXXXXX will be made expressly conditional upon the issuance of these rulings as well as written confirmation from the XXXXXXXXXX Stock Exchange that the proposed amendment is acceptable for its purposes.

Purpose of the Proposed Amendments to the Plan

19. The Plan covers employees resident and employed in Canada as well as employees resident and employed outside Canada. Certain employees who are currently resident and employed outside Canada hold Options with related SARs that were granted to them while they were employed in Canada.

The purpose of the paragraph XXXXXXXXXX amendment to the Plan and the existing Option Agreements is to provide flexibility to the Corporation when employees subject to tax under the Act exercise their SARs and surrender their related Options for cancellation. At the present time, when such an employee exercises the SAR, the Corporation may settle its obligation only by the issuance of Shares equal to the Option Premium whereas, in the case of an employee who is not subject to tax under the Act, the Corporation may settle its obligation by either issuing Common Shares or paying cash equal to the Option Premium. The proposed amendment to paragraph XXXXXXXXXX of the Plan will not affect the employee's right to choose between the exercise of the Option and the exercise of the related SAR. Rather, once the employee elects to exercise the SAR, the proposed amendment will simply provide flexibility to the Corporation to choose the form of payment for the Option Premium, that is to say, either by issuing Common Shares or by paying cash equal to the Option Premium.

Additional Information

20. To the best of your and the Corporation's knowledge, none of the issues involved in this ruling are:

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

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

iii) under objection by the Corporation, a Participant, or any person related to the Corporation or a Participant;

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

v) the subject of a ruling previously issued by the Directorate to the Corporation.

Rulings

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

A. For the purposes of paragraph 7(1)(b) of the Act, the implementation of the amendments to the Plan as described in 16 and 17 above, will not result in the disposition of any rights under any existing Option Agreements held by Participants on the date the proposed amendments are implemented.

B. The amendments of the Plan, as described in 16 above, will not of themselves, preclude employees who exercise SARs and thereby receive cash or shares at the Corporation's discretion, from qualifying for the deduction from taxable income provided for in paragraph 110(1)(d) of the Act in respect of such an exercise.

C. Subject to paragraph 18(1)(a) and section 67 of the Act, where, pursuant to the amendments of the Plan as described in 16 and 17 above, a particular Participant exercises a SAR and the Corporation or, in the case of a Participant employed by a Subsidiary, the Subsidiary, pays cash in the amount of the Option Premium to the Participant, the Corporation or the Subsidiary, as applicable, will be entitled to deduct the amount paid in computing its income from business under section 9 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 70-6R5 dated May 17, 2002, and are binding on the CCRA provided that the Plan is amended by XXXXXXXXXX.

Comments

The above rulings are provided solely in respect of the proposed amendments to the Plan as it is presently written and the effect of these amendments on existing Option Agreements. We have not provided any rulings in respect of any previous amendments to the Plan except as provided in any prior advance income tax rulings, in particular, our rulings of XXXXXXXXXX, 1998 (E9803523) and XXXXXXXXXX, 1994 (E9403251).

We are not providing any rulings in respect to the application of the terms of the existing or proposed Plan. However, in this respect, we have noted the following:

a. The Plan defines the terms Market Price and Surrender Price. These terms may or may not be equivalent to the fair market value of a Share at the time of the determination of the Market Price or Surrender Price, as the case may be, and nothing in this ruling should be construed as implying our acceptance of the Market Price or the Surrender Price as the fair market value of the Shares.

b. The Plan provides that the exercise price of an Option (and the Purchase Price of a XXXXXXXXXX-SAR) may be set by the Board at an amount that is not less than the Market Price at the time the agreement is entered into and that the exercise price of a SAR may be set at any amount as the Board may determine. The ability of a Participant to claim a deduction under paragraph 110(1)(d) of the Act on the exercise of an Option or a SAR will depend, in part, on a determination that the amount paid is not less than the fair market value of a Share at the time the agreement is entered into. Accordingly, because of the above factors, no assurance can be provided that a Participant will be able to claim a deduction on the exercise of an Option or a SAR and nothing in this ruling should be construed as implying that we have provided such an assurance.

c. It should be noted that, in our view, under the terms of the Plan, the holder of a XXXXXXXXXX SAR would not normally be able to claim a deduction under paragraph 110(1)(d) of the Act. A XXXXXXXXXX SAR as provided under the Plan would represent a separate option to acquire Shares of the Corporation for an amount that is less than the fair market value of the Shares at the time the XXXXXXXXXX SAR is issued.

d. The Plan provides for the issue of Options, SARs and XXXXXXXXXX SARs to officers and Directors who are not full time employees. It should be noted that section 7 of the Act would not apply to these rights, by virtue of subsection 7(5) of the Act, if the Option Agreement was not entered into in respect of, in the course of, or by virtue of employment.

e. The Plan defines Employees to include employees of Subsidiaries as that term is defined in the Plan. While it will generally be the case that such Subsidiaries are related to the Corporation, it should be noted that section 7 of the Act will only apply to Option Agreements entered into with employees of Subsidiaries where the Subsidiaries do not deal at arm's length with the Corporation.

f. The Plan defines Employees to include employees of partnerships and (unincorporated) joint ventures in which the Corporation or a Subsidiary are participants. It should be noted that while, in general, such employees may be provided employee stock options, in our view this will only be possible in respect of a particular employee if there is no agreement in place which limits the employment relationship of that particular employee to another member of the partnership or the joint venture.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate