21 January 2003 Internal T.I. 2002-0160907 - INCOME FROM AN EQUITY PARTICIPATION 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:

Whether payment received under an equity participation plan is employment income or capital gains.

Position: Question of Fact

Reasons:

The facts provided suggest the payment is employment income. There is nothing to suggest a capital gain.

				January 21, 2003

	SUMMERSIDE TAX CENTRE		HEADQUARTERS
				Income Tax Rulings
	Attention:  Joe MacDonald			  Directorate
				Renée Shields
(613) 948-5273

2002-016090

Equity Participation Plan (the "Plan")

This is in response to your memorandum of August 29, 2002 regarding whether payments received by XXXXXXXXXX pursuant to the Plan are employment income or capital gains.

Under the terms of the Plan, XXXXXXXXXX, (the "Employee") and the other participants (collectively, the "Participants") are entitled to XXXXXXXXXX % of the growth in value of XXXXXXXXXX (the "Company") over a base value of $XXXXXXXXXX as at XXXXXXXXXX. The Company's value at a redemption date shall be equal to XXXXXXXXXX times the average of its pre-tax profits for the XXXXXXXXXX preceding fiscal years. A Participant is entitled to redeem his interest in the Plan after XXXXXXXXXX years participation. If still employed by the Company after XXXXXXXXXX years of participation, a Participant may elect to remain in the Plan for a further XXXXXXXXXX -year term.

The letter from XXXXXXXXXX asserts that the $XXXXXXXXXX payment made to the Employee pursuant to the Plan should be characterized as a capital gain, but provides no substantiating evidence or rationale. It may be that XXXXXXXXXX has other information that would support his conclusion, however based on the documentation provided to us, namely the letter from the Company to the Employee which sets out the Plan terms, there is no evidence to suggest that the payment represents a capital gain. In general, capital gains occur when a taxpayer disposes of a capital asset i.e. an asset capable of earning income in the form of business profits, interest, dividends, royalties or rents. There is no suggestion of the disposition of an asset, or any kind of investment by the Participants.

The terms of the Plan indicate at paragraphs XXXXXXXXXX that the Participants are employees of the Company. We see nothing that would indicate that the payment was in respect of shareholdings in the Company. In the absence of evidence of some other relationship between the Company and the Participants, our view is that a payment pursuant to the Plan is employment income. This is how the Company and its accountants, XXXXXXXXXX , treated the payment, as evidenced by the Employee's XXXXXXXXXX T4 slip and the letter from the Company's accountants to the Employee dated October 19, 2001. The fact that the performance of the Company affects the ultimate amount received by the Participant is irrelevant. The amount retains its character as employment income. You may also refer to Advanced Tax Ruling ATR-45, Share Appreciation Rights Plan which sets out the CCRA's position that payments of this nature are employment income.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mickey Sarazin, C.A.

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