2003 Ruling 2003-0008513 - STOCK OPTION PLAN SAR EMPLOYEE RIGHTS

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) of the Act?

Position: No

Reasons:

The proposed amendments do not constitute a change so fundamental as to constitute a new agreement.

XXXXXXXXXX 2003-000851

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

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

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Corporation, and further to your subsequent submissions dated XXXXXXXXXX and our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) 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) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person, except for the 2002 Ruling noted in paragraph 3, below;

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS AND ABBREVIATIONS

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

(a) "Board" means: the Board of Directors of the Corporation;

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

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

(d) "Corporation" means: XXXXXXXXXX;

(e) "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;

(f) "Exercise Price" means: the price specified in an Incentive Agreement that a Participant must pay to the Corporation to acquire a Share;

(g) "Incentive 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 Incentive Agreement will only be entered into between the Corporation and an Employee of the Corporation or an Employee of a Subsidiary;

(h) "Market Price" means:

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

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

(iii) in the event that the Shares are not listed on the Exchange but are listed on another exchange or stock exchanges in Canada, the foregoing references to the Exchange 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;

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

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

(k) "Plan" means: the XXXXXXXXXX as amended;

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

(m) "SAR" means: a "share appreciation right" which may be granted under 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. The Shares are "prescribed shares" as defined in section 6204 of the Regulations;

(o) "Share Premium" means: the amount by which the Surrender Price of a Share on the exercise date of a SAR exceeds the Exercise Price of the Share under the related Incentive Agreement;

In the case of a XXXXXXXXXX SAR, Share Premium means the amount by which the Surrender Price of a Share on the exercise date of a XXXXXXXXXX SAR exceeds the price of the XXXXXXXXXX SAR fixed by the Board under the Incentive Agreement ("Base Price").

In the Plan, "Share Premium" is referred to as "Option Premium";

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

(q) "Subsidiary" means: another corporation more than 50% of the outstanding Voting Shares (as defined in the Plan) of which 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.

(r) "Surrender Price" means:

(i) the closing trade price at which Shares traded on the Exchange 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 Exchange but are listed on another exchange or stock exchanges the foregoing references to the Exchange shall be deemed to be references to such other stock exchange or, if more than one, to such exchange being designated by the Board for the purpose of establishing the Market Price for grants of Options occurring at that time.

FACTS

Our understanding of the facts, proposed amendments to the Plan and the purpose of the proposed amendments to the Plan is as follows:

1. The Corporation is a taxable Canadian corporation.

2. The Corporation carries on directly and indirectly through Subsidiaries the business of XXXXXXXXXX.

3. The Plan was established effective as of XXXXXXXXXX and has undergone a number of amendments since its establishment. The most recent amendment was made pursuant to the advance income tax ruling (#2002-014598) issued on XXXXXXXXXX, 2002 (the "2002 Ruling").

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

5. 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. The Incentive Agreement evidences the grant of an Option, with or without a SAR, or the grant of a XXXXXXXXXX SAR.

6. The Board fixes the Exercise Price per Share under an Option on the Grant Date. The Exercise Price cannot be less than the Market Price of a Share on the Grant Date. Immediately after the time the Incentive Agreement is made, the Option holder must be an employee of the Corporation or of an affiliated corporation and the employee must deal at arm's length with the Corporation and its affiliated corporations.

7. A SAR may be granted to a Participant in accordance with paragraph XXXXXXXXXX of the Plan. 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. On the exercise of a SAR, a Participant is entitled to receive the amount of the Share Premium multiplied by the number of SARs being exercised.

8. A XXXXXXXXXX SAR may be granted to a Participant in accordance with paragraph XXXXXXXXXX of the Plan. No XXXXXXXXXX SARs have been granted under the Plan as of the date of this Ruling. The Base Price of a XXXXXXXXXX SAR shall be as fixed by the Board on the Grant Date but shall not be less than the Market Price of a Share.

On the exercise of a XXXXXXXXXX SAR, a Participant is entitled to receive the amount of the Share Premium multiplied by the number of XXXXXXXXXX SARs being exercised.

9. When a SAR or XXXXXXXXXX SAR is exercised by a Participant, the Participant is entitled to receive a number of Shares which when multiplied by the Surrender Price is equal to the Share Premium determined in respect of the SAR or XXXXXXXXXX SAR, as the case may be. The Plan provides that no fractional Shares will be issued. The Participant will be paid the cash value of the fractional entitlement.

10. Notwithstanding 9 above, in accordance with paragraph XXXXXXXXXX of the Plan, if a Participant chooses to exercise a SAR or XXXXXXXXXX SAR, the Board may require the Participant to receive the Share Premium in cash in lieu of Shares. In such a case the payment of cash to a Participant shall be net of applicable withholding taxes.

11. Administratively, the exercise of any SAR or XXXXXXXXXX SAR is treated the same as the exercise of an Option except that no cash payment by the Participant is required upon the exercise of a SAR or XXXXXXXXXX SAR. For greater certainty, the exercise of a SAR will result in the cancellation of the related Option and vice versa.

12. 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 Incentive 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 XXXXXXXXXX, the Board may terminate the Plan at any time.

PROPOSED AMENDMENTS TO THE PLAN

13. Pursuant to the power granted it under paragraph XXXXXXXXXX of the Plan, the Board proposes a further amendment to section XXXXXXXXXX so that the second paragraph of section XXXXXXXXXX (wherein reference to "SAR" includes both SAR and XXXXXXXXXX SAR and wherein "Option Premium" refers to Share Premium) would read as follows:

In such case, the cash payment shall be equal to:

(i) the aggregate Option Premium;

(ii) the aggregate Option Premium, less any brokerage fees or commissions (if the Option Premium is paid through the issue and sale of Common Shares); or

(iii) the net amount obtained through the cashless exercise of the related Options.

The payment of cash to a holder on the exercise of SARs pursuant to this paragraph shall be net of any applicable withholding taxes.

The amendment to section XXXXXXXXXX of the Plan will apply to all existing Incentive Agreements.

14. In accordance with your additional submissions and our various conversations (XXXXXXXXXX), we understand that the amended section XXXXXXXXXX of the Plan will operate as follows:

If the Board elects to proceed by issuing the number of Shares which when multiplied by the Surrender Price will equal the Share Premium (i.e. pursuant to section XXXXXXXXXX of the Plan), the said Shares will be legally and beneficially vested in the Participant. The Participant will be required to sign a direction to a broker authorizing the immediate sale of the Shares. The broker will sell the Shares and the proceeds, net of brokerage fees, will be paid to the Participant.

If the Board elects to proceed by issuing Shares to effect a cashless exercise of the Option (i.e. pursuant to section XXXXXXXXXX of the Plan), the Shares will be legally and beneficially vested in the Participant. The Participant will be required to sign a direction to a broker authorizing the immediate sale of the Shares. The broker will sell the Shares. The amount that would have been payable to the Corporation as the Exercise Price had the Participant exercised the Option will be paid to the Corporation. The balance, representing the Share Premium, net of brokerage fees and the Exercise Price, will be paid to the Participant.

15. XXXXXXXXXX.

16. The Board has conditionally approved the proposed amendments at its regularly scheduled meeting on XXXXXXXXXX. The Board's approval of the amendments to sections XXXXXXXXXX of the Plan has been made expressly conditional upon issuance of the rulings herein as well as written confirmation from the Exchange that the proposed amendments are acceptable for its purposes.

THE PURPOSE OF THE PROPOSED AMENDMENTS TO THE PLAN

17. The purpose of the section XXXXXXXXXX amendments to the Plan and the existing Incentive Agreements is to provide further flexibility to the Corporation when Employees subject to tax under the Act exercise their SARs or XXXXXXXXXX SARs.

The amendment to section XXXXXXXXXX of the Plan is to enable the Corporation to permit the exercise of an Option or SAR or XXXXXXXXXX SAR in respect of less than a block of XXXXXXXXXX Common Shares in any circumstance.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendments to the Plan and purpose of the proposed amendments to the Plan, and provided that the terms of the Plan 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 13 and 15 above, will not result in the disposition of any rights under any existing Incentive Agreements held by Participants on the date the proposed amendments are implemented.

B. The amendments to the Plan as described in 13 and 15 above, will not, in and of themselves, preclude employees who exercise SARs and thereby receive shares or cash at the employer's discretion, regardless of the method selected by the Corporation to acquire and deliver such cash, from qualifying for the deduction from taxable income provided for in paragraph 110(1)(d) of the Act in respect of such exercise.

C. Subject to paragraph 18(1)(a) and section 67 of the Act, where, pursuant to the amendments to the Plan as described in 13 and 15 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 Share Premium to the Participant in accordance with section XXXXXXXXXX of the Plan, 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.

D. Where, pursuant to the amendments to the Plan as described in 13 and 15 above, a particular employee exercises a SAR and the Corporation opts to proceed in accordance with either section XXXXXXXXXX of the Plan (i.e. the issue and sale of Shares with a value equal to the Share Premium or the cashless exercise of the related Option by the Participant for the purpose of generating cash for delivery to the Participant), neither the Corporation, nor, in the case of a Participant employed by a Subsidiary, the Subsidiary, will be entitled to claim a deduction in computing its income from business.

The above advance income tax rulings, which are based on the Act and Regulations in their 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 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CCRA provided that the proposed Plan is implemented 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 Incentive 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), XXXXXXXXXX, 1994 (E9403251) and XXXXXXXXXX, 2002 (E2002-0145983)

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 by virtue of subsection 7(5) of the Act, section 7 of the Act would not apply to these rights if the Option Agreement was not entered into in respect of, in the course of, or by virtue of employment. The determination of whether an officer or Director receives an Option, SAR or XXXXXXXXXX SAR in respect of employment services or in another respect, is a question of fact.

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
Policy and Legislation Branch