2004 Ruling 2003-0051421R3 - blind management agreement for employee 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.

Principal Issues: 1. Will an arrangement which allows a third part custodian to determine when the ex-employee's SAR are exercised result in a disposition by the ex-employee when the arrangement is entered into?

2. Will the custodian or person holding the power to exercise the SAR be taxed on any amount as a result of exercise of the SAR?

Position: No to both questions

Reasons: The arrangement will not alter the tax consequences that would otherwise apply to the employee with respect to the SAR and the Custodian will not be taxed personally or as a person having ownership and control of the SAR.

XXXXXXXXXX 2003-005142

Attention: XXXXXXXXXX

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers on whose behalf this ruling is requested, none of the issues involved in this ruling request are:

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

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

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

(d) before the courts or, if a judgement has been issued in respect of the issues, the time limit for appeal to a higher court has expired; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.

In this letter, unless otherwise indicated, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and the following terms have the meanings specified:

"Agreement" means the agreement to be entered into by the Employee and the Custodian under which the Custodian will have the right to exercise the SAR held by the Employee for the sole benefit of the Employee for the duration of the Agreement;

"Custodian" means an individual resident in Canada acceptable to both the Employee and Employer1who will act on behalf of the Employee to exercise the Employee's rights under the Plan according to the terms set out in the Agreement;

"Employee" means XXXXXXXXXX, a resident of Canada;

"Employer1" means XXXXXXXXXX, a taxable Canadian corporation;

"Employer2" means XXXXXXXXXX, a direct competitor of the Employer1, and a taxable Canadian corporation;

"SAR" means one or more incentive share units, or stock appreciation rights, issued to a participating employee of Employer1 under the terms of the Plan; and

"Plan" means Employer1's Incentive Share Unit Plan which is plan commonly referred to as a stock appreciation rights plan.

Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:

Facts

1. Employer1 created the Plan as an incentive for its employees to perform well in the future. Under the terms of the Plan, Employer1 issues a number of SAR to participating employees in accordance with the terms of the Plan. A participating employee pays no amount to acquire the SAR granted under the terms of the Plan. A SAR represents Employer1's promise to pay the participating employee an amount in the future based on the increase, if any, in the value of a common share of Employer1 from the time the SAR is granted to the employee until the time that the employee exercises the right to receive a payment in accordance with the terms of the Plan. The granting of a SAR to an employee does not provide the employee with the right to acquire shares of Employer1.

2. The principal features of the Plan are as follows:

? the purpose of the Plan is to encourage participating employees to contribute to the overall sustained improvement in Employer1's business and to remain employed with Employer1;
? to achieve that purpose, Employer1 will grant SAR to certain participating employees from time to time;
? each SAR represents a notional common share in the capital stock of Employer1;
? upon the exercise of each SAR, the participating employee will receive an amount from Employer1 equal to the increase in value of one common share of Employer1 from the date the SAR was granted to the date on which the employee exercises the SAR; and
? provided the employee remains employed by Employer1 and subject to certain terms applicable on the retirement or disability of a participating employee, XXXXXXXXXX.

3. A certain number of SAR were issued to the Employee while he was an employee of Employer1. As of XXXXXXXXXX, the Employee owned XXXXXXXXXX SAR.

4. The Employee has ceased to be employed by Employer1 and is currently employed as a senior officer and director of Employer2. However, notwithstanding the principal features set out in the Plan as described in paragraph 2 above, the Employee still owns the XXXXXXXXXX SAR and has the right to exercise them.

Proposed Transactions

5. The Employee will enter into the Agreement with the Custodian under which the Custodian will have the sole right to exercise the XXXXXXXXXX SAR on behalf of the Employee. The Custodian will have the unfettered ability to exercise the SAR to the same extent as if the Custodian were the owner of the SAR. The Custodian will have the right to exercise any of the SAR issued to the Employee that have not yet been exercised for the sole benefit of the Employee until the earliest of:

? the date which is the XXXXXXXXXX anniversary of the Agreement,
? the date on which the last of the SAR is exercised,
? the date on which the Employee ceases to be an officer, employee or director of Employer2, or
? the date of death of the Employee

at which time the Agreement will terminate.

When the Custodian receives a payment from Employer1 as a result of the exercise of a number of SAR on behalf of the Employee, the Custodian will pay that amount to the Employee, net of the required withholding taxes, as soon as possible. Employer1 will issue the appropriate information slip to the Employee.

Purpose of Proposed Transactions

6. Employer1 views the Employee as having a potential conflict of interest as a result of holding SAR while in the employment of Employer2. The purpose of the proposed transactions is eliminate any conflict of interest by transferring the control and discretion over the timing of the exercise of the SAR to a third party who is not related to the Employee and is acceptable to the Employee and Employer1.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, that the executed Agreement is drafted in substantially the same form as the draft Agreement submitted on XXXXXXXXXX, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The proposed transactions, in and of themselves, will not alter the tax consequences that would otherwise apply to the Employee under the Plan.

B. Any income derived from the exercise or cancellation of the SAR will not be required to be included in the income of the Custodian either in his own right or as a person having ownership and control of the SAR.

C. The assignment of the right to exercise the SAR held by the Employee to the Custodian as described in paragraph 5 above will not result in a disposition of the SAR for the purposes of the Act.

D. The relinquishment by the Custodian of the right to exercise the SAR upon the termination of the Agreement as described in paragraph 5 above will not result in a disposition of the SAR as defined in subsection 248(1).

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, and are binding on the Canada Revenue Agency (the "CRA") provided that the proposed transactions are completed within six months of the date of this letter.

Nothing in this advance income tax ruling should be construed as implying that the CRA has agreed to or reviewed:

a) the fair market value or adjusted cost base of any property referred to herein and in particular, the SAR issued by Employer1,

b) the tax consequences to the Employee or Employer1 arising from the Plan, or

c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

As noted in ATR-45, entitled Share Appreciation Rights Plan, the determination of whether the main purpose of the creation of an employee's right to receive an amount in the future is to postpone the tax otherwise payable on such an amount, such that the plan or arrangement would be a salary deferral arrangement, is a question of fact upon which we offer no comment in the context of this Plan.

XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch