2008 Ruling 2006-0217541R3 - Stock Option Reimbursement

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: If Parentco and Subco enter into a Recharge Agreement under which Subco pays to Parentco an amount equal to the stock option benefit enjoyed by Subco's employees on the exercise of options to acquire shares of Parentco, would the payment be included in the income of Parentco under sections 9 or 90, subsections 15(1) or 56(2), or paragraph 12(1)(x)?

Position: No, in cases where the payment is in respect of services rendered by the employees to Subco, for options granted after the date of the Recharge Agreement, or for the increase in the stock option benefit that arises after the date of the Recharge Agreement on pre-existing options.

Reasons: It would not be unreasonable for Subco to reimburse Parentco for that portion of the employment benefit that has effectively been borne by Parentco on Subco's behalf.

XXXXXXXXXX 2006-021754

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
XXXXXXXXXX Share Option Plan Recharge Amounts

This is in reply to a letter from XXXXXXXXXX in which she requests an advance income tax ruling on behalf of XXXXXXXXXX . We also acknowledge subsequent emails and telephone conversations with you and with XXXXXXXXXX .

Definitions

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. All statute references in this letter are to the Act unless otherwise indicated;

(b) "Bargain Element" means (i) in respect of the exercise of a Stock Option, the excess of the FMV of a common share of Parentco on the date a common share is issued by Parentco upon such exercise over the Option Price of the Stock Option, and (ii) in respect of the exercise of a Share Appreciation Right, the excess of the FMV of a common share of Parentco on the date the Share Appreciation Right is exercised over the Option Price of the Stock Option;

(c) "CRA" means the Canada Revenue Agency;

(d) "FMV" on any relevant date, means the fair market value of a common share of Parentco, determined by reference to the closing price of the Parentco common shares on the XXXXXXXXXX Stock Exchange on the relevant date;

(e) "Option Price" means the price at which an executive may purchase a common share of Parentco pursuant to a Stock Option;

(f) "Parentco" means XXXXXXXXXX ;

(g) "Parentco Group" means Parentco and its subsidiaries;

(h) "Public Corporation" has the meaning assigned by subsection 89(1);

(i) "Plan" means the XXXXXXXXXX , established on XXXXXXXXXX ;

(j) "Recharge Agreements" means the agreements described in 7 below;

(k) "Recharge Amount" means an amount paid to Parentco by Subco1 or Subco2, as the case may be, under the Recharge Agreement entered into by Subco1 or Subco2, as the case may be, equal to the Bargain Element in respect of the exercise of a Stock Option or Share Appreciation Right;

(l) "Share Appreciation Right" means a right granted under the Plan to an executive in conjunction with a Stock Option granted to the executive (i) which entitles the executive to be paid in cash the Bargain Element upon the exercise of such right, and (ii) upon the exercise of which right, the Stock Option is cancelled;

(m) "Stock Option" means an option granted under the Plan to an executive who is an employee of a corporation in the Parentco Group to purchase one Parentco common share at the Option Price;

(n) "Subco1" means XXXXXXXXXX

(o) "Subco2" means XXXXXXXXXX ;

(p) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);

(q) "XXXXXXXXXX Ruling" means an advance income tax ruling issued by the CRA to Parentco on XXXXXXXXXX , 2001 (document 2001-008298), including extensions. The implementation date for the proposed transactions in the XXXXXXXXXX Ruling was extended to XXXXXXXXXX , 2002 by document 2001-011516, to XXXXXXXXXX , 2002 by document 2002-0142751, and to XXXXXXXXXX , 2003 by document 2002-0179421.

Facts

1. Parentco is a Public Corporation and a Taxable Canadian Corporation incorporated under the XXXXXXXXXX Its address is XXXXXXXXXX . It files its income tax returns at the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office.

2. XXXXXXXXXX

3. Subco1 is a XXXXXXXXXX company domiciled in XXXXXXXXXX . Its address is XXXXXXXXXX . Subco2 is a XXXXXXXXXX company domiciled in XXXXXXXXXX . Its address is XXXXXXXXXX . Subco1 and Subco2 are indirect, wholly-owned subsidiaries of Parentco.

4. The Plan provides for a number of different types of equity based compensation awards for executives globally including Stock Options for executives who are employees of the Parentco Group. Under the Plan, Stock Options are granted to executives to purchase Parentco common shares at the "Option Price" per common share equal to the fair market value of one common share on the date of the grant. The Stock Options vest over XXXXXXXXXX years after their grant at XXXXXXXXXX % a year. The executives may purchase up to XXXXXXXXXX % of the shares covered by a Stock Option at each anniversary date of the grant of the Stock Option. The Plan also provides for Share Appreciation Rights to be granted to executives in conjunction with such Stock Options; such Shares Appreciation Rights have the same term and are exercisable only at such time or times and to the extent the related Stock Option is exercisable. However, no Share Appreciation Rights have been granted to date in conjunction with Stock Options under the Plan.

5. An executive who chooses to exercise a Stock Option will pay Parentco the Option Price and receive one common share of Parentco. An executive who chooses to exercise a Share Appreciation Right will receive in cash the Bargain Element in respect of such exercise (and the related Stock Option will be cancelled).

6. To properly reflect the costs and benefits of the Stock Options and Share Appreciation Rights, Subco1 and Subco2 should bear the full economic costs of the Stock Options and Share Appreciation Rights granted to their respective employees after XXXXXXXXXX to the extent that Subco1 and Subco2 enjoy the services provided by the executives who are their respective employees. For the same reason, Subco1 and Subco2 should bear the full economic costs that arise after XXXXXXXXXX of the Stock Options granted to their respective employees before XXXXXXXXXX to the extent that Subco1 and Subco2 enjoy the services provided by the executives who are their respective employees.

7. Parentco entered into Recharge Agreements with Subco1 and Subco2 on

XXXXXXXXXX . The Recharge Agreements are conditional upon receiving a favourable ruling from the CRA. Under the Recharge Agreements, Subco1 or Subco2 will be required to pay, as soon as reasonably practicable, to Parentco their respective share of the Recharge Amount for Stock Options and Share Appreciation Rights granted to and exercised by their respective executives under the Plan on or after XXXXXXXXXX . Similarly, for Stock Options granted to executives of Subco1 or Subco2 under the Plan before XXXXXXXXXX , and exercised on or after XXXXXXXXXX Subco1 or Subco2 will be required to pay, as soon as reasonably practicable, to Parentco their respective share of the Recharge Amount, adjusted to reflect only the increase, if any, in the Bargain Element in respect of such exercises that arose after XXXXXXXXXX . For executives of Subco1 or Subco2 who were employed during the vesting period of the Stock Options by more than one company in the Parentco Group, Parentco will allocate the Recharge Amount (or the adjusted Recharge Amount) to the companies on a pro rata basis taking into account the number of days during the vesting period that the executive was employed by each of the respective companies.

8. Parentco requested the XXXXXXXXXX Ruling in respect of substantially the same issues that are the subject of this ruling. However, XXXXXXXXXX , Parentco was unable to implement the proposed transaction in the timelines stipulated in the XXXXXXXXXX Ruling. XXXXXXXXXX , and the Parentco Group is in a position to implement the Proposed Transaction.

Proposed Transaction

9. Upon and after the receipt of this favourable ruling, Subco1 and Subco2 will pay their respective share of the Recharge Amount (or the adjusted Recharge Amount) allocated to each of them to Parentco in respect of Stock Options or Share Appreciation Rights exercised thereafter, all as described in 7 above.

Purpose of the Proposed Transaction

Subco1 and Subco2 enjoy the services provided by the executives who are their respective employees, and the Plan is a key component in Subco1 and Subco2's strategy to retain top talent for their operations. Accordingly, Parentco, Subco1 and Subco2 have agreed that Subco1 and Subco2 should bear their respective actual economic costs of the Stock Options and Share Appreciation Rights granted to their respective employees under the Plan as provided in the Recharge Agreements. By making the payments required under the Recharge Agreements, Subco1 and Subco2 will, to that extent, bear the economic costs of the Stock Options and Share Appreciation Rights granted under the Plan to their respective employees.

Other Information

To the best of your knowledge and that of Parentco, none of the issues involved in this advance income tax ruling is:

• in an earlier return of Parentco, or a related person;
• being considered or under assessment by a tax services office or taxation centre in connection with a previously filed tax return of Parentco or a related person;
• under objection by Parentco or a related person;
• before the courts, and no judgement has been issued which may be under appeal; or
• the subject of a ruling previously issued by the Directorate, other than as mentioned above.

Rulings Given

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Proposed Transaction, Purpose of the Proposed Transaction and Other Information, we rule as follows:

A. Recharge Amounts (or adjusted Recharge Amounts) paid to Parentco by Subco1 or Subco2 under the Recharge Agreement in accordance with 9 above will not be included in income of Parentco under sections 9 or 90, subsections 15(1) or 56(2), or paragraph 12(1)(x).

B. Section 245 will not be applied as a result of the proposed transaction, in and by itself, to redetermine the tax consequences confirmed in the ruling given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA with respect to the Recharge Agreements. The above rulings are based on the Act in its present form and do not take into account any proposed amendments which, if enacted, could have an effect on the rulings given.

Opinion

If an amount paid to Parentco in accordance with 9 above is in respect of an active business carried on by Subco1 or Subco2, as the case may be, for the purposes of computing the "exempt surplus", "exempt deficit", "taxable surplus", or "taxable deficit" (as those terms are defined in subsection 5907(1) of the Income Tax Regulations (the "Regulations")), at a particular time of Subco1 or Subco2, as the case may be, in respect of Parentco, the amount so paid will be deducted in the computation of earnings (as defined in subsection 5907(1) of the Regulations) of Subco1 or Subco2, as the case may be, pursuant to paragraph 5907(2)(j) of the Regulations, to the extent it was not otherwise deducted in the computation of such earnings.

The foregoing opinion is not a ruling, and, in accordance with the practice referred to in Information Circular 70-6R5, is not binding on the CRA.

Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to

(a) the determination of the adjusted cost base, the fair market value or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the Facts and Proposed Transaction described herein other than those specifically described in the rulings given above.

This letter is based solely on the Facts and Proposed Transaction described above. The documentation submitted with your request does not form part of the Facts and Proposed Transaction and any references thereto are provided solely for the convenience of the reader.

Yours truly,

XXXXXXXXXX
For Director
International & Trusts Division
Income Tax Rulings Directorate