29 April 2013 External T.I. 2010-0356401E5 - Stock Option Recharge on Grant Date

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: The parent company (Parentco) grants employee stock options or share awards to the subsidiary's (Canco's) employees. Canco reimburses Parentco an amount equal to the fair value at the grant date of the options or share awards. Would the reimbursement constitute a benefit paid by Canco to Parentco, such that Part XIII applied to payment?

Position: No, however the method used to compute fair value may be reviewed.

Reasons: It would not be unreasonable for Parentco to recoup the portion of the stock option or share award benefit that it has effectively provided to the employees on Canco's behalf.

XXXXXXXXXX
2010-035640
S.E. Thomson
(613) 957-2122

April 29, 2013

Dear XXXXXXXXXX:

Re: Employee Stock Option Recharge Agreement

This is in reply to your letter of January 27, 2010 in which you ask for our views on the following hypothetical situation.

Parentco is a public company, not resident in Canada. Canco is a wholly-owned subsidiary of Parentco, and is resident in Canada. Parentco has a Long-Term Incentive Plan ("LTIP") for its employees, and for employees of Canco. The LTIP has two elements:

a) a contingent award of free ordinary shares that vests after three years based on performance criteria established at the time of the grant of the award, and

b) an option to acquire ordinary shares at a specified exercise price that vests after three years based on performance criteria established at the time of the grant of the option.

For accounting purposes, Parentco prepares its financial statements in accordance with applicable International Financial Reporting Standards. Under IFRS-2, Share-Based Payment (footnote 1),

• The services received are recognized as they are received. [Par 7]
• For share-based transactions with employees, the fair value of the services received is measured by reference to the fair value of the equity instruments granted at grant date. [Par 10 and 11]
• The services are accounted for during the vesting period. [Par 15]
• The term "fair value" is defined in Appendix A as the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm's length transaction.
• Appendix B contains guidance on the measurement of the fair value of shares and share options, focusing on the specific terms and conditions that are common features of a grant of shares or share options to employees. [Par 18]
• The amount recognized for services during the vesting period is adjusted for shares or options that will not vest, except to the extent that the vesting is dependent upon market conditions, such as a target share price. [Par 19, 20 and 21]
• No adjustment is made after the vesting date. [Par 23]

Parentco annually engages a third party to compute the fair value of the LTIP for purposes of IFRS-2.

Under an agreement between Parentco and Canco, Canco reimburses Parentco for options granted or shares awarded by Parentco to Canco's employees. The amount of the reimbursement is equal to the fair value at the date of grant of the share award or stock option award (net of the exercise price paid by the employees) computed under IFRS-2, and adjusted for shares or options that will not vest as set out above.

Canco does not deduct the amount of the reimbursement paid to Parentco in computing its income for tax purposes pursuant to paragraph 7(3)(b) of the Income Tax Act.

In our view, a reimbursement by Canco to Parentco as described above generally would not be considered to be a benefit conferred on Parentco that would be subject to subsection 15(1), paragraph 214(3)(a) or paragraph 246(1)(b) of the Income Tax Act. However, upon audit, the Canada Revenue Agency may review the method used to compute the fair value of the awards and/or the inputs to that method.

We trust that our comments are of assistance.

Yours truly,

Olli Laurikainen, CA
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 2013 Edition, CICA Handbook