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: Where Parent issues treasury shares to Subsidiary's employees in satisfaction of RSU awards (stock options) granted by Parent to the employees, and Subsidiary reimburses Parent for the FMV of the shares, pursuant to a reimbursement agreement, will a benefit be conferred by Subsidiary on Parent under subsections 246(1) and 15(1) of the Act? Will the reimbursement payment be subject to Part XIII of the Act? Will section 245 of the Act apply?
Position: No. No. No.
Reasons: Where Subsidiary reimburses Parent, pursuant to a reimbursement agreement, in respect of RSUs (stock options) awarded to Subsidiary employees and any increase in the intrinsic value of the RSUs (stock options), after the date of the reimbursement agreement, Subsidiary has a legal obligation to make the reimbursement payment and no benefit will be considered conferred on Parent. In general, a reimbursement payment made by a Canadian Subsidiary to a U.S. Parent, in respect of benefits received by the Canadian Subsidiary's employees under the U.S. Parent's stock option plan, would not constitute a payment that would be subject to Part XIII of the Act. The reimbursement payment made by the Canadian Subsidiary would not appear to result in a "tax benefit", as paragraph 7(3)(b) of the Act will deny the Canadian Subsidiary a deduction in respect of the payment.
Re: Advance Income Tax Ruling
This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced Company and further to the information provided in your emails sent XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the above-referenced Company, none of the issues involved in the ruling request is:
(i) in an earlier return of the Company or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person;
(iii) under objection by the Company or a related person;
(iv) before the courts; nor,
(v) the subject of an advance income tax ruling previously issued by the Directorate.
This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Unless otherwise stated, the following terms and expressions have the meanings specified below:
(a) "Act" means the Income Tax Act (Canada), as amended from time to time.
(b) "Administrator" means the Board, any committee appointed by the Board to administer the Plan, or any officer or employee of Parent to whom the Board or the committee appointed by the Board delegates authority to administer the Plan.
(c) "Board" means the board of directors of Parent.
(d) "CRA" means the Canada Revenue Agency.
(e) "Effective Date" means the later of the effective date of the Reimbursement Agreement as specified in that agreement and the date of this advance income tax ruling.
(f) "Market Value" means, on a particular date, if the Shares are traded on any established stock exchange or quoted on a national market system, the closing sales price for the Shares as quoted on the stock exchange or system for that date as reported in the Wall Street Journal or a similar publication. If no sales are reported as having occurred on the particular date, "Market Value" shall be the closing sales price for the last preceding trading day on which sales of Shares are reported as having occurred. If no sales are reported as having occurred during the five trading days before the particular date, "Market Value" shall be the closing bid for Shares on such date. If the Shares are not traded or quoted as provided above, but the Shares are regularly quoted by a recognized securities dealer, "Market Value" on a particular date shall be the mean between the high bid and low asked prices on that date and if no prices are quoted for the particular date, "Market Value" shall be the mean between the high bid and low asked prices on the last preceding trading day on which any bid and asked prices were quoted. If the Shares are not traded or quoted as provided above, the Administrator will determine "Market Value" in good faith and consistent with the requirements of Section 409A of the United States Internal Revenue Code of 1986 and the CRA.
(g) "Parent" means XXXXXXXXXX.
(h) "Participant" means an individual employed by the Company who has been awarded RSUs under the Plan.
(i) "Plan" means the XXXXXXXXXX Stock Incentive Plan of Parent, as amended and restated from time to time.
(j) "Reimbursable RSU" means an RSU that, at the effective date of the Reimbursement Agreement as described in 5 below, is either outstanding but not yet vested or has not yet been granted.
(k) "Reimbursement Agreement" means the agreement entered into by the Company and Parent providing for the payment by the Company to Parent in respect of Reimbursable RSUs, subject to receipt of an advance income tax ruling.
(l) "RSU or Restricted Stock Unit" means a right awarded under the Plan to receive a Share at a future date, subject to satisfaction of vesting conditions.
(m) "RSU Value" has the meaning ascribed thereto in 6(a) below.
(n) "Share" means a share of the common stock $XXXXXXXXXX par value of Parent, or other shares substituted for common stock under the Plan.
1. The Company is incorporated under the laws of Canada. It is a private corporation and a taxable Canadian corporation as those terms are defined in subsection 89(1) of the Act. The Company is an indirectly wholly-owned subsidiary of Parent. The direct shareholder of the Company is XXXXXXXXXX ("Direct Shareholder"), and its shareholder is XXXXXXXXXX ("Indirect Shareholder"), a direct wholly-owned subsidiary of Parent. Direct Shareholder and Indirect Shareholder are taxable Canadian corporations.
2. Parent is a XXXXXXXXXX corporation that operates XXXXXXXXXX, mainly under the "XXXXXXXXXX" name. The Shares trade on XXXXXXXXXX. Parent is resident in the United States and is subject to tax on its business profits under the United States Internal Revenue Code of 1986.
3. The Plan has been in existence for a number of years. Under the Plan, Parent may award stock options and RSUs to eligible employees, directors and consultants of Parent and its affiliates. Since XXXXXXXXXX, Parent has granted RSUs to employees of the Company. RSUs are generally subject to vesting conditions relating to continued employment over a period of several years. Vesting may accelerate in certain cases upon the termination of an employee's employment with Parent and/or its affiliates.
4. In the case of Participants, promptly (generally within XXXXXXXXXX (XXXXXXXXXX) business days) following the date on which a Participant's RSUs vest, Parent issues Shares to the Participant from treasury, of authorized but unissued Shares, and the vested RSUs are cancelled.
5. To date, the Company has not reimbursed Parent with respect to the value of the Shares issued to the Participants under the Plan. As of XXXXXXXXXX, the Company and Parent executed the Reimbursement Agreement, which provides for the Company to reimburse Parent for the Market Value of the Shares issued to Participants in respect of Reimbursable RSUs that vest. The Reimbursement Agreement provides that it is effective as of the date it was executed, subject to receipt of an advance income tax ruling.
6. The relevant features of the Reimbursement Agreement are as follows:
(a) Following the issuance by Parent of Shares in respect of a Participant's vested RSUs, Parent will notify the Company in writing of the economic value of the RSUs, which Parent and the Company agree will be equivalent to the Market Value of the Shares issued to the Participant in respect of such RSUs (the "RSU Value").
(b) Within XXXXXXXXXX (XXXXXXXXXX) business days following receipt of the notice referred to in 6(a) above, the Company will reimburse Parent for an amount equal to the RSU Value as described in 6(a) above.
(c) The obligations of the Company and Parent under the Reimbursement Agreement are subject to the receipt by the Company of an advance income tax ruling from CRA with respect to all or some of the Reimbursable RSUs. The Reimbursement Agreement provides that in the event such ruling applies only to some Reimbursable RSUs the Reimbursement Agreement will be effective only with respect to those Reimbursable RSUs.
7. Subject to the receipt of an advance income tax ruling, upon receipt by the Company from time to time of a notice from Parent in accordance with the Reimbursement Agreement, which sets out the RSU Value provided to Participants in the form of Shares at such times as may be specified in the relevant notice, the Company will, after the Effective Date, pay such RSU Value to Parent in accordance with the Reimbursement Agreement. In accordance with paragraph 7(3)(b) of the Act, the Company will not claim a deduction for amounts paid to Parent under the Reimbursement Agreement on account of the RSU Value of any Participants' RSUs provided by Parent in the form of Shares.
Purpose of the Proposed Transactions
8. The purpose of the Reimbursement Agreement and the payments by the Company to Parent thereunder is to provide a mechanism whereby the Company bears the economic cost of the benefits provided to its employees, the Participants, under the Plan. In the absence of such agreement and such payments, Parent would, in effect, bear a portion of the total value of the compensation received by Participants and the costs associated with delivering that compensation, even though the Participants render services to the Company not Parent.
Provided the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:
A. No benefit will be considered to have been conferred by the Company on Parent or Direct Shareholder under subsection 15(1) or subsection 246(1) of the Act and no amount will be included in computing the income of Direct Shareholder under subsection 56(2) of the Act, by reason only of the Company paying an amount to Parent, after the Effective Date:
(i) in respect of RSUs that were awarded prior to XXXXXXXXXX and that were at that time not vested, the increase in the RSU Value, if any, that occurred on or after XXXXXXXXXX, and
(ii) in respect of RSUs awarded on or after XXXXXXXXXX, the RSU Value.
B. No portion of any amount, that is the subject of ruling A above, paid by the Company to Parent under the Reimbursement Agreement in respect of the RSU Value of vested RSUs settled through the issuance of Shares to a Participant by Parent will be subject to tax under Part XIII of the Act.
C. Section 245 of the Act will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings set out above.
The above rulings, which are based on the Act in its 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 dated May 17, 2002, and are binding on the CRA with respect to amounts paid pursuant to the Reimbursement Agreement, as described in 5 and 6 above.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, the Plan, the proposed transactions or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
The Market Value of a Share, at any particular time, is a question of fact and nothing in this ruling should be construed as implying our acceptance of any method for the determination of the fair market value of a Share for the purposes of the proposed transactions.
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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