2096 Ruling 9611273 - XXXXXXXXXX INCENTIVE PLAN

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether agreement to issue shares for no consideration to employees if they remain continuously employed for a certain number of years results in taxable benefit in year of agreement or in year shares issued.

Position:

Taxable benefit under section 7 in year shares are issued.

Reasons:

Application of section 7.

XXXXXXXXXX							961127

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your request of XXXXXXXXXX for an advance income tax ruling on behalf of the above-named taxpayer.

To the best of your knowledge, none of the issues involved in this ruling application is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed and none of the issues is under objection.

Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act (the "Act").

Our understanding of the statements of facts and proposed transactions is as follows:

FACTS

1.XXXXXXXXXX is a corporation continued under the XXXXXXXXXX and its offices are at XXXXXXXXXX. It is serviced by the XXXXXXXXXX Taxation Services Office and files its returns with the XXXXXXXXXX Taxation Centre.

2.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX whose shares are traded on the XXXXXXXXXX.

3.XXXXXXXXXX established a Long-Term Incentive Compensation Plan (the "Plan") for its employees and those of its subsidiaries, the purpose of which is to attract and retain key employees and provide additional motivation and incentives for the performance of key employees. You provided a copy of the Plan and the relevant terms are as follows:

(a)The Plan is administered by XXXXXXXXXX (the "Committee"). The Committee determines the terms, restrictions, and provisions of all agreements granted pursuant to the Plan and may grant any type of award permitted under the terms of the Plan. One of the awards which may be granted under the Plan is a Restricted Stock Right (referred to herein in the singular as "RSR" and in the aggregate as "RSRs").

(b)The maximum number of common shares of XXXXXXXXXX that may be awarded under the Plan with respect to all the types of awards including the RSRs is XXXXXXXXXX and may consist of authorized and unissued shares held in XXXXXXXXXX treasury or shares purchased on the open market. If any award granted under the Plan is terminated or lapses for any reason, any shares subject to such award are made available again for the grant of an award.

(c)The Committee may grant RSRs to any employee selected by the Committee entitling the employee to receive a stated number of common shares of XXXXXXXXXX subject to forfeiture if the employee fails to remain continuously as an employee of XXXXXXXXXX or any subsidiary for the period stipulated by the Committee (the "Restricted Period").

(d)RSRs are subject to the following restrictions and limitations:

(i)RSRs cannot be transferred except by will or the laws of descent and distribution;

(ii)Except as provided in (iv) and (v) below, the RSRs and shares subject to such RSRs will be forfeited and all rights of a grantee of such RSRs and shares will terminate without any payment of consideration by XXXXXXXXXX if the employee fails to remain continuously as an employee of XXXXXXXXXX or any subsidiary for the Restricted Period. A grantee is deemed not to have terminated continuous employment if he leaves the employ of XXXXXXXXXX or any subsidiary for immediate re-employment with XXXXXXXXXX or any subsidiary;

(iii)The grantee of RSRs is not entitled to any rights of a holder of the shares subject to such RSRs prior to the issuance of shares pursuant to the Plan. At the Committee's discretion, during the Restricted Period, for each share subject to an RSR, XXXXXXXXXX will pay the grantee an amount of cash equal to the cash dividend declared on a share of the common stock of XXXXXXXXXX during the Restricted Period on or about the date XXXXXXXXXX pays such dividend to its stockholders of record;

(iv)The Committee in its sole discretion may accelerate the payment of XXXXXXXXXX common shares under RSRs prior to termination of the Restricted Period if the grantee has achieved certain performance levels established by the Committee at the time the RSR is granted. The Committee in its sole judgment may revise such performance levels as it deems appropriate to reflect significant, unforseen events or changes;

(v)In the event that the employment of a grantee terminates by reason of death or total disability or as a result of (vi) below, such grantee is entitled to receive the number of shares subject to the RSR XXXXXXXXXX provided, however, that any fractional share will not be awarded. A grantee of an RSR whose employment terminates for reasons other than those cited in this paragraph forfeits his rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion;

(vi)If a "Change in Control" occurs, then the Committee, in its sole discretion, may:

1.accelerate the time periods for realizing the RSR, notwithstanding the minimum holding period set forth in the Plan or established by the Committee at the time of the grant of the RSR;

2.provide for the purchase by XXXXXXXXXX of any RSRs in cash equal to the amount that could have been received upon the realization of the shares subject to the RSRs had the RSRs been vested on the day before the said cash payment is made;

3.make such adjustments, including the granting of additional RSRs, to any outstanding RSR as the Committee deems appropriate to reflect the Change in Control; and

4.cause any outstanding RSRs to be assumed, or new rights substituted therefor, by any corporation that is a successor to XXXXXXXXXX.

Any grantee whose position with XXXXXXXXXX or any of its subsidiaries within 24 months after a Change in Control is materially changed (as defined below), shall be deemed to be involuntarily terminated without cause from XXXXXXXXXX and be entitled to receive the shares subject to the RSRs that were outstanding immediately prior to the event causing such termination in accordance with (v) above, without any action by the Committee or Board of Directors.

"Change in Control" means a change in the beneficial ownership of XXXXXXXXXX common stock or a change in the composition of XXXXXXXXXX Board of Directors as a result of 1) generally, the acquisition of XXXXXXXXXX% or more of the total voting power of XXXXXXXXXX then outstanding common stock by persons other than employees, or 2) a tender offer being made for XXXXXXXXXX% or more of the common stock of XXXXXXXXXX which tender offer has not been approved by XXXXXXXXXX Board of Directors.

"Materially changed" means, generally:

-termination without cause,
-assignment to a position of lesser rank or status,
- reduction in the employee's annual target bonus or targeted performance unit awards without substitution of compensation equivalent in aggregate value,
- reduction in salary,
-reduction in benefits under the Plan without a corresponding supplemental increase in benefits under XXXXXXXXXX Supplemental Retirement Income Plan,
-reduction of the employee's benefits under XXXXXXXXXX Supplemental Retirement Income Plan,
-reduction of the employee's other benefits or perquisites and the reductions were not uniformally applied to all similarly situated employees,
-reassignment of the employee to a geographical area outside of the metropolitan area in which the employee was assigned at the time of the Change in Control.

(vii)When a grantee is entitled to receive shares pursuant to an RSR, XXXXXXXXXX will grant the appropriate number of shares registered in the name of the grantee.

PROPOSED TRANSACTIONS

4.XXXXXXXXXX proposes to offer participation in the Plan to employees of XXXXXXXXXX (the "Employee" or "Employees") XXXXXXXXXX.

5.An Employee selected for participation will enter into an RSR Agreement (the "Agreement") with XXXXXXXXXX whereby XXXXXXXXXX will grant RSRs to the Employee. A copy of a draft Agreement was provided with your submission and the relevant terms are as follows:

(a)The Restricted Period for the RSRs will be XXXXXXXXXX years from the date of the Agreement at which time the RSRs will be fully vested in the Employee, in accordance with the terms set out in the Agreement and subject to the provisions of the Plan. The RSRs entitle the Employee to receive the number of common shares of XXXXXXXXXX as set forth in the cover sheet to the Agreement;

(b)No shares may be issued under the RSRs for XXXXXXXXXX from the date of the Agreement. After the XXXXXXXXXX period, shares subject to the RSRs will vest XXXXXXXXXX (the "Vesting Dates") from the grant date;

(c)On each Vesting Date an Employee shall be entitled to receive shares representing the vested RSRs, and XXXXXXXXXX will issue the appropriate number of vested shares (rounded down to the nearest whole share) registered in the name of the Employee or his or her estate or administrator, provided the Employee has satisfied all tax obligations with respect to the shares. The unvested shares subject to RSRs will be forfeited and all rights of the Employee will terminate without payment of consideration by XXXXXXXXXX or any subsidiary if the Employee fails to remain continuously as an Employee of XXXXXXXXXX or any subsidiary for the Restricted Period subject to (i) and (ii) below.

(i)In the case of an Employee who is retirement-eligible under the terms of a pension plan of XXXXXXXXXX or a subsidiary, the Employee will receive either 1) the number of shares subject to the RSR multiplied by

XXXXXXXXXX

provided however that any fractional share shall not be awarded; and provided further that the Committee, in its sole discretion, may determine that full vesting is appropriate under the circumstances or, 2) 100% of the shares subject to the RSR on his or her last day of employment if retirement occurs on or after age 65.

(ii)In the event that the employment of the Employee terminates by reason of death or permanent and total disability, the Employee will be entitled to receive the number of shares subject to the RSR multiplied by XXXXXXXXXX provided however that any fractional share shall not be awarded.

Any shares that the Employee is entitled to receive in accordance with (i) and (ii) above will be reduced by any shares that the Employee has already received because of vesting XXXXXXXXXX.

(d)An Employee is deemed not to have terminated his or her period of continuous employment with XXXXXXXXXX if he or she leaves the employ of XXXXXXXXXX or any subsidiary for immediate re-employment with XXXXXXXXXX or any subsidiary;

(e)An Employee whose employment terminates for reasons other than those listed in (c) above (other than a Change in Control) will forfeit his or her unvested rights under any outstanding RSRs. This automatic forfeiture may be waived in whole or in part by the Committee in its sole discretion;

(f)An Employee will not be entitled to any of the rights of a holder of common shares with respect to the shares subject to RSRs prior to the issuance of such shares pursuant to the Plan. However, during the Restricted Period, for each unvested share subject to an RSR, XXXXXXXXXX will pay the Employee as additional income, less applicable taxes, an amount in cash equal to the cash dividend declared on a common share of XXXXXXXXXX during the Restricted Period on or about the date XXXXXXXXXX pays such dividend to its stockholders of record.

6.Although the Agreement refers to "unvested shares" there are in fact no such shares. The RSRs are subject to vesting periods. Shares of XXXXXXXXXX are issued (and immediately released) to the Employees only as the RSRs vest, and as such, the shares vest immediately upon issuance.

PURPOSE OF PROPOSED TRANSACTIONS

7.XXXXXXXXXX proposes to extend participation in the Plan to employees of XXXXXXXXXX in order to attract and retain key employees and to provide additional motivation and incentives for the performance of such key employees of XXXXXXXXXX.

RULINGS GIVEN

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, we rule as follows:

A.A grant to an employee of an RSR in accordance with an agreement as described in 5 above will not, in and of itself, result in a taxable benefit to the employee under any of sections 5, 6 or 7 of the Act.

B.Upon the vesting and issuance of the shares subject to the RSRs in accordance with an agreement as described in 5 above, an employee will be required to include in income an amount as a taxable benefit in accordance with paragraph 7(1)(a) of the Act.

C.Cash payments as described in 3(d)(vi)2 and 5(f) above will be required to be included in the employee's income in the taxation year received pursuant to subsection 5(1) of the Act.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990, and are binding on Revenue Canada, Taxation, provided that the proposed transactions described herein are instituted by XXXXXXXXXX. Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch