7 July 1996 Income Tax Severed Letter 9617433 - Employee/shareholder stock options

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 an option is received qua employee or qua shareholder.

POSITION:

Received by virtue of employment & taxable under 7(1.1) and 7(1)(a).

REASONS:

Sufficient facts to evidence that reason for granting options is because of employment and not to confer shareholder benefit.

XXXXXXXXXX 961743 XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Re: Advance Income Tax Ruling Request XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, 1996, in which you request an advance ruling on behalf of the above- named taxpayer, and further to numerous telephone conversations (XXXXXXXXXX and XXXXXXXXXX).

To the best of your client's and 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 facts and proposed transactions is as follows:

FACTS

1. XXXXXXXXXX (the "Company") is a corporation incorporated and existing under XXXXXXXXXX. The Company is resident in Canada for purposes of the Act and is a "Canadian-controlled private corporation" within the meaning assigned to that term in subsection 125(7) of the Act. The Company files its annual income tax returns at the XXXXXXXXXX Taxation Centre.

2. The Company is in the business of

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

3. The Company has XXXXXXXXXX common shares and XXXXXXXXXX preference shares outstanding. The preference shares are XXXXXXXXXX. The common shares are owned XXXXXXXXXX:

XXXXXXXXXX

These are the only shares of any class that have been issued by the Company.

4. XXXXXXXXXX is a corporation incorporated and existing under the XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX.

XXXXXXXXXX is a corporation incorporated and existing XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX

XXXXXXXXXX is a corporation incorporated and existing under XXXXXXXXXX. It has issued XXXXXXXXXX common shares and XXXXXXXXXX preference shares. All of the common shares of XXXXXXXXXX are owned by XXXXXXXXXX. The preference shares of XXXXXXXXXX are owned by XXXXXXXXXX.

5. XXXXXXXXXX

6. XXXXXXXXXX

7. Pursuant to a shareholders' agreement

XXXXXXXXXX:

a) XXXXXXXXXX

b) XXXXXXXXXX

c) XXXXXXXXXX

XXXXXXXXXX

d) XXXXXXXXXX

XXXXXXXXXX

8. XXXXXXXXXX are not related persons as defined for the purposes of the Act in subsection 251(2) of the Act.

9. The book value of a common share of the Company as at XXXXXXXXXX, is $XXXXXXXXXX

PROPOSED TRANSACTIONS

10. The Company proposes to grant stock options (the "Options") XXXXXXXXXX (the "Employees") as partial compensation and reward for employment-related services provided to the Company by such Employees. These Options will be granted by the Company, upon receipt of favourable rulings as requested herein, at the following exercise prices:

Employee Number of Options Exercise Price

XXXXXXXXXX

11. Each Option will provide the Employee to whom it is granted with the right to purchase one common share of the Company from the Company at a stated exercise price of $XXXXXXXXXX per common share (the "Exercise Price"), which Exercise Price will be required to paid in full upon the exercise of an Option to acquire a common share of the Company. 12. Each Option will provide that the Employee may only exercise the Option after having being employed by the Company for XXXXXXXXXX, and provided that the Employee agrees to be bound by all of the provisions of the Shareholders' Agreement and becomes a party thereto in respect of the share acquired on the exercise of the Option.

13. Each Option will provide that it shall expire and no longer be exercisable one year after it becomes exercisable (as described in 12 above) or upon the prior termination of the Employee's employment with the Company.

14. In the event of the death or the permanent physical or mental disability of an Employee in the year after the Option becomes exercisable, each Option held by the Employee will cease to be exercisable. Instead, the Employee, or where the Employee has died, the Employee's estate, will be entitled to receive a cash payment from the Company equal to the total value of all such Options. For the purpose of calculating the above, the value of each Option will be equal to the amount by which the "book value" of one common share of the Company within the meaning set out in 7 above exceeds the Exercise Price of the Option.

15. An Option will not be assignable or transferable and will only be exercisable by the Employee to whom it is granted.

PURPOSE OF THE PROPOSED TRANSACTIONS

16. The purpose of the proposed transactions is to compensate the Employees for employment-related services provided to the Company by the Employees, and to do so in a manner that will promote the long-term success of the Company by providing appropriate incentives to the Employees. It is considered that the Options to be granted to the Employees will provide the Employees with additional incentives to further the growth and development of the Company.

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. Provided the Employee deal's at arm's length with the Company immediately after the Company grants an Option to the Employee, subsection 7(1.1) and paragraph 7(1)(a) of the Act will apply to deem the Employee to have received a benefit calculated in accordance with those provisions in the year the Employee disposes of or exchanges a common share of the Company acquired by the Employee through the exercise of the Option.

B. No amount or value will be required to be included in an Employee's income pursuant to subsection 15(1) of the Act as a result, in and of itself, of a grant of an Option by the Company to the Employee.

C. An amount paid to an Employee in the circumstances described in 14 above will be deductible in determining the income of the Company for the taxation year in which it is paid, to the extent that it is deductible by the Company in computing its profits from its business for that taxation year under generally accepted accounting principles and is reasonable in the circumstances.

The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990, issued by Revenue Canada, and are binding upon Revenue Canada provided the proposed transactions are entered into by XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

Yours truly,

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