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:
1.Does section 7 still apply when amendment is made to acelerate option and provide a cash payout
2. Does 110(1)(d) apply
Position:
1. Yes
2. Request withdrawn
Reasons:
1.Plan provided for amendment. We have stated this type of payout is acceptable to us.
2. Shares are not prescribed shares
XXXXXXXXXX 3-961895
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, your facsimile of XXXXXXXXXX, and our telephone conversation of XXXXXXXXXX, in respect of a request for an advance income tax ruling on behalf of the above-noted taxpayer.
Facts:
XXXXXXXXXX is incorporated under the XXXXXXXXXX The Company files its returns with the XXXXXXXXXX Tax Services Office.
XXXXXXXXXX The capital stock consists of XXXXXXXXXX common shares.
On XXXXXXXXXX, the Company adopted a stock option plan for key employees to purchase common shares (the "Employees' Plan"). A separate plan was also adopted for outside directors of the company (the "Directors' Plan"). Copies of these plans (the "Plans") were provided with your request. The Plans are administered by the Compensation Committee of the Board of Directors (the "Committee").
XXXXXXXXXX
Since XXXXXXXXXX, options to acquire XXXXXXXXXX shares of the Company have been issued under the Plans. These options vest over a period of XXXXXXXXXX years for key employees and over a period of XXXXXXXXXX years for "Outside Directors" (as defined in the Plans).
In the event of a change in control of the Company, paragraph XXXXXXXXXX of the Plans provides that the Committee may:
a)accelerate the vesting dates of all options issued under the Plans without the need for agreement of the option holders, and
b) determine the period following the change of control during which all options shall be exercisable.
A change in control is defined in the Plans for this purpose and includes a sale or other disposition of all or substantially all of the Company's assets.
Paragraph XXXXXXXXXX of the Plans also provides that the Board of Directors of the Company may at its discretion from time to time retrospectively amend the Plans and, with the consent of the affected option holders, retrospectively amend the terms and conditions of any options which have been theretofore granted.
The option holders are each dealing at arm's length with the Company.
The common shares of the Company are not convertible into any other shares or securities. The option holders can not cause the shares to be redeemed, acquired or cancelled by the Company.
In XXXXXXXXXX, the Company entered into negotiations for the sale of all its assets to a purchaser dealing with the Company at arm's length and on XXXXXXXXXX, the Company and the purchaser executed a definite asset purchase agreement (the "Agreement"). Pursuant to the Agreement, the purchaser will purchase substantially all of the assets of the Company in exchange for cash and will, as a result, essentially acquire the business of the Company as a going concern. All or substantially all of the employees of the Company will become employees of the purchaser. In addition the purchaser will assume all of the liabilities and obligations of the Company.
The sale of the business is expected to be completed by the end of XXXXXXXXXX
XXXXXXXXXX
Proposed Transactions:
The Company will modify the Plans pursuant to paragraph XXXXXXXXXX of the Plans to permit option holders to either exercise their options or receive an amount equal to the economic value of their options. This amendment will be made whether or not the assets of the company are sold as noted above. The option holders will be entitled to elect to receive the economic value of the options in whole or in part. The payment of the economic value will result in the cancellation of the corresponding options.
Pursuant to paragraph XXXXXXXXXX of the Plans, the Company will:
a) accelerate the vesting dates of all options such that the options will be fully vested with the option holders prior to the date of the sale of the assets of the company as noted above; and
b)determine the period after the change in control during which the options will be exercisable.
It is anticipated that some of the option holders will elect to receive the cash equivalent of the economic value of their options before XXXXXXXXXX
Purpose of the Proposed Transactions
The purpose of the Plans was and is to attract, retain and motivate qualified employees and to reward such employees for their contributions. However, the sale of substantially all of the Company's assets will XXXXXXXXXX and some employees may not wish to pursue their association with the Company but may instead be interested in being rewarded for their past efforts.
Management feels that to accommodate such employees, the Plans should be modified to allow them to either cash in on the results of their past efforts or to continue holding options to acquire shares of the Company XXXXXXXXXX
Management therefore proposes to modify the Plans to allow employees a greater flexibility through an acceleration of the vesting of the options and by allowing the option holders the right to receive an amount equal to the economic value of the options.
To the best of your knowledge, none of the issues involved in this ruling are being considered by a District Office or Taxation Centre in connection with a tax return already filed, and none of the issues are under objection.
Rulings
Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:
A.Paragraphs 7(3)(b), 18(1)(a) and 18(1)(b) and section 67 of the Act will not apply to deny a deduction to the Company with respect to any amounts paid in cash as a result of an option holder's election to receive the economic value of the stock options.
B.7(1)(b) will not apply as a consequence of the amendment of the Plans in accordance with paragraph XXXXXXXXXX of the Plans to provide, at the option holder's option, the right to receive the economic value of the stock options in the form of cash consideration, and the Plans will not be considered to be new plans as a result of the modification.
C.The amount received in respect of the economic value of a stock option in exchange for the cancellation of that option will be taxable in the option holder's hands in accordance with subsection 7(1)(b) of the Act.
D.We confirm that as a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings provided above.
These rulings are given subject to the general limitations and ualifications set forth in Information Circular 70-6R2 dated September 28, 1990, issued by Revenue Canada Taxation, and are binding provided the proposed transactions are initiated on or before XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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