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 formula in stock option plan provides that exercise price is equal to fair market value of shares on date option is granted - 110(1)(d)(iii).
Position:
Cannot rule that exercise price is the fair market value but will provide comfort by stating that "provided the exercise price is the fair market value" and other requirements of 110(1)(d) are satisfied, then deduction under 110(1)(d) will be available.
Reasons:
Although a ruling which merely repeats the legislation is not normally granted, the only issue here is whether the formula satisfies the condition in 110(1)(d)(iii). Also referred client to Valuations at the applicable TSO.
XXXXXXXXXX
XXXXXXXXXX 961993
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX 1996
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-named client, and further to your letter of XXXXXXXXXX and numerous telephone conversations (XXXXXXXXXX).
FACTS
1.The Corporation is incorporated under the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX ("Parentco"). Parentco is a corporation incorporated under the laws of XXXXXXXXXX and its shares are traded on the XXXXXXXXXX.
2.Parentco has an Incentive Option Plan ("Plan") under which its employees, and employees of certain corporations related to Parentco such as the Corporation, are granted options ("Options") at no cost to the employees to take up fully paid XXXXXXXXXX shares ("Shares") in the capital of Parentco at a specific price ("Option Price"). A copy of the Plan was enclosed with your letter of XXXXXXXXXX.
3.The Option Price is the higher of
(a)XXXXXXXXXX last sale price XXXXXXXXXX on the date the Option is granted XXXXXXXXXX;
(b)the par value of a Share.
4.The Shares are currently trading in the range of $XXXXXXXXXX per share; the par value of a Share is $XXXXXXXXXX.
5.Parentco has XXXXXXXXXX employees in XXXXXXXXXX of whom have been offered Options under the Plan. The Corporation has XXXXXXXXXX employees in Canada, XXXXXXXXXX of whom could be eligible for Options under the Plan ("Affected Employees").
6.The number of Shares which can be issued under the Plan is limited by Plan terms to XXXXXXXXXX% of the issued capital of Parentco. The issued capital of Parentco is currently XXXXXXXXXX.
PROPOSED TRANSACTION
7.Parentco would like to offer Options to Affected Employees which Options in total will number XXXXXXXXXX.
8. XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTION
9.The Plan has been established to provide a method whereby officers and employees of Parentco and its related companies are able to acquire shares in Parentco. The Plan enables participants, such as the Affected Employees, to share in the future growth and prosperity of Parentco. The Plan is intended to encourage employees to have a greater involvement in the achievement of Parentco's objectives, which will benefit all shareholders.
10.To the best of the Corporation's knowledge, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with a tax return already filed, and none of the issues is under objection.
11.The Corporation files its tax returns at the XXXXXXXXXX Taxation Centre and is served by the XXXXXXXXXX Tax Services Office.
RULINGS GIVEN
Provided that
1)the statement of facts and proposed transactions are correct and constitute a complete disclosure of all relevant facts and proposed transactions,
2)an Affected Employee deals at-arm's length with both the Corporation and Parentco at the time immediately after the Option is granted to the Affected Employee,
3)at the time the Share is acquired under the Option it is a prescribed share in accordance with subparagraph 110(1)(d)(ii) of the Income Tax Act at the time the Affected Employee acquires it, and
4)the Option Price is not less than the fair market value of the Share at the time the Option is granted to the Affected Employee, we rule as follows:
The Affected Employee will be entitled to a deduction to the extent permitted by paragraph 110(1)(d) of the Act for the taxation year in which he or she acquires a Share by exercising an Option.
The above advance income tax ruling is 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.
OTHER MATTERS
1.You asked for the Department's position concerning the determination of the fair market value of a minority shareholder's publicly-traded share(s) and we have confirmed the Audit Directorate's position as follows:
The fair market value of a minority holding of publicly-traded shares at any point in time should be the price established on the appropriate stock exchange on the particular date. It is the Department's view that the following criteria should be considered in determining a price which is representative of fair market value:
-The closing price on the particular day (in this case the day the option is granted),
-The average of the high and low prices for the particular day,
-The simple average of a stock's daily trading price, calculated as the total value of the stock traded during the particular day divided by the total number of shares traded,
-The closing price for the most recent, previous day on which there was active trading, or
-The average closing price of the stock over a limited number of trading days immediately before the valuation date.
2.Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the manner of determination of the fair market value of the Shares as set out in the Plan.
Further information concerning valuations may be addressed to the Tax Services Office serving the region in which your client resides.
XXXXXXXXXX
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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