30 November 1995 Ruling 9632153 - OPTIONS WITH SAR RIGHTS

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)Will a SAR be an SDA where partial vesting under SAR occurs on each anniversary date?

2)Will 7(1)(b) apply where employee requests cash payment for value of stock option and employer chooses to settle its obligation by issuing shares having fmv equal to economic value of option?

Position:

1)question of fact, no ruling

2)no

Reasons:

1)position taken in ATR-45

2)7(1)(a) applies becasue shares issued under agreement

XXXXXXXXXX							963215
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your letters of XXXXXXXXXX you informed us of additional information in respect of, and amendments to the facts described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Facts

XXXXXXXXXX is a taxable Canadian corporation and a public corporation whose shares are listed on XXXXXXXXXX The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").

The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares and an unlimited number of preferred shares.

XXXXXXXXXX has a number of wholly owned subsidiary corporations. XXXXXXXXXX and its subsidiaries serve

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX currently has a stock option plan (the "Existing Plan") for its officers and employees as well as officers and employees of its subsidiaries. There are currently approximately XXXXXXXXXX shares that may be acquired through options granted under the Existing Plan. Under the terms of the Existing Plan, the aggregate number of common shares that may be issued by XXXXXXXXXX.

Proposed Transactions

The board of directors of XXXXXXXXXX (the "Board") will amend the Existing Plan such that some options already issued will provide the optionee with the right to receive the economic value of the stock options in the form of cash (the "Right to Receive Cash") in exchange for the options. Options with the Right to Receive Cash, whether already issued or to be issued, will be considered to be issued pursuant to the "Option/SAR Plan" while options without the Right to Receive Cash, whether already issued or to be issued, will be considered to be issued under the Existing Plan. The essential terms and conditions of the Option/SAR Plan will be as follows:

the Option/SAR Plan will be administered by the Board;

regular salaried officers or employees of XXXXXXXXXX or its subsidiaries may be granted an option by the Board to purchase common shares of XXXXXXXXXX for an amount that is not less than the fair market value of the common shares on the date of the granting of the particular option;

the aggregate number of shares that may be issued under the Existing Plan and the Option/SAR Plan will be XXXXXXXXXX common shares;

each option will expire after XXXXXXXXXX years from the date of grant, or after such shorter period, not less than XXXXXXXXXX years, as the Board shall determine, but within this period an option may be exercised in whole or in part at any time by the optionee, unless the Board shall limit the number of common shares in respect of which options may be exercised in any one period of time;

each option will expire on the effective date of termination of employment for any reason other than retirement at or after normal retirement age. In the event of qualifying retirement, each option shall become exercisable on the date of retirement and may be exercised at any time up to and including a date 12 months following the date of retirement;

an employee will be entitled, at his or her option, to surrender to XXXXXXXXXX any stock option which the employee is otherwise entitled to exercise and request receipt of an amount of cash equal to the amount by which the aggregate market value of the related common shares subject to the stock option exceeds the aggregate purchase price for those common shares (the "SAR Amount"). The Board may elect to settle XXXXXXXXXX obligation to pay the SAR Amount by the payment of cash equal to the SAR Amount, issuance of common shares having a fair market value equal to the SAR Amount or any combination of cash and common shares having an aggregate fair market value equal to the SAR Amount; and

the Board may, by resolution, suspend or amend the Option/SAR Plan except that any such amendment, suspension or termination shall not affect any unexercised rights under the Option/SAR Plan without the optionee's consent to such changes.

The Board will also establish a stock appreciation rights plan (the "SAR Plan"). The essential terms and conditions of the SAR Plan are as follows:

the SAR Plan will be administered by XXXXXXXXXX

the XXXXXXXXXX will from time to time determine the particular XXXXXXXXXX and/or other key officers and managers who are eligible for participation ("Eligible Management");

the XXXXXXXXXX may grant stock appreciation rights ("SARs") to Eligible Management who, in its view, are deserving because of the value of his or her future services to XXXXXXXXXX or the relevant subsidiary;

the maximum number of SARs to be outstanding at any time shall not exceed XXXXXXXXXX percent of the issued and outstanding common shares of XXXXXXXXXX

each of the SARs will expire not earlier than XXXXXXXXXX years from the date of grant and not later than XXXXXXXXXX years from the date of the grant, as determined by the XXXXXXXXXX at the time of grant, and each of the SARs will be exercisable as follows:

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

each of the SARs will expire on the effective date of termination of employment for any reason other than retirement at or after normal retirement age. In the event of qualifying retirement, the SARs shall become exercisable on the date of retirement and may be exercised at any time up to and including a date 12 months following the date of retirement;

the XXXXXXXXXX may limit the number of SARs which may be exercised in any one period of time;

upon an election of an individual to exercise his or her SAR, XXXXXXXXXX will pay the individual within five days following such exercise an amount equal to the number of common shares in respect of which the SAR is exercised multiplied by the difference between the market value of such shares on the date of exercise and the market value of such shares on the date the SAR was granted; and

the SAR Plan may be amended, modified or otherwise changed by the Board provided that any such amendments, modifications or changes shall not affect outstanding SARs without the consent of the holders of such SARs.

Purpose of the Proposed Transactions

The purpose of the addition of the Right to Receive Cash to the Existing Plan to create the Option/SAR Plan is to permit option holders to either exercise their options or receive an amount equal to the economic value of their options where it is their intention to exercise the stock option and to dispose of the common shares acquired under the option.

The purpose of the Option/SAR Plan and the SAR Plan is to promote the interests of XXXXXXXXXX and its shareholders by providing incentive compensation to its key officers and employees.

Additional Information

To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

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, and that the terms of the Plans are as set out in your submissions, we rule as follows:

The Option/SAR Plan and the SAR Plan will not constitute retirement compensation arrangements as that term is defined in subsection 248(1) of the Act. However, this ruling only applies to:

the Option/SAR Plan provided there are no changes to it pursuant to paragraph 4(g) above; and

the SAR Plan provided there are no changes to it pursuant to paragraph 5(i) above.

The Option/SAR Plan will not constitute a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act, provided there are no changes to the Option/SAR Plan pursuant to paragraph 4(f).

The SAR Plan will not constitute a "salary deferral arrangement" prior to the SARs becoming exercisable under the SAR Plan, provided there are no changes to the SAR Plan pursuant to paragraph 5(i) above.

The addition of the Right to Receive Cash to an option under the Existing Plan held by an employee to create the Option/SAR Plan will not result in the disposition of any rights under the existing option by the employee for the purposes of paragraph 7(1)(b) of the Act or the inclusion of any benefit in the hands of the employee under paragraph 6(1)(a) of the Act.

Provided there are no changes to the Option/SAR Plan pursuant to paragraph 4(g) above, where an employee exercises his or her Right to Receive Cash under the Option/SAR Plan and the employer pays cash to settle all or part of its obligation under the Right to Receive Cash (the "Cash Portion"):

the Cash Portion of the SAR Amount received by the employee in respect of the economic value of the stock option exchanged for the cancellation of that option under the particular plan will be taxable in the employee's hands in accordance with paragraph 7(1)(b) of the Act; and

provided the conditions in paragraph 110(1)(d) of the Act are satisfied, the Cash Portion received by the employee will be eligible for the deduction under paragraph 110(1)(d) of the Act.

Provided there are no changes to the Option/SAR Plan pursuant to paragraph 4(g) above, where an employee exercises his or her Right to Receive Cash under the Option/SAR Plan and the employer settles all or part of its obligation under the Right to Receive Cash by issuing common shares of its capital stock (the "Share Portion"):

the Share Portion of the SAR Amount received by the employee in respect of the economic value of the stock option exchanged for the cancellation of that option under the particular plan will be included in the employee's income under paragraph 7(1)(a) of the Act; and

the Share Portion received by the employee and deemed to be a benefit under paragraph 7(1)(a) of the Act will not be eligible for the deduction under paragraph 110(1)(d) of the Act.

Where an employee exercises his or her right under a SAR Plan in the year the right becomes exercisable, the amount received by the employee will be included in the employee's income under subsection 5(1) or paragraph 6(1)(a) of the Act in the year of receipt, provided there are no changes to the SAR Plan pursuant to paragraph 5(i) above.

XXXXXXXXXX will be entitled to claim a deduction in computing its income from business under subsection 9(1) within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act for the Cash Portion payable under the Option/SAR Plan and for amounts payable under the SAR Plan. However, this ruling only applies to:

the Option/SAR Plan provided there are no changes to it pursuant to paragraph 4(g) above; and

the SAR Plan provided there are no changes to it pursuant to paragraph 5(i) 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 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise, and Taxation provided that the Plans are implemented within six months of the date of this letter.

Comments

You have requested a ruling that the right to exercise one-third of the SARs at the end of each year under the SAR Plan would not constitute a salary deferral arrangement within the meaning assigned by subsection 248(1) of the Act. As stated in the Editor's Note to Income Tax Ruling ATR-45, no ruling can be provided with respect to the right after it is exercisable because it is not possible to determine whether the main purpose of the creation of the right to receive the amount under the SAR Plan is to postpone tax otherwise payable under the Act.

Yours truly,

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