30 November 1996 Internal T.I. 970820A - SAR, VESTED 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:

Will we rule that a SAR will not be an SDA after the right to cash in vests and participant chooses not to cash-in?

Position: No

Reasons: Addressed in ATR-45

XXXXXXXXXX							970820
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of the facsimile from XXXXXXXXXX, detailing additional proposed transactions and providing a copy of the revised phantom stock plan. We also acknowledge the information provided during our various telephone conversations XXXXXXXXXX.

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

Facts

1. XXXXXXXXXX (the "Employer") was incorporated under the Canada Business Corporations Act on XXXXXXXXXX. The Employer is a Canadian-controlled private corporation and a taxable Canadian corporation. The expressions "Canadian-controlled private corporation" and "taxable Canadian corporation" have the meanings assigned by subsections 125(7) and 89(1) of the Income Tax Act (the "Act"), respectively.

The Employer deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre. The Employer's fiscal year ends on XXXXXXXXXX.

2. The authorized capital of the employer consists of:

(a) an unlimited number of Class XXXXXXXXXX common shares;

(b) an unlimited number of Class XXXXXXXXXX common shares; and

(c) an unlimited number of Class XXXXXXXXXX common shares.

3. The issued and outstanding share capital consists of:

(a) XXXXXXXXXX Class XXXXXXXXXX common shares; and

(b) XXXXXXXXXX Class XXXXXXXXXX common shares.

The issued and outstanding Class XXXXXXXXXX common shares have an aggregate paid-up capital of $XXXXXXXXXX and they are all owned by XXXXXXXXXX. The issued and outstanding Class XXXXXXXXXX common shares have an aggregate paid-up capital of $XXXXXXXXXX and they are all owned by XXXXXXXXXX.

4. The Employer is engaged primarily in the business of XXXXXXXXXX.

Proposed Transactions

5. The issued and outstanding Class XXXXXXXXXX common shares of the Employer will be split XXXXXXXXXX shares for each issued and outstanding share and the issued and outstanding Class XXXXXXXXXX common shares of the Employer will be split XXXXXXXXXX shares for each issued and outstanding share.

6. The Employer intends to implement a Share Appreciation Rights Plan (the "Plan") for the benefit of certain arm's length employees (the "Participating Employees"). The terms of the Plan will include:

(a) A definition section defining the following terms:

i. "Authorized Units" means the number of units that the Board of Directors may award to Participants which is limited to XXXXXXXXXX of the aggregate number of Class XXXXXXXXXX common shares and Class XXXXXXXXXX common shares of the Employer that are issued and outstanding after the stock split described in paragraph 5 above;

ii. "Equity Event" means either of the following two events:

a. the sale of all of the issued and outstanding shares of the Employer to an arm's length purchaser; or

b. the issuance of a receipt for a final prospectus in respect of the Employer by the Ontario Securities Commission and delivery of notice in writing thereof to the Participants within 30 days;

iii. "Median Market Price Earnings Multiple" means the figure calculated annually by an independent business valuator based upon its research of the public market place, as at the valuation date, as it relates to the business of the Employer. This number will be valid until the following year's valuation date.

iv. "Triggering Event" means the occurrence of any of the following events:

a. the death of the Participant;

b. the insolvency or bankruptcy of the Participant;

c. the permanent disability of the Participant; or

d. the termination of the Plan by the Board of Directors of the Employer and delivery of notice thereof to the Participant within thirty days.

(b) The Employer may issue units (the "Units") to Participants under the Plan. The Units will be awarded for no consideration and will have no initial value (see formula below). The Board of Directors will have full discretion as to the number of Units that will be issued, when the Units will be issued, which Participants will receive Units, and the conditions attached to the particular Units.

(c) The Board of Directors will allocate Units based on:

i. a determination that it would be in the Employer's best interest if the Participant remains with the Employer; and

ii. the future performance expected from the Participant.

(d) A Participant will have the right to redeem up to XXXXXXXXXX% of his or her Units (hereinafter referred to as the "Redeemable Units"), in accordance with 6(e)ii) below, on or after each anniversary of the date that the particular Units were issued (the "Issue Date"). Where a Participant does not redeem any of, or fewer than, his or her Redeemable Units on or after the first anniversary of the Issue Date, the Participant will be entitled to redeem the balance of the Redeemable Units remaining from the first anniversary plus an additional XXXXXXXXXX% on or after the second anniversary of the Issue Date. Consequently, on or after the fifth anniversary of the Issue Date, the Participant will be entitled to redeem all of the Units received on the particular Issue Date.

The period that begins when a Unit is issued and ends on the date that a Unit becomes a Redeemable Unit shall be referred to as the "Qualifying Period". The period that begins after the Unit becomes a Redeemable Unit and ends on the date that the Redeemable Unit is actually redeemed or cancelled shall be referred to as the "Holding Period".

(e) Subject to the provision that adequate working capital is maintained by the Employer to operate in an effective manner, the decision of which is at the absolute discretion of management, the following redemptions for an amount equal to the Redeemable Unit's fair market value, as determined under 6(f) below, are permitted under the Plan:

i. On the occurrence of a Triggering Event, the Participant or his or her legal representative shall be deemed to have terminated his or her participation in the Plan and the Redeemable Units held by the Participant shall be redeemed by the Employer.

ii. A Participant notifies the Employer in writing within 180 days after the end of any fiscal year that he or she elects to have his or her Redeemable Units redeemed.

iii. In the event that a Participant is terminated by the Employer whether or not for cause, the Employer may, at its discretion, within thirty days of the termination redeem the Redeemable Units for nil consideration.

iv. At any time in any financial year, the Employer may at its option, by written notice to the Participant redeem any Redeemable Units held by the Participant.

(f) For purposes of the Plan, a formula will be used to determine the annual increase or decrease in the value of a Unit (the "Annual Adjustments"). The fair market value of a Unit will be determined by taking the sum of the Annual Adjustments for each year during the period that begins on the Issue Date and ends on the most recently ended fiscal year before the redemption date. If a Unit's Issue Date is not the fiscal year end date or within the month following the fiscal year end, the Annual Adjustment for the first year shall be computed by multiplying the Annual Adjustment for the fiscal year which includes the Issue Date by the fraction determined when the number of months in the period which commences with the month that includes the Issue Date and ends on the fiscal year end is divided by twelve. The value of each Unit is not guaranteed so if the Annual Adjustments are negative then the Unit will have a negative value. The Annual Adjustment will be determined by the following formula:

Value = ((A/2)/B) where

A = The average for the last three fiscal years of the amounts determined for each fiscal year by taking XXXXXXXXXX percent (XXXXXXXXXX%) of the sales revenue for a year plus XXXXXXXXXX percent (XXXXXXXXXX%) of the Mean Market Price Earnings Multiple multiplied by the consolidated net income after taxes as reported in the consolidated financial statements of the Employer for that year.

B = The sum of the issued and outstanding Class XXXXXXXXXX common shares and Class XXXXXXXXXX common shares of the Employer (after the stock split described in paragraph 5 above) and the Authorized Units as of the last day of the particular fiscal year.

(g) A Participant cannot transfer or assign rights or Units under the Plan.

(h) The rights under the Plan do not replace any of the Participant's rights to employment earnings.

(i) All Units that are redeemed under the Plan will be cancelled.

(j) The terms and conditions of the Plan may be amended, modified, terminated or otherwise changed, in whole or in part, in any manner by the Board of Directors at any time and from time to time, without prior notice to the Participants.

7. The Board of Directors may, at its discretion, at any time after the Issue Date request that certain Participants make a non-interest bearing loan to the Employer. The Participant is not obligated to make the loan and the loan will not affect the Participant's rights under the Plan. Under the loan agreement, a Participant, that makes a loan to the Employer, will have the right to acquire Common Shares as specified in the loan agreement at the time immediately before the occurrence of an Equity Event. The aggregate purchase price to be paid by the Participant for the Common Shares will be equal to net after tax amount received by the Participant on the redemption of some or all (as specified in the loan agreement) of his or her Redeemable Units. For greater certainty, a Participant that exercises his or her option under the loan agreement will be required to redeem the number of Redeemable Units specified in the loan agreement immediately before the exercising of the option.

Purpose of the Proposed Transactions

8. The purpose of the Plan is to promote the entrepreneurship of the Employer's Participants, to motivate the Participants to maximize the long-term value of the Employer, and to provide incentive for the Participants to remain with the Employer.

Additional Information

9. To the best of your knowledge and the knowledge of the Employer, 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 of the relevant facts and proposed transactions, that the terms of the Plan are as set out above and that the terms of the Plan are not amended, modified or otherwise changed as allowed in subparagraph 6(j) above, we rule as follows:

A. The Plan does not constitute a "salary deferral arrangement" at the end of the Qualifying Period within the meaning of subsection 248(1) of the Act.

B. The Plan does not constitute a "retirement compensation arrangement" within the meaning of subsection 248(1) of the Act.

C. No benefit will be deemed to have been received by a Participant for the purposes of paragraph 6(1)(a) of the Act by reason of the issuance, in and by itself, of Units pursuant to the Plan.

D. Amounts payable to a Participant under the Plan between the date the Units are issued and the end of the Qualifying Period will not be included in income under subsection 5(1) or paragraph 6(1)(a) of the Act until the year of receipt.

E. The Employer will be entitled to claim a deduction in computing its income from business for the fiscal year under subsection 9(1) of the Act, within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act, for amounts payable under the Plan between the date the Units are issued and the end of the Qualifying Period in the taxation year in which such Units are redeemed.

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 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Plan is implemented as described herein within six months of the date of this letter.

Yours truly,

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