30 November 1996 Ruling 9716083 - AMERICAN DEPOSITARY SHARES, 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:

1)Are American Depositary Shares ("ADS") considered shares for purposes of section 7? 2) Would the addition of dividend equivalent rights to a stock option constitute additional rights for subsection 7(1.4)?

Position: 1) Yes 2) Yes

Reasons:

1)We have previously concluded that an ADS is a share for purposes of subsection 146(1).  2) Dividend Equivalents are rights to cash payments which is not permitted under 7(1.4).
XXXXXXXXXX
XXXXXXXXXX							971608
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

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. 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 corporation organized under the laws of Canada and is a taxable Canadian corporation. XXXXXXXXXX is an indirect wholly-owned subsidiary of XXXXXXXXXX. The common shares of XXXXXXXXXX are traded through the XXXXXXXXXX. XXXXXXXXXX acquired its interest in XXXXXXXXXX. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").

XXXXXXXXXX deals with the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX is a public limited company

XXXXXXXXXX

XXXXXXXXXX, together with its subsidiaries, is

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

In XXXXXXXXXX, certain employees of XXXXXXXXXX and its affiliates became eligible to receive options to acquire common shares of XXXXXXXXXX pursuant to the XXXXXXXXXX Stock Option Plan (the "Pre-Merger Agreement Options"). Under the terms of the Pre-Merger Agreement Options, the option holder is entitled to exercise up to XXXXXXXXXX% of the options on or after the first anniversary of the option grant date, the option holder is entitled to exercise up to XXXXXXXXXX% of the options (including any exercised options) on or after the second anniversary of the granting of the option and the option holder is entitled to exercise all of the remaining options on or after the third anniversary of the granting of the option. The Pre-Merger Agreement Options expire on the tenth anniversary of the granting of such options.

Pursuant to an "Agreement and Plan of Merger" (the "Merger Agreement") dated XXXXXXXXXX agreed to a certain merger (the "Merger"). Under the terms of the Merger Agreement, the following will take place:

XXXXXXXXXX will be merged with and into XXXXXXXXXX (the "Merged Corporation"). XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX which was incorporated under the laws of Delaware in XXXXXXXXXX solely for the purpose of the Merger.

The Merged Corporation will be a wholly-owned subsidiary of XXXXXXXXXX.

XXXXXXXXXX will be renamed XXXXXXXXXX (hereinafter any reference to XXXXXXXXXX, subsequent to the Merger, will be a reference to XXXXXXXXXX).

Each outstanding common share of XXXXXXXXXX (other than any shares held by XXXXXXXXXX or any wholly-owned subsidiary of XXXXXXXXXX or treasury shares of XXXXXXXXXX (all of which will be cancelled on the Merger)) will be converted into a right to receive XXXXXXXXXX. Each XXXXXXXXXX ADS will represent XXXXXXXXXX ordinary shares of XXXXXXXXXX and will be evidenced by American Depositary Receipts ("XXXXXXXXXX ADRs").

The Merger Agreement provides that XXXXXXXXXX will discuss, in general terms, the approach that will be taken with respect to XXXXXXXXXX compensation and benefits programs, including any compensation and benefits programs to be adopted during the period beginning the date that the Merger Agreement was signed and ending on the date of the actual Merger (the "Effective Date"). XXXXXXXXXX also agrees to honour all employment agreements and retention arrangements with current and former employees of XXXXXXXXXX and its subsidiaries, to the extent entered into or adopted by XXXXXXXXXX pursuant to the Merger Agreement. Section XXXXXXXXXX of the Merger Agreement deals with the effect of the Merger on the stock option plans of XXXXXXXXXX and includes the following provisions:

After entering into the Merger Agreement and before the Effective Date (the "Merger Period"), XXXXXXXXXX is permitted to grant to certain of its employees, Senior Retention Incentive Stock Units ("Senior Retention ISUs"), Special Incentive Stock Units ("Special ISUs") and 1997 Incentive Stock Units ("1997 ISUs"). Under the Senior Retention ISUs, Special ISUs and the 1997 ISUs, an employee is entitled to receive a certain number of XXXXXXXXXX common shares for no consideration and, subsequent to the Merger, the employee is entitled to receive a certain number of XXXXXXXXXX ADSs for no consideration. Certain employees of XXXXXXXXXX and its affiliates have been granted Senior Retention ISUs, Special ISUs and 1997 ISUs (hereinafter collectively referred to as the "XXXXXXXXXX ISUs"). In the case of Senior Retention ISUs and Special ISUs, XXXXXXXXXX% of the ISUs vest on the Effective Date, an additional XXXXXXXXXX% vest on the first anniversary of the Effective Date and the remaining XXXXXXXXXX% vest on the second anniversary of the Effective Date. In the case of 1997 ISUs, XXXXXXXXXX% vest on each of the first and second anniversaries of the granting of the particular 1997 ISU and the remaining XXXXXXXXXX% vest on the third anniversary of the granting of the particular 1997 ISU.

Each of the XXXXXXXXXX ISUs contemplates the Merger. Paragraph XXXXXXXXXX of each XXXXXXXXXX ISU agreement provides that in the event of the Merger, all references to the Company (i.e. XXXXXXXXXX) shall be deemed to be references to XXXXXXXXXX and its successors and all references to XXXXXXXXXX Stock (i.e. common shares of XXXXXXXXXX) shall be deemed to be references to ordinary shares of XXXXXXXXXX represented by XXXXXXXXXX ADSs. Paragraph XXXXXXXXXX of each XXXXXXXXXX ISU agreement provides that upon the occurrence of the Merger, each XXXXXXXXXX ISU outstanding immediately prior to the Effective Date will be converted into:

an ISU to receive XXXXXXXXXX ADSs, on the same terms and conditions applicable to the XXXXXXXXXX ISUs immediately prior to the Effective Date; and

$XXXXXXXXXX cash consideration (the "Cash Component") which will be paid promptly after the Effective Date.

Paragraph XXXXXXXXXX of each XXXXXXXXXX ISU agreement provides that on and after the Effective Date, the company continuing from the merger of XXXXXXXXXX will pay to the employee as soon as possible after the applicable record date an amount equal to any dividends declared with respect to a XXXXXXXXXX share for each ISU held on the applicable record date (the "Dividend Equivalents").

During the Merger Period, XXXXXXXXXX is permitted to grant options to acquire common shares of XXXXXXXXXX ("1997 Options") to certain of its employees substantially on the terms and conditions described in Annex A to the Merger Agreement. XXXXXXXXXX has granted and may, prior to the Effective Date, continue to grant 1997 Options to a number of employees of XXXXXXXXXX and its affiliates. Paragraph XXXXXXXXXX of the 1997 Options provides that options that are outstanding at the Effective Date of the Merger will be exchanged for options to acquire XXXXXXXXXX ADSs as specified in the Merger Agreement. Paragraph XXXXXXXXXX of the 1997 Option entitles the option holder to Dividend Equivalents after the Merger as required under the Merger Agreement. In addition, a notional amount of interest will accrue on the Dividend Equivalents and this notional interest will be paid when the Dividend Equivalents are paid to the 1997 Option holder.

During the Merger Period, XXXXXXXXXX is required to ensure that each option to purchase common shares of XXXXXXXXXX that was granted pursuant to any XXXXXXXXXX Stock Option Plans entered into prior to the date of the Merger Agreement and which remain outstanding during the Merger Period, become immediately vested and fully exercisable prior to the Effective Date so that an option holder will be able to exercise his or her option. Consequently, the Pre-Merger Agreement Options will be fully exercisable prior to the Effective Date. Where the option holder exercises his or her right prior to the Effective Date, the shares of XXXXXXXXXX acquired by the option holder will be converted to the right described in subparagraph 7(d) above.

Each XXXXXXXXXX stock option (including each 1997 Option and each Pre-Merger Agreement Option) which remains outstanding on the Effective Date is to be converted, on the Effective Date, into an option to acquire, on the same terms and conditions as were applicable under the XXXXXXXXXX Stock Option Plans (as modified by the Merger Agreement) that number of XXXXXXXXXX ADSs (the "Converted Options") determined by multiplying the number of XXXXXXXXXX common shares under the option by the "Conversion Ratio", rounded if necessary, to the nearest whole XXXXXXXXXX ADS. The "Conversion Ratio" is defined to mean the sum of

XXXXXXXXXX, and

the quotient determined by dividing $XXXXXXXXXX by the average of the last sale prices on the XXXXXXXXXX of the XXXXXXXXXX ADS on each of the five consecutive trading days ending on the last trading day immediately prior to the day on which the Effective Date occurs.

Each Converted Option will be amended as of the Effective Date to provide for the payment of Dividend Equivalents equal to the amount of any dividends that would have been paid to the holder following the Effective Date had the XXXXXXXXXX ADS underlying such options been delivered and outstanding on the applicable dividend record date. Any such Dividend Equivalents will actually be paid when the option is exercised. If the option is not exercised, the Merger Agreement currently provides that the Dividend Equivalents will be forfeited.

XXXXXXXXXX agrees to take all corporate action necessary to have a sufficient number of XXXXXXXXXX ADSs available for delivery to satisfy the XXXXXXXXXX stock options and ISUs.

Proposed Transactions

The Merger will be completed shortly after the satisfaction of all of the conditions set out in the Merger Agreement and receipt of the appropriate regulatory approvals. It is expected that this could happen XXXXXXXXXX.

The Merger Agreement will be amended to provide that the Dividend Equivalents will only be paid on vested 1997 Options whether exercised or not. The Dividend Equivalents and any notional interest, described in subparagraph 8(b) above, will be payable at the earlier of:

the exercise of the option;

the expiration of the allowed exercise period following termination of the option holder's employment; and

the expiration of the option.

However, Dividend Equivalents will not be paid to an option holder whose employment is terminated for cause.

XXXXXXXXXX will seek an amendment to the Merger Agreement (the "Merger Amendment") to provide that any Canadian-resident employees of XXXXXXXXXX or any of its affiliates (the "Affected Employees") who are subject to tax under the Act on their employment income and who hold Pre-Merger Agreement Options will not be entitled to any Dividend Equivalents in respect of such Pre-Merger Agreement Options.

XXXXXXXXXX will establish a special retention bonus plan for its executives which will include the Affected Employees. In order to retain its executives, XXXXXXXXXX will, at its discretion, pay bonuses to its executives.

XXXXXXXXXX will convert Pre-Merger Agreement Options held by Affected Employees into Converted Options in accordance with the terms of the Merger Agreement, as described in subparagraph 8(d) above, as amended by the Merger Amendment described in paragraph 11 above.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to complete the Merger between XXXXXXXXXX as contemplated in the Merger Agreement but in a manner which does not disadvantage Affected Employees who hold Pre-Merger Agreement Options.

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 proposed transactions are completed in the manner described herein, we rule as follows:

Provided the Merger Amendment is completed as described in paragraph 11 above, the provisions of subsection 7(1.4) will apply in respect of the conversion of the Pre-Merger Agreement Options held by Affected Employees into Converted Options.

The automatic conversion, under the terms of the 1997 Option, of the reference to shares of XXXXXXXXXX to shares of XXXXXXXXXX will not result in the creation of a new stock option for the purposes of section 7 of the Act.

The automatic conversion, under the terms of the XXXXXXXXXX ISUs, of the reference to shares of XXXXXXXXXX to shares of XXXXXXXXXX will not result in the creation of a new stock option for the purposes of section 7 of the Act.

The Cash Component, described in subparagraph 8(a) above, received by an Affected Employee as a result of the Merger will be included in the Affected Employee's income under paragraph 6(1)(a) of the Act.

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, Customs, Excise, and Taxation provided that the proposed transactions are completed within six months of the date of this letter.

Yours truly,

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