30 November 1996 Ruling 9717003 - GAAR, IDENTICAL PROPERTIES

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 GAAR be applied where property transferred to a personal trust to avoid the application of subsection 47(1)?

Position:

Not in this specific case.

Reasons:

Since shares currently held are subject to an escrow agreement and the acb of the shares will not reflect any section 7 benefit until the shares are disposed of pursuant to 7(1.1), any additional shares acquired under stock options and disposed of during the escrow period could be subject to significant amount of taxes due to the application of 47(1) and 7(1) of the Act. The avoidance of 47(1) in this situation was not considered to be an abuse or misuse of the Act.

XXXXXXXXXX							971700
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-noted taxpayers. 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. He resides at XXXXXXXXXX, deals with the XXXXXXXXXX Tax Services Office and files his income tax returns with the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX. He resides at XXXXXXXXXX, deals with the XXXXXXXXXX Tax Services Office and files his income tax returns with the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX is a public corporation and a taxable Canadian corporation. XXXXXXXXXX became a public corporation as a result of its XXXXXXXXXX Initial Public Offering (the "IPO"). XXXXXXXXXX shares trade on XXXXXXXXXX. The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").

In conjunction with the IPO, XXXXXXXXXX created the XXXXXXXXXX Stock Option Plan (the "Plan"). XXXXXXXXXX provided its management, officers and key employees with options to acquire its common shares under the Plan. Under the terms of the Plan, the option holders may acquire a specific number of shares of XXXXXXXXXX at the market price of the shares on the day prior to the date that the option was granted to the option holder. However, initial options were granted in conjunction with the IPO whereunder the option holder could acquire a specific number of shares at the IPO issue price of the common shares. Fifty percent of the options awarded under the Plan will become exercisable at any time after the third anniversary date of the granting of the option (the "First Vesting Date") and the remaining fifty percent of the options awarded under the Plan will become exercisable at any time after the sixth anniversary date of the granting of the option (the "Second Vesting Date"). Consequently, the earliest First Vesting Date will be XXXXXXXXXX and the earliest Second Vesting Date will be XXXXXXXXXX.

XXXXXXXXXX (hereinafter referred to collectively as "Employees" and singly as the "Employee") hold stock options granted to them by XXXXXXXXXX under the Plan and it is anticipated that the Employees will be granted additional options under the Plan (hereinafter the existing and future options will be referred to as the "Options").

The Employees presently own shares of XXXXXXXXXX which were acquired under stock options granted to them by a predecessor corporation of XXXXXXXXXX which was then a Canadian-controlled private corporation. These stock options were exercised prior to the time that XXXXXXXXXX became a public corporation. A minimum of 70%, and in most cases all, of the shares issued under these stock options continue to be held by the Employees in escrow (the "Escrow Shares") for a period of five years from the date of the IPO (the "Escrow Period") in order to comply with certain holding requirements of the applicable stock exchanges. The adjusted cost base of the shares held by the Employees is nominal. The expression "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act.

Proposed Transactions

The Employees will each establish a separate revocable trust (each such trust referred to herein as the "Trust"), the salient terms of which will be as follows:

the Employee will be the sole trustee (the "Trustee") during his lifetime. If the Trust has not been wound-up by the time he dies, his executors will become the trustees;

the Trust will be wound-up at such time as the Employee is no longer eligible to be a member of the Plan or any other stock option plan established by XXXXXXXXXX and the Employee no longer holds any Options granted under the Plan or any other stock option plan established by XXXXXXXXXX;

the Employee will retain the ability to revoke, alter or amend the terms of the Trust during his lifetime;

in his capacity as trustee, the Employee will have full discretion to dispose of the Trust's property; and

a registered charity will be specified in the Trust deed and will be given a bequest of $XXXXXXXXXX at such time as the conditions set out in paragraphs 7(g) and 11 below are met;

with the exception of the registered charity, the Employee will be the sole income and capital beneficiary of the Trust during his lifetime; and

on the Employee's death, the Trust's assets will be distributed to the same persons and in the same proportion as the residue of the Employee's estate is to be distributed under the terms of his will. If the registered charity has not been paid its bequest of $XXXXXXXXXX at the time of death, it will be entitled to receive such bequest before any assets are distributed to the Employee's beneficiaries under the terms of his will.

Each Employee will settle his Trust with all of the Options held by him and will, in the future, transfer to the Trust any additional options granted to him.

In the event that no Options are exercised by the Trust (or transferred to XXXXXXXXXX by the Trust for cash consideration) and the Employee ceases to be a member of the Plan, the Trust will be wound-up.

Depending on the market conditions and in accordance with the terms of the Plan, the Trustee will cause the Trust to exercise the Options whereupon the Trust will be issued shares of XXXXXXXXXX (hereinafter, the "Shares"). The funds necessary to exercise Options will be loaned to the Trust by the Employee and the Trustee will cause the Trust to dispose of the Shares through a stock exchange.

The first $XXXXXXXXXX received by the Trust, after repayment of any amount loaned to the Trust by the Employee in order to permit the Trust to exercise such Options, will be distributed to the registered charity in accordance with the terms of the Trust. The remaining funds and any subsequent proceeds of disposition will be distributed to the Employee in satisfaction of his capital interest in the Trust.

Any additional after-tax amounts received by the Trust after the Employee has died will be distributed to the beneficiaries specified in subparagraph 7(g) above.

The Plan will be amended to permit the transfer of Options in order to allow the above transactions to take place.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is allow the Employees to exercise the Options and dispose of the shares acquired under the Options without any adverse tax effects resulting from the Escrow Shares.

Additional Information

To the best of your knowledge and the knowledge of the Employees, 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:

Paragraph 7(1)(b) of the Act will not apply to the transfer of the Options to the Trust as described paragraph 8 above.

In determining the adjusted cost base of a share acquired by the Trust under an Option, the benefit included in the Employee's income under paragraph 7(1)(c) of the Act will be added to the cost of the shares pursuant to paragraph 53(1)(j) of the Act.

The Trust and the Employees will be separate and distinct taxpayers for the purposes of subsection 47(1) of the Act.

With respect to Options exercised by the Trust during the Escrow Period, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

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