30 November 1997 Ruling 9816813 - PSP RIGHTS EXCHANGED STOCK 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: Where an employee receives cash equal to the fair market value of a phantom stock plan and simultaneously accepts a new stock option right, will there be tax at that time?

Position: Only in respect of the amount received.

Reasons: Option benefit only taxed when received and PSP plan benefit taxed on receipt of cash.

XXXXXXXXXX
XXXXXXXXXX 981681
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
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

1. XXXXXXXXXX (the “Corporation”) is a taxable Canadian corporation and a public corporation. The expressions “taxable Canadian corporation” and “public corporation” have the meanings assigned by subsection 89(1) of the Income Tax Act (the “Act”).

2. The Corporation carries on an XXXXXXXXXX business, directly for its own account and indirectly through its wholly and partly owned subsidiaries, in Canada and elsewhere in the world. The Corporation's head office is located in XXXXXXXXXX.

The Corporation files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3. Part of the compensation arrangements for the Corporation's senior management employees includes the right to participate in the Corporation's Phantom Stock Plan ("PSP") and Senior Management Stock Option Plan ("SMSOP").

4. The objective of the awards made under each of these plans is to encourage the employees to strive to build the value of Corporation's business. The Board of Directors (the "Board") of the Corporation believes that the senior management employees will be well motivated to achieve that objective if an element of their compensation is linked to the price of the Corporation's common shares ("stock").

5. The Corporation's PSP contains, inter alia, the following terms and conditions:

(a) the Chief Executive Officer determines which senior managers are eligible to participate in the plan;

(b) the Human Resources Committee of the Board (the "Committee") has a discretion to determine if units of phantom stock will be granted annually to the plan participants;

(c) the units in the PSP have no market value but entitle the employee, in accordance with the terms of the plan, to eventually realize the cash equivalent of the appreciation in the value of the Corporation's shares over the issue price for each unit;

(d) the issue price of each unit is determined by reference to the XXXXXXXXXX Stock Exchange's closing market price for the Corporation's stock on the day before the units are issued;

(e) the units cannot be held for longer than ten years; and

(f) dividends are not attributed to the units during the period they are held.

6. The PSP sets the terms upon which the employee can realize upon his or her rights under the plan, which rights vest over a period of three years starting from the first anniversary of the day the units are granted. Vesting does not continue after retirement and there are special rules to deal with the right to exercise after retirement, death or termination.

7. When an employee exercises (or is deemed to exercise) his or her rights under the PSP, the employee receives a cash payment equal to the difference between the notional issue price for each unit and the current fair market value of the Corporation's stock.

8. The SMSOP contains, inter alia, the following terms and conditions:

(a) the Committee approves an employee as a participant under the plan;

(b) the Committee decides upon the number of shares that can be acquired pursuant to options issued to each participant;

(c) the option price for the shares is set by reference to the trading price for the Corporation's stock - generally by reference to the price on the day before the option is granted;

(d) the options vest over a period of three years starting on the first day of the year following the grant; and

(e) the options may be exercised (once vested) at any time up to the tenth anniversary of the grant (the Corporation can cause this period to be shorter) and, if the options are exercised, shares of the Corporation's stock are issued to the employee upon payment of the option price.

9. The SMSOP sets the terms upon which the employee can realize upon his or her rights under the plan. The plan includes limitations upon the right to exercise as a result of retirement, death or termination.

10. At the discretion of the Corporation, an option granted under the SMSOP may be connected with a share appreciation right ("SAR"). A SAR allows an employee to surrender an unexercised option (the "SAR election") to the Corporation and to receive in exchange a cash payment equal to the difference between the fair market value of the stock on the day of the SAR election and the option price for the shares. A SAR election terminates a related option. Unexercised SARs terminate when the related options terminate.

11. All of the senior management employees deal at arm's length with the Corporation.

12. The Corporation's stock that would be issued if an option is exercised are prescribed shares under Regulation 6204.

13. The option price for the options granted under the SMSOP is equal to or greater than the fair market value of the Corporation's stock on the day the options are granted.

PROPOSED TRANSACTIONS

14. The Corporation proposes to extend a unilateral offer (the "Offer") to all of the participants with existing rights under the PSP (the “Participants”). The Offer will allow the Participants to:

(a) receive an immediate cash payment equal to the total amount computed when the current fair market value of a share of the Corporation exceeds the notional strike price for each unit held in the PSP by the Participant (the “Cash Payment”); and

(b) receive one option under the SMSOP to purchase a share of the Corporation's stock for each unit held under the PSP. Each option:

(i) will provide the Participant with a right to acquire a share of the Corporation's stock at a strike price equal to the weighted average trading price for the Corporation's stock on the day before the offer is made; and

(ii) will become fully vested on the same day as the unit of the PSP which it replaces.

15. Each option will include the right to make a SAR election which will allow the Participant to elect to dispose of his or her option in exchange for a cash payment equal to the difference between the fair market value of the stock on the day the election is made and the option price for the Corporation's stock.

16. If a Participant accepts the Offer and acquires options under the SMSOP, the Participant’s rights under the PSP will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

17. The Corporation would like to continue to encourage its senior management employees to increase the value of the Corporation and its business by having an element of their compensation linked to the price of the Corporation’s stock and to minimize the amount of those benefits that has to be charged against the Corporation’s income statement.

ADDITIONAL INFORMATION

18. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Corporation or of a person related to the Corporation;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Corporation or of a person related to the Corporation;

(c) is under objection by the Corporation or by a person related to the Corporation;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described herein, we rule as follows:

A. The amount to be included in a Participant’s income for a year, pursuant to the Offer, in respect of the disposition of existing rights under the PSP is, under subsection 5(1) of the Act, the Cash Payment received from the Corporation in the year as described in subparagraph 14(a) above;

The above ruling, which is based on the Act in its present form and does not take into consideration any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada 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
Interpretations Directorate
Policy and Legislation Branch