1998 Ruling 9829193 - STOCK OPTION, CASH OUT

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: Is the proposed plan an agreement to issue shares for the purposes of section 7 of the Act?

Position: Yes.

Reasons: The plan provides employees with the ability to acquire shares of the parent corporation.

XXXXXXXXXX
XXXXXXXXXX 982919
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

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 in respect of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Relevant Facts

1. XXXXXXXXXX (the "Company") was incorporated under the Business Corporations Act of XXXXXXXXXX. The Company is a subsidiary wholly-owned corporation, within the meaning assigned by subsection 248(1) of the Income Tax Act (the "Act"), of XXXXXXXXXX (the "Parent").

The Company's address is XXXXXXXXXX. The Company files its tax returns with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.

2. The Parent was incorporated under the laws of the XXXXXXXXXX and is a resident of the United States with its head office in XXXXXXXXXX. Parent's common shares are listed and trade on the XXXXXXXXXX Stock Exchange.

3. The Company has, at present, XXXXXXXXXX. The Company has approximately XXXXXXXXXX employees.

4. All employees of the Company deal at arm's length with the Parent and the Company for purposes of the Act. All employees that will participate in the proposed plan described in paragraph 5 below will be residents of Canada for purposes of the Act.

Proposed Transaction

5. The Company will establish the "XXXXXXXXXX" (the "Plan"). The Plan will be administered by the XXXXXXXXXX (the "Committee") established by the Company's Board of Directors (the "Board"). The terms and conditions of the Plan that are relevant to the proposed transactions may be summarized as follows:

(a) The Committee will select the employees of the Company that will participate in the Plan. Based upon the job performance of an employee, the Committee may grant the particular employee (the "Participant") an Option (the "Option") to acquire shares of the Parent. The grant of the Option will be communicated to the Participant through a Notice of Stock Incentive Award (the "Notice"). The Notice will provide the Participant with the following information:

i) the total number of shares that could be acquired under the Option;

ii) the price to be paid by the Participant to acquire the shares of the Parent (the "Option Exercise Price");

iii) the number of shares that could be acquired each year under the vesting provisions within the Option. Generally, a Participant will be entitled to acquire XXXXXXXXXX of the shares granted under the Option for each full year of employment after the date that the Option is granted to the Participant. However, the Committee may, at its discretion, grant Options that will vest based on performance-based criteria; and

iv) the right to elect to receive the cash equivalent in lieu of purchasing shares under the Option.

(b) The Option Exercise Price will be determined by the Committee (it is expected that such price will generally be equal to the fair market value of the Parent's shares on the date that the Option is granted to the Participant). Fair market value is defined in the Plan to mean that day's closing price for the Parent's common shares on the XXXXXXXXXX Stock Exchange. If the shares are not listed at that time, the Committee will determine the fair market value.

(c) The Participant will have the right to elect to receive the shares of the Parent (after paying the Option Exercise Price for such shares) or to receive cash (the "Cash Amount") from the Company equal to the number of shares that may be acquired under the Option multiplied by difference between the fair market value of a share of the Parent on the date the Option is exercised and the Option Exercise Price for each share under the Option.

(d) Where a Participant chooses to acquire shares of the Parent under the Option, the Participant will remit an amount equal to the Option Exercise Price for such shares to the Company and the Company, acting as the Participant's agent, will acquire shares from the Parent in the name of the particular Participants. Once the Parent issues the shares acquired under the Plan, the Company will distribute the shares to the Participants.

(e) The Plan provides the following rights on termination:

i) Where the Company terminates a Participant's employment for cause, the Participant will forfeit all rights under the Plan;

ii) Where the Company terminates a Participant's employment without cause, the Participant will have three months from the actual termination date to acquire shares of the Parent under any vested Options. All rights in respect of unvested Options will be forfeited as of the actual termination date;

iii) Where the Participant dies, the Participant's estate (or a beneficiary) will be entitled, for twelve months from the date of the Participant's death, to acquire shares of the Parent in respect of Options that have vested as of the date of the Participant's death; and

iv) In all other cases, the Committee will determine what rights a Participant will have under the Plan in respect of vested and unvested Options.

6. The Board may amend or terminate the Plan at any time without the approval of any of the Participants. However, any amendment or termination will not affect a Participant's rights in respect of vested Options.

Purpose of the Proposed Transaction

7. The purpose of establishing the Plan is to provide employees that can provide a significant contribution to the Company with incentives that are based on the increase in the value of the shares of the Parent.

Additional Information

8. We understand that to the best of your knowledge and that of the Company, none of the issues involved in this ruling request:

(a) are in an earlier return of the Company or a related person;

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

(c) are under objection by the Company or a related person;

(d) are before the courts; and

(e) are the subject of a ruling previously issued by this Directorate to the Company or a related person.

Rulings Given

Provided that the statement of relevant facts and proposed transaction are correct and constitute a complete disclosure of all of the relevant facts and proposed transaction, and that the terms of the Plan are as described in paragraph 5 above, we rule as follows:

A. The granting of an Option to a Participant, as described in subparagraph 5(a) above, will constitute an agreement to issue shares for the purposes of subsection 7(1) of the Act.

B. The amount to be included in a Participant's income for a year in respect of any Options granted to the Participant under the Plan will consist of the following:

(a) under paragraph 7(1)(a) of the Act, the amount by which the fair market value of any shares acquired under the Option in the year, as described in subparagraph 5(d) above, exceeds the Option Exercise Price paid to the Company for such shares; and

(b) under paragraph 7(1)(b) of the Act, the Cash Amount, as described in subparagraph 5(c) above, received by the Participant from the Company in the year.

C. Provided that the conditions in paragraph 110(1)(d) of the Act are satisfied, the Participant will be entitled to claim a deduction under paragraph 110(1)(d) of the Act in respect of the amounts included in a Participant's income, as described in Ruling B above.

D. The Company will be entitled to claim a deduction in computing its income from its business under subsection 9(1) of the Act within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act in respect of the Cash Amounts, as described in Ruling B(b) above, paid to the Participants in the year.

E. The payment of the Cash Amount by the Company to the Participants, as described in subparagraph 5(c) above, will not be considered a distribution by way of dividend or otherwise by the Company to the Parent for the purposes of subsections 15(1) and 56(2) 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 provided that the Plan is implemented within six months of the date of this letter.

Comment

This letter does not express or imply, and should not be construed as expressing or implying, that any ruling, opinion, confirmation or approval is being provided in respect of the "restricted stock awards" that the Company may provide to Participants under the Plan.

Yours truly,

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

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