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 amendments to the proposed plan that is subject to ruling 982536 (an "in the money" stock appreciation rights plan) effect the rulings provided?
Position:
No
Reasons:
The plan meets the exception in paragraph k of the SDA definition.
XXXXXXXXXX
XXXXXXXXXX 983346
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Re: Advance Income Tax Ruling
Stock Appreciation Rights Plan
This is in reply to your letter of XXXXXXXXXX and our telephone conversation of XXXXXXXXXX in respect of our ruling of XXXXXXXXXX, 1998 (our file 982536) and certain amendments you wish to make to the plan.
Attached to this letter is the prior ruling amended as required to give effect to your requests. We confirm that the rulings provided in the ruling as amended will continue to be valid and binding upon the Department subject to the limitations and qualifications set out therein.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
XXXXXXXXXX
XXXXXXXXXX 982536(amended)
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Re: Advance Income Tax Ruling
Stock Appreciation Rights Plan
This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling in respect of the above noted plan.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(b) "Plan" means the Stock Appreciation Rights Plan as described in your submission;
(c) "Employer" means: XXXXXXXXXX
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(d) "Participant" means an employees of the Employer who participate in the Plan;
(e) "Shareholder A" and "Shareholder B" ("Shareholders") mean XXXXXXXXXX;
(f) "Parentco" means XXXXXXXXXX; and
(g) "Vesting Date" means in respect of a particular SAR, the date that the SAR vests in a Participant under the Plan.
Facts
1. The Employer is a corporation incorporated under the laws of the Province of XXXXXXXXXX having authorized capital of an unlimited number of common shares of which XXXXXXXXXX are issued. Of the issued common shares, XXXXXXXXXX are owned by Shareholder A and XXXXXXXXXX are owned by Shareholder B. Shareholder A is a wholly-owned subsidiary of Parentco, a public corporation whose common shares are listed on the XXXXXXXXXX Stock Exchange. Parentco and its subsidiaries are in business in Canada and elsewhere, directly and through subsidiary corporations. The Employer is a private corporation but not a Canadian-controlled private corporation for the purposes of the Act.
Proposed Transactions
2 The Employer will establish the Plan for the benefit of its senior executives and officers, including its President, who, in the opinion of the Compensation Committee of the Board of Directors or, the Board of Directors, if such Compensation Committee is not constituted (herein collectively referred to as the "Compensation Committee"), have demonstrated significant contributions to the Employer.
3 The purpose of the Plan is to afford senior executives a long-term incentive benefits plan that will emulate benefits comparable to those that would be afforded by a stock option plan.
4 The principal features of the Plan are as follows:
(i) The Compensation Committee shall from time to time select senior executive employees of the Employer who shall be granted stock appreciation rights ("SARs") under the Plan. Each SAR shall represent a notional common share in the capital stock of the Employer.
(ii) The Compensation Committee shall determine the number of SARs to be granted to a particular employee who is designated by the Compensation Committee to participate in the Plan. At the time of such grant, the Participant shall execute an agreement respecting the grant of such SARs (the "Grant Agreement") with the Employer acknowledging, inter alia:
(a) the number of SARs granted to such Participant as at the date of execution (the "Grant Date") of the Grant Agreement,
(b) the terms and conditions pursuant to which such SARs will vest in the Participant,
(c) the notional common share value (defined in paragraph 4(viii) below) as at the Effective Date in respect of a SAR granted to a Participant (the "Effective Date Share Value") to be used in determining the share appreciation value (the "Share Appreciation Value") in respect of the SARs in respect of such SAR as at its Redemption Date (as defined in 4(vii) below),
(d) the effective date (the "Effective Date") of the Grant Agreement which date will be the Grant Date or such later date as may be agreed between the Employer and the Participant, and
(e) an acknowledgment that all SARs granted to the Participant shall be subject to and exercised in accordance with the terms and conditions of the Plan.
(iii) The Effective Date of a grant of SARs may be at any time between January 1 and November 30 in the calendar year the SARs are granted. However, for 1998 only, the Effective Date shall not occur before the date of this ruling or after December 28, 1998.
(iv) Subject to the provisions of 4(v), the SARs granted to a Participant pursuant to a Grant Agreement shall, except to the extent that the vesting of such SARs is waived by the Participant (as described in 4 (vi) below), vest in the Participant as to XXXXXXXXXX% thereof on XXXXXXXXXX of the calendar year in which the Effective Date of such SARs falls, except that if the Effective Date is in 1998, XXXXXXXXXX% of the SARs shall vest on XXXXXXXXXX and as to XXXXXXXXXX% on XXXXXXXXXX of each of the next following three calendar years; provided that all SARs that have not vested by XXXXXXXXXX of the third calendar year following that in which the Effective Date of such SARs falls, shall vest in the Participant on XXXXXXXXXX of that third calendar year.
(v) All SARs granted to a Participant which have not vested prior to such Participant's cessation of employment with the Employer:
(a) by reason of retirement at normal retirement age or early retirement in accordance with the then current policies and practices of the Employer,
(b) by reason of prolonged disability determined in the discretion of the Compensation Committee,
(c) by reason of death, or
(d) by reason of the termination of the Plan,
shall, upon any such occurrence, vest in such Participant.
Where a Participant's employment with the Employer is terminated for cause, all unredeemed SARs, whether vested or unvested, shall be forfeited and canceled as of the Effective Date of such termination. Any SARs so forfeited shall expire on the day of forfeiture.
(vi) On or before the Effective Date of the SARs of a particular Participant, the Participant may waive the vesting of any or all of the XXXXXXXXXX% of all SARs granted to such Participant that, pursuant to 4(iv), would otherwise vest in the Participant in the year in which the Effective Date falls. A Participant wishing to so waive shall advise the Employer in writing on or before the Effective Date of the Participant's desire to waive the vesting of such SARs and the number of such SARs that the Participant desires to waive. Any SARs so waived will be included with and form part of the next following year's SARs that, except to the extent further waived, will vest in the Participant on XXXXXXXXXX of that next year. Any such SARs not waived will, pursuant to 4(iv), vest in the Participant on XXXXXXXXXX of the year in which the Effective Date falls except in 1998 when such shares shall vest on XXXXXXXXXX. With respect to the remaining SARs that vest in the Participant under the normal vesting schedule on XXXXXXXXXX of each of the three years next following the year in which the Effective Date falls, at least one month prior to XXXXXXXXXX of the year immediately preceding each such year (other than the year in which the Effective Date falls) the employer will send a notice to each Participant under the Plan advising that the Participant may waive the vesting of any remaining SARs under the Plan that would otherwise vest in such Participant on December 15 in the immediately following calendar year under the normal annual vesting schedule together with any SARs the vesting of which has been previously waived by the Participant and which would otherwise also vest in that immediately following calendar year. A Participant wishing to waive the vesting of all or part of such remaining SARs may elect, at any time prior to January 1 of the calendar year following the year in which such Employer's advise is received, by notice in writing delivered to the Employer, to waive the vesting of all or part of the SARs that would otherwise vest in the Participant in such immediately following calendar year. Such waived SARs shall vest in the Participant as described in 4(iv) above provided that all of the SARs that have not vested by December 15 of the third calendar year immediately following the calendar year in which the Effective Date falls shall vest in the Participant on XXXXXXXXXX of the third calendar year immediately following the calendar year in which the Effective Date falls
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(vii) A SAR which becomes vested at any time will be redeemed by the Employer within 30 days thereafter (the "Redemption Date") provided that the Redemption Date of any SAR for the third calendar year immediately following the calendar year in which the Grant Date falls will be on or before December 31 of that year. The amount payable in respect of the redemption of a SAR (the "Redemption Amount") will be paid on the Redemption Date to the Participant or to the Participant's heirs and successors, as the case may be, in cash by the Employer, subject to applicable withholding of tax. The Redemption Amount of a particular SAR is equal to the Share Appreciation Value of that SAR on the Redemption Date. The Share Appreciation Value of a SAR on its Redemption Date is equal to the amount, if any, by which the Share Value as of the Vesting Date of that SAR exceeds the Effective Date Share Value.
(viii) The Share Value at any particular time is equal to the amount determined by dividing by a notional number of Employer common shares to be determined by the Compensation Committee in respect of any SARs granted as of a particular Effective Date, that amount which is the aggregate of the amounts determined in respect of each of the four completed consecutive quarters ending with the March, June, September or December quarter, as the case may be, next preceding the particular time, equal to the product of (a) multiplied by (b), where for each such quarter,
(a) is the pre-tax earnings of the Employer, for such quarter, determined in accordance with generally accepted accounting principles, where a calculation of pre-tax earnings has been completed for such quarter, increased by the gross amount of any royalties payable by the Employer to either of the Shareholders or to Parentco, as the case may be, in respect of any licenses granted by such persons to the Employer for any such quarter, provided that, if such pre-tax earnings for such quarter has not been calculated or is otherwise not available, the pre-tax earnings for such quarter, increased by the gross royalties payable for such quarter, shall be that amount, if any, that the compensation committee may in its unfettered discretion, determine as a reasonable substitution for the amount that would otherwise be determined in accordance with this paragraph (a) for such quarter, and
(b) is the after tax price to earnings multiple of the common shares of Shareholder B determined on the last day of each such quarter or, if such price to earnings multiplier is not available, by such amount as the Compensation Committee in its unfettered discretion considers appropriate as a substitution for such multiple.
The Effective Date Share Value in respect of a grant of SARs will be equal to the Share Value at the Effective Date of such SARs or such other value as the Compensation Committee determines.
The notional number of Employer shares in respect of the SARs to be granted to Participants in 1998 has initially been determined to be XXXXXXXXXX but this number may be adjusted by the Compensation Committee as it sees fit. The Share Appreciation Value of a SAR at any time cannot be less than nil.
(ix) The Plan may be amended, modified, changed, in whole or in part from time to time, or terminated by the Board or Directors provided that any such amendment, modification, change or termination shall not adversely affect any SARs then outstanding unless consented to by the affected Participants.
(x) Except in the event of death, a Participant's SARs cannot be transferred to any person. In the event of death, a deceased Participant's SARs will transfer to the Participant's heirs or legal representatives.
Purpose of the Plan
5. Various executives of the Employer currently receive annual short-term incentives whereas executives employed at each of the shareholders of the Employer participate in their employer's respective stock option plans.
6. To extend long-term incentives to executives of the Employer that are comparable to those provided to employees of the Shareholders, the Employer proposes to adopt the Plan the details of which are described above.
7. To the best of your knowledge and that of the Employer, none of the issues related to this request:
(1) have previously been reported in the Employer's or any related party's prior income tax returns:
(2) are being considered by a tax services office or taxation centre in connection with the Employer's or a related party's prior income tax return;
(3) are under objection by the Participants or a related person;
(4) are before the courts; and
(5) are the subject of a ruling previously issued by this Directorate to the Employer but have been the subject of previous rulings issued by the Income Tax Rulings and Interpretations Directorate. In particular, Revenue Canada has issued advance tax rulings, interpretation bulletins and technical interpretations respecting certain of the tax issues raised in this application.
Rulings
Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:
A. The Plan will not constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act provided the Plan is not amended as provided in paragraph 4(ix) above;
B. The Plan will not constitute a Retirement Compensation Arrangement as that term is defined in subsection 248(1) of the Act provided the Plan is not amended as provided in paragraph 4(ix) above;
C. The Plan will not constitute a Salary Deferral Arrangement as that term is defined in subsection 248(1) of the Act in respect of a SAR issued under the Plan to a Participant prior to the SARs Redemption Date, provided the Plan is not amended as provided in paragraph 4(ix) above;
D. No benefit will be deemed to have been received by a participant for the purposes of subsection 5(1) and paragraph 6(1)(a) of the Act by reason of the issuance in and by itself of a SAR pursuant to the terms of the Plan and no amount payable on the redemption of a SAR will be included in the income of a Participant under subsection 5(1) or paragraph 6(1)(a) in respect of a SAR until the Redemption Date, provided the Plan is not amended as provided in paragraph 4(ix) above;
E. Provided the Plan is not amended as provided in paragraph 4(ix) above, where SARs are redeemed in a calendar year, the amounts to be included in the Participants income for a calendar year under subsection 5(1) or paragraph 6(1)(a) of the Act as a result of the redemption shall be equal to the Redemption amounts payable under the terms of the Plan including, for greater certainty, any applicable taxes withheld therefrom; and
F. The Employer will be entitled to a deduction under subsection 9(1) of the Act in respect of the amount payable under the Plan in computing its income from business for the taxation year in which a SAR vests in a Participant, subject to the provisions of paragraph 18(1)(a), section 67 and section 78 of the Act.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada Taxation, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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