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 the Department reconsider its position regarding the application of GAAR to the transfer of stock options to a trust which is designed to avoid the application of subsections 7(1.3) and 47(1) of the Act?
Position: Yes
Reasons: After further consideration, the GAAR Committee reversed the position that it had taken in 9723463. The avoidance of inappropriate tax results resulting from the application of these provisions would not result in a misuse or abuse of the Act.
XXXXXXXXXX 990316
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter 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
1.
XXXXXXXXXX
2.
XXXXXXXXXX
3. The Company is a public corporation and a taxable Canadian corporation. The Company's shares trade on the XXXXXXXXXX. The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
4. In conjunction with the Company's Initial Public Offering, it created the XXXXXXXXXX (the "Plan") under which the Company provided its management, officers and key employees with options to acquire its common shares under the Plan. The purpose of the Plan has been to:
- promote a proprietary interest in the Company among its management, officers and key employees and those of its subsidiaries and affiliates;
- align the interests of the Company's management, officers and key employees with those of its public shareholders;
- encourage participants to further the development of the Company, its subsidiaries and affiliates; and
- attract management, officers and key employees necessary for the long-term success of the Company, its subsidiaries and affiliates.
5. XXXXXXXXXX (hereinafter referred to collectively as the "Employees" and singly as the "Employee") applied for and received an advance income tax ruling (the "Previous Ruling") in respect of stock options granted under the Plan. Among the proposed transactions described in the Previous Ruling was the transfer by each Employee, to a trust settled by the particular Employee for his own benefit (the "Trust"), of the options they held and the options they would receive within six months of the date of the Previous Ruling under the Plan.
6. The Trust settled by XXXXXXXXXX is known as the XXXXXXXXXX Stock Option Trust, its taxpayer identification number is XXXXXXXXXX and it files its returns with the XXXXXXXXXX Tax Centre. The Trust settled by XXXXXXXXXX is known as the XXXXXXXXXX Stock Option Trust, its taxpayer identification number is XXXXXXXXXX and it files its returns with the XXXXXXXXXX Tax Centre.
7. Each of the Trusts holds options to acquire XXXXXXXXXX shares of the Company. Because the options held by each of the Trusts were granted to the Employees at various times, they have different vesting dates and exercise prices. The vesting dates range from XXXXXXXXXX to XXXXXXXXXX. Depending on market conditions and in accordance with the terms of the Plan, the trustee of each of the Trusts may cause them to exercise the options they currently hold once they become vested (i.e. between XXXXXXXXXX and XXXXXXXXXX). Shares of the Company acquired by the Trusts under the options will be disposed of by the Trusts through a stock exchange. The disposition may be on the same day as the shares are issued by the Company. The net proceeds to the Trust from the disposition of shares acquired under the options will be distributed according to the terms of the Trust, as described in the Previous Ruling and the related correspondence subsequent thereto.
8. Each of the Employees own shares of the Company (XXXXXXXXXX) which were acquired by them pursuant to stock options granted by the Company when it was a Canadian-controlled private corporation. These shares were acquired for nominal consideration at a time when the shares had a fair market value of $XXXXXXXXXX per share. The recognition of the benefit conferred on the Employees under those stock options was deferred under the provisions of subsection 7(1.1) of the Act. As a result of the Company's Initial Public Offering, some of these shares were required to be held in escrow by the Employees. The expression "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act.
9. The remaining shares held in escrow by the Employees described in 8 above will be released from the escrow agreement by XXXXXXXXXX. With respect to the application of subsection 245(2) of the Act to any exercise of options by the Trusts after XXXXXXXXXX (i.e. after the time the last shares held in escrow described in 8 may be sold by the Employees), the Previous Ruling will no longer be applicable.
Proposed Transactions
10. Subsequent to the release from the escrow agreement of the shares held by the Employees, the Employees will be granted additional options under the Plan ("New Options").
11. The Employees will transfer their New Options to their respective Trusts.
12 Subsequent to the vesting of the New Options and market conditions permitting, the Trusts will exercise the New Options and they will dispose of the shares acquired under the New Options. The proceeds of disposition in respect of the disposition of any shares acquired under the New Options will be distributed according to the terms of the Trust.
Purpose of the Proposed Transactions
13. The purpose of the proposed transactions is to ensure that the Employees receive the intended benefit from participating in the Plan without being subjected prematurely to income taxes that may be deferred pursuant to subsection 7(1.1) of the Act on benefits until the shares that are held outside the Trusts are disposed of.
14. To the best of your knowledge and the knowledge of the Employees, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Employees or of a person related to the Employees;
(b) is being considered by a tax services office or tax centre in connection with a previously filed return of the Employees or of a person related to the Employees;
(c) is under objection by the Employees or by a person related to the Employees;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate, other than the Previous Ruling described in 5 above.
Rulings Given
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. Paragraph 7(1)(b) of the Act will not apply to the transfer of any New Options to the Trust.
B. In determining the adjusted cost base of a share acquired by the Trust under a New 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.
C. The Trust and the Employees will be separate and distinct taxpayers for the purposes of subsection 47(1) of the Act.
D. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in rulings A, B and C given above.
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 proposed transactions described in 10 and 11 above are completed within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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