9 November 1999 External T.I. 9926105 - COMBINED STOCK OPTION AND SDA PLAN

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 an arrangement that encompasses both a section 7 - employee stock option plan and a performance incentive plan be excluded from the SDA rules?

Position:

The issue should be addressed as the subject matter of an advance income tax ruling. However, in general we would be inclined to treat the arrangement as being two separate although interrelated plans.

Reasons:

A resolution of the issue in any specific situation will depend on the specific terms of an arrangement. Therefore the issue can not be properly addressed in an opinion letter. Nevertheless in general it would seem more appropriate to treat two plans that are provided under one such arrangement to be separate and distinct plans.

XXXXXXXXXX 		992610
W. C. Harding
Attention:  XXXXXXXXXX 

November 9, 1999

Dear Sirs:

Re: Employee Stock Option and Salary Deferral Arrangements

This is in reply to your letter of September 29, 1999, in which you asked if a hypothetical arrangement described in your letter would constitute an agreement to sell or issue shares within the meaning of section 7 of the Income Tax Act (the "Act").

In our opinion the treatment of an arrangement as described in your letter will depend on the specific provisions of the arrangement. Accordingly, we can not provide any opinion on it except in the context of an advance income tax ruling. However we can provide the following comments which may be of assistance to you.

Section 7 of the Act applies with respect to agreements to sell or issue shares to employees (generally referred to as "employee stock options"). Employee stock options frequently have provisions referred to as stock appreciation rights or "SARs". A SAR generally permits an employee to dispose of the employee's rights under the option and in return receive as consideration, an amount in the form of cash or shares, equivalent to the increase in value of the option over the period it was held by the employee.

Another typical form of employee performance incentive plan (referred to here as an "EIP") typically provides that an employee will be entitled to receive an amount (generally paid in cash) equivalent to the increase in value of a specified measure of employee performance over a specified period of time. An EIP will not be an employee stock option as long as shares are not issued under its terms.

In some respects an EIP may resemble a SAR component of an employee stock option. However, the two arrangements are distinct in that a SAR exists only as a means by which proceeds of an option may be received while an EIP can exist as a distinct arrangement. Nevertheless it is recognized that a distinct EIP can be designed which may in fact represent a SAR in its application. The Department has previously stated that in such cases it might be appropriate to consider the relevant employee stock option and the EIP to constitute a single employee stock option. On the other hand, if an arrangement is composed of two parts where one part is of itself an agreement to issue shares within the meaning of section 7 of the Act and the other part is a distinct and separate EIP, we would not likely accept that the two segments of the arrangement represented a single agreement for the purposes of section 7 of the Act because the terms of such an EIP would not reflect those found in a typical SAR. In particular, the terms of the EIP would not simply provide a means for an employee to dispose of the employee's rights under the option and in return receive in consideration an amount, in the form of cash or shares, equivalent to the increase in value of the option.

We trust these comments will be of assistance.

Yours truly,

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

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