2000 Ruling 9932063 - SAR SDA CHANGE OF CONTROL

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: Can benefits under a stock appreciation right plan be used to acquire deferred share units under a plan that qualifies under 6801(d)?

Position: Yes.

Reasons: If the provisions of 6801(d) are satisfied, there is no reason to exclude the employment income under the stock appreciation right plan. The plan will only be accepted because the employee will elect to participate in the 6801(d) plan prior to receiving any rights to cash under the stock appreciation plan.

XXXXXXXXXX
XXXXXXXXXX 1999-001400
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)
Amendment to the 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 in subsequent correspondence and during our various telephone conversations (XXXXXXXXXX).

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

(i) is in an earlier return of the Company or a related person,

(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person,

(iii) is under objection by the Company or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed amendment to the above-noted plan and purpose of the proposed amendment is as follows:

Facts

1. The Company is a public corporation and a taxable Canadian corporation. XXXXXXXXXX ("Parentco") is a public corporation and it owns approximately XXXXXXXXXX% of the Company's outstanding common shares. The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Act.

The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office. The Company's address is XXXXXXXXXX.

2.

XXXXXXXXXX

3. Part of the Company's compensation arrangements for its key employees and the key employees of its subsidiaries includes the right to participate in the XXXXXXXXXX (the "SAR Plan") which was established by the Company on XXXXXXXXXX. In general, the purpose of the SAR Plan is to provide an incentive and reward for key employees of the Company and its subsidiaries (the "Participants") that relate to the achievement of the Company's long-term financial objectives as reflected through the increase in shareholder value. To this end, the SAR Plan operates as a so-called "share appreciation plan" in which Participants receive an award of units and, at specified times, the employees are entitled to receive cash amounts. The Participant's cash payment in respect of a unit is determined by multiplying (a) the excess, if any, of the book value on the particular maturity date under the plan over the book value when the unit was issued by (b) a percentage payout formula. The book value and the percentage payout formula are determined in accordance with the terms of the SAR Plan.

4. The essential terms and conditions of the SAR Plan are as follows:

(a) The Company's human resources committee (the "HRC") is charged with the overall administration of the SAR Plan and, subject to the ultimate responsibility of the Company's board of directors, the decisions of the HRC are final and binding on SAR Plan matters.

(b) On an annual basis, XXXXXXXXXX of the SAR Plan provides that the HRC will select the employees of the Company and its subsidiaries who will participate in the SAR Plan based on their job performance and determines the number of units to be awarded to each Participant.

(c) Under XXXXXXXXXX of the SAR Plan, a Participant is eligible to receive a cash payment under the SAR Plan in respect of the Participant's units on XXXXXXXXXX (the "Maturity Date"), or such earlier date (the "Early Maturity Date") that is the date

(i) on which the Participant elects under XXXXXXXXXX of the SAR Plan to exercise the units following termination of the Participant's employment (other than for cause),

(ii) on which the Participant elects under XXXXXXXXXX of the SAR Plan to exercise a Special Unit and receive the appreciation in market value of the Special Units following a change of control of the Company (see (d) below) , or

(iii) the HRC approves a Participant's request to cancel up to XXXXXXXXXX% of the units granted to the Participant at least XXXXXXXXXX years before such date of approval.

An example of a payment after an Early Maturity Date is as follows:

XXXXXXXXXX

Payments will normally be made within XXXXXXXXXX days of the Early Maturity Date or Maturity Date, as the case may be. The Company may, however, make such payments over a period of up to XXXXXXXXXX years, in such equal instalments as the HRC in its discretion shall determine, if the HRC considers this in the best interests of the Company.

(d) Under XXXXXXXXXX of the SAR Plan, on a change of control of the Company all units then outstanding immediately vest in the Participants and become Special Units (the "Special Units"). The Participant is entitled to, within XXXXXXXXXX days, elect to exercise the Special Units and receive a cash payment equal to the appreciation in market value of the Special Units. If no election is made within XXXXXXXXXX days of the change of control, the Participant receives the normal cash payout under XXXXXXXXXX of the SAR Plan of the appreciation in market value of the Special Units on the Maturity Date described in (c) above or an Early Maturity Date described in (c)(i) or (iii) above. A Participant may exercise from time to time in whole or in part the Participant's Special Units prior to their respective Maturity Dates by providing the Corporate Secretary with at least XXXXXXXXXX days' advance written notice of the intention to exercise the Special Units.

The appreciation in market value of a Special Unit is defined in the SAR Plan to mean the amount by which (a) the highest price paid for the Company's common shares on the change of control exceeds (b) the average closing price of the Company's common shares during a specified trading period in the fiscal year the Special Units were granted (less $XXXXXXXXXX for units granted before XXXXXXXXXX). Notwithstanding this computation, for a Special Unit granted before XXXXXXXXXX the appreciation in market value cannot be less than $XXXXXXXXXX.

The normal cash payout on Maturity Dates or Early Maturity Dates occurring after XXXXXXXXXX, is an amount equal to the excess of (i)(A) the aggregate of the common shareholders' equity of the Company determined in accordance with the audited financial statements of the Company as at XXXXXXXXXX, and the net earnings attributable to common shares (adjusted for extraordinary events) less an amount reflecting dividends paid plus a return on a certain portion of shareholders equity for the particular year the units are being redeemed, divided by (B) the time weighted average number of fully diluted common shares in the capital of the Company outstanding during the most recently completed fiscal year of the Company over (ii) the result under (i) for the effective date the particular units being redeemed were issued to the Participant (less $XXXXXXXXXX for each unit granted prior to XXXXXXXXXX).

(e) For new or existing units, under XXXXXXXXXX of the SAR Plan, the HRC may designate a unit as a deferred unit ("DU") with the result that on the Maturity Date the unit continues as a DU and the Participant is only entitled to receive cash payments under XXXXXXXXXX of the SAR Plan. Such designation does not affect the Participant's right to receive cash payments under XXXXXXXXXX on an Early Maturity Date, including the Participant's right, upon a XXXXXXXXXX election, to receive a cash payment based on the appreciation in market value in respect of Special Units after a change of control of the Company.

(f) XXXXXXXXXX of the SAR Plan provides that where a Participant's units are designated as DU's, the initial number of DU's will be equal to the amount that would otherwise be paid on the applicable Maturity Date of the unit divided by the average trading price of a common share (of the Company or of a related person as specified by the HRC) on the XXXXXXXXXX trading days preceding XXXXXXXXXX of the year in which the designation occurs. A Participant is entitled to receive a cash payment XXXXXXXXXX days after XXXXXXXXXX of the year following the Participant's termination of employment (whether by reason of death, retirement or otherwise) from the Company and its subsidiaries. The cash payment will be equal to the number of DUs credited to the Participant's account multiplied by the average trading price of a common share of the Company or related person on the XXXXXXXXXX trading days immediately following XXXXXXXXXX of the year following the Participant's termination of employment.

(g) Under XXXXXXXXXX of the SAR Plan, the board of directors of the Company may amend the SAR Plan provided that where the amendment adversely affects the rights of Participants in existing units or DU's, the consent of the affected Participants is required.

(h) The SAR Plan is unfunded in that all payments to be made by the Company to Participants in the SAR Plan are from the general funds of the Company. The first grants to Participants under the SAR Plan were made in XXXXXXXXXX and their maturity date is on XXXXXXXXXX.

5. Through various agreements, which are subject to the applicable shareholder and regulatory approvals, the XXXXXXXXXX (the "Purchaser") will acquire Parentco's shares of the Company. Because of the various approvals that are required, there is no assurance that Purchaser will be able to complete the acquisition.

6. Under XXXXXXXXXX of the SAR Plan, if Purchaser acquires control of the Company, all outstanding units credited to a Participant's account automatically become Special Units (see 4(d) above). In such case, a Participant will only have two options. The Participant may exercise the Special Units and, within XXXXXXXXXX days of the change of control or on XXXXXXXXXX days notice thereafter (but in no event later than the Maturity Date of the units), receive a cash payment equal to the appreciation in market value of the Company's shares, the computation of which will be based on the offer price paid by Purchaser for the Company's shares. Alternatively, the Participant may retain the Special Units until the Maturity Date or Early Maturity Date and receive XXXXXXXXXX days after the Maturity or Early Maturity Date the normal cash payments in accordance with the provisions of XXXXXXXXXX of the SAR Plan. Absent the proposed amendment described below which contemplates an additional option for Participants, the Company expects that most Participants would cash out their Special Units rather than retain them if the Purchaser acquires control of the Company.

Proposed Plan Amendment

7. Under XXXXXXXXXX of the SAR Plan, the board of directors of the Company will propose to amend and restate the SAR Plan by adopting the "XXXXXXXXXX" (the "Plan Amendment"). In general, the basic objective of the Plan Amendment is to provide Participants with an additional option in respect of their existing units under the SAR Plan if the Purchaser acquires control of the Company.

8. Specifically, under the Plan Amendment

(a) the HRC may give notice to a Participant that, in respect of existing units of the Participant, the HRC will designate as DU's on a change of control, all or any portion of the Special Units that the units will become on a change of control, all on the basis set out in XXXXXXXXXX of the SAR Plan. The HRC's notice will identify the relevant particulars of the HRC's designation, including the applicable share of the Company or a related person to be used as the basis for the valuation. Where the HRC gives notice, for the designation to be effective, the Participant must be an employee of the Company or a related person on the date of the change of control and the Participant must make an election before the change of control (i) consenting to the HRC's designation in respect of all or any portion of the Special Units that the units became on the change of control and (ii) revoking an earlier election, if any, made in respect of the Special Units to exercise all such Special Units within XXXXXXXXXX days of the change of control. In the absence of an election to accept the DU designation or to exercise the Special Units within XXXXXXXXXX days, the Participant retains the right to payment of the Special Units in accordance with 4(c) above. To explain further, if the change of control does not occur before the Maturity Date of the units or the Participant is not an employee of the Company or a related person on the change of control date, the units will not become Special Units and HRC will not be able to designate them.

(b) Where a Participant's Special Units are designated as DU's, the initial number of DU's will be equal to the DU Award Amount in respect of the Special Units divided by the average trading price of a common share of the Company (or a common share of the related person identified in the HRC notice described in (a) above) on the change of control date. The DU Award Amount in respect of the Special Units is defined as

(i) in the case of Special Units granted prior to XXXXXXXXXX, the highest price per common share of the Company paid for the control block of such shares in the course of the change in control event less the average of the closing prices of such shares on XXXXXXXXXX Stock Exchange in the first five business days on which at least XXXXXXXXXX of such shares were traded in the year in which the Special Unit was granted, less XXXXXXXXXX if such Special Unit was granted prior to XXXXXXXXXX, provided that if the amounts so determined per Special Unit is less than XXXXXXXXXX the amount shall be XXXXXXXXXX; and

(ii) in the case of all other Special Units, the highest price per common share of the Company paid for the control block of such shares in the course of the change in control event less the average of the closing prices of such shares on XXXXXXXXXX Stock Exchange in the first five business days on which at least XXXXXXXXXX of such shares were traded in the year in which the Special Unit was granted.

A Participant is entitled to receive a cash payment XXXXXXXXXX days after XXXXXXXXXX of the year following the Participant's termination of employment (whether by reason of death, retirement or otherwise) from the Company and its subsidiaries. The cash payment will be equal to the number of DUs credited to the Participant's account multiplied by the average trading price of a common share of the Company or the related person on the XXXXXXXXXX trading days immediately following XXXXXXXXXX of the year following the Participant's termination of employment.

To summarize the effect of the proposed additional option, as a consequence of the HRC designation and the Participant's election, the Participant will be entitled to receive a cash payment determined under the SAR Plan which will be payable on the Participant's termination of employment (whether by reason of death, retirement or otherwise) from the Company and its subsidiaries in accordance with the provisions of existing XXXXXXXXXX of the SAR Plan. For this purpose, the DU will be an amount equal to the appreciation in market value of the units credited to the Participant's account which would become Special Units and would otherwise have been paid to the Participant if the Participant had elected to exercise the option related to the Participant's Special Units under XXXXXXXXXX of the SAR Plan, within the specified period after the event giving rise to the change of control.

. The result is that where a Participant elects before the Purchaser acquires control of the Company in respect of any units credited to his or her account, the Participant will have no entitlement to cash payments under XXXXXXXXXX (or any other provision) of the SAR Plan in respect of such units that would be converted into Special Units until the Participant's employment with the Company or any related person terminates as a result of retirement, death or otherwise. The cash payments that the Participant will receive on termination of employment in respect of such DUs will be based on the then trading price of the Purchaser's common shares.

Purpose of the Proposed Plan Amendment

9. The purpose of the Plan Amendment is to give the Participants a pecuniary interest in the financial performance of the Purchaser on a going-forward basis that aligns and is consistent with the similar pecuniary interest the Purchaser provides to its senior executives under its existing plans. From the perspective of the Company, the Purchaser and the Purchaser's shareholders, the Plan Amendment will promote their respective interests by ensuring an important and long-term linkage between the Participants' pecuniary interest and the long-term financial performance of the Company and the Purchaser.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed Plan Amendment and purpose of the proposed Plan Amendment , and provided that proposed Plan Amendment is carried out as described above, we rule as follows:

A. The Plan Amendment, in and by itself, will not cause a separate arrangement as contemplated by subsection 6(14) of the Act to come into existence.

B. Provided the arrangement to designate units as DUs under the SAR Plan qualifies as a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations, the designation of the Special Units credited to a Participant's account as DUs, as described in 8(a) above, will not result in an amount being included in a Participant's income under subsection 5(1) or section 6 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 the Canada Customs and Revenue Agency provided that the proposed Plan Amendment is made on or before XXXXXXXXXX.

Comment

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed any of the tax consequences arising from any of the facts, the SAR Plan or the proposed Plan Amendment described herein other than those specifically referred to in the rulings given above. Where a Participant does not elect to accept the HRC's designation of Special Units as DUs and the Special Units are not cashed out on a change of control, the Special Units may be considered a salary deferral arrangement for purposes of the Act.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate