2007 Ruling 2006-0201541R3 - SAR-type 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.

Principal Issues: Whether a plan in which the payout is based on the appreciation of the value of units from the grant date to the payment date will be excluded from the definition of a salary deferral arrangement as defined under subsection 248(1) of the ITA?

Position: Yes.

Reasons: Typical SAR under which the employee has no right conditional or not to receive an amount.

XXXXXXXXXX 								2006-020154

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above noted-taxpayer. We also acknowledge the information provided during our telephone conversations and electronic correspondence.

This letter is based solely on the facts and proposed transactions described below. The documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter, the following terms have the respective meanings:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof.

(b) "Agreement" means an agreement between the Company and an Eligible Employee relating to the grant of Stock Appreciation Rights to such Eligible Employee a draft of which is attached hereto as Schedule "A".

(c) "Board" means the board of directors of the Company or any committee thereof designated to administer the Plan.

(d) "Canadian Subsidiaries" means the Canadian subsidiaries of the Company employing potential Eligible Employees and, more particularly XXXXXXXXXX.

(e) "Cause" means any one or more of the following:

(i) an act or acts of personal dishonesty taken by the Grantee resulting in personal enrichment of the Grantee at the expense of the Company;

(ii) the failure, refusal or neglect by the Grantee to perform his obligations and duties as an employee of the Company which are willful and deliberate on the Grantee's part and which are not remedied within XXXXXXXXXX days after the Grantee's receipt of written notice of such violations from the Company;

(iii) the willful engaging by the Grantee in conduct that is injurious to the Company; or

(iv) any other act, as deemed by the Board, which from time to time is considered to be harmful or detrimental to the Company.

(f) "CCPC" means a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7) of the Act.

(g) "Change in Control" means a transaction or series of transactions by which (i) any person, or two or more persons acting as a Group (persons will be considered to be acting as a Group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or a similar business transaction with a corporation), who prior to such time beneficially owned less than 50% of the voting rights attaching to the then outstanding capital stock of the Company, shall acquire shares of the Company's capital stock, and after such transaction or transactions such Group beneficially owns more than 50% of the voting rights attaching to the Company's outstanding capital stock, (ii) the Company shall sell all or substantially all of its assets or undertaking to any Group which, immediately after the time of such transaction, beneficially owned less than 50% of the then outstanding capital stock of the Company, or (iii) the Company shall merge or amalgamate with or consolidate into any Group which, immediately prior to the time of such transaction, beneficially owned less than 50% of the then outstanding capital stock of the Company, and shall not be the surviving corporation of such merger, amalgamation or consolidation. Provided however, that no Change of Control shall occur as a result of any sale or transfer of capital stock of the Company by XXXXXXXXXX to the other or to an affiliate of either of them or to their respective descendants and / or family.

(h) "Common Share" means a common share without nominal or par value of the Company.

(i) "Company" means XXXXXXXXXX.

(j) "CRA" means the Canada Revenue Agency.

(k) "Eligible Employee" means the chairman, president, any vice-president or any other Board member of the Company or of any subsidiary of the Company or any other key employee determined to be an Eligible Employee by the Board and who has agreed to enter into a non-compete and confidentiality agreement for a period of XXXXXXXXXX years following his/her termination date.

(l) "Grant Date" means the date on which any Stock Appreciation Right is granted to an Eligible Employee.

(m) "Grantee" shall have the meaning as described to such term in 15 below.

(n) "IPO" means an underwritten public offering of Common Shares or other equity securities of the Company that results in the Common Shares or other equity securities of the Company being listed on a Recognized Stock Exchange.

(o) "Plan" means the Company Stock Appreciation Rights Plan, a draft of which is attached to this letter.

(p) "Recognized Stock Exchange" means XXXXXXXXXX or any other stock exchange or quotation service designated as such by the Board.

(q) "Stock Appreciation Right" or "SAR Units" means a contractual right evidenced by an Agreement and credited by the Company to a Grantee by way of a bookkeeping entry in the books of the Company and administered pursuant to the Plan entitling the Grantee to an increase (or decrease) in his/her value of its proportional share of the SAR Units over time.

(r) "TCC" means taxable Canadian corporation as defined in subsection 89(1).

(s) "Termination Date" in respect of a Grantee means the date on which he or she is no longer an employee of the Company or of any subsidiary of the Company for any reason other than Cause, the effective date of Change in Control and the date of termination of the Plan by the Board.

(t) "U.S. Subsidiaries" means the U.S. subsidiaries of the Company employing potential Eligible Employees and, more particularly means XXXXXXXXXX.

(u) "Valuation Date" means XXXXXXXXXX in any year and the effective date of Change in Control.

Facts

1. The Company is a resident of Canada.

2. The Company is a TCC and a CCPC.

3. The Company has a fiscal year-end date of XXXXXXXXXX.

4. The head office of the Company is in XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

5. The Company is incorporated under the laws of the Province of XXXXXXXXXX. The Company is a holding company and it provides administrative services to its subsidiaries.

6. The Company wholly-owns several subsidiaries.

7. The Canadian Subsidiaries are resident in Canada.

8. The U.S. Subsidiaries are resident in the United-States of America (the "USA").

9. The Canadian Subsidiaries are incorporated under the laws of Canada or the Province of XXXXXXXXXX and are principally engaged in the active business in Canada of XXXXXXXXXX.

10. The Canadian Subsidiaries are TCCs and CCPCs.

11. The U.S. Subsidiaries are incorporated under the laws of various states of the USA and are principally engaged in the same active business in the USA.

12. The U.S. Subsidiaries are taxable in the USA.

Proposed Transactions

13. The Company proposes to establish a stock appreciation rights plan for Eligible Employees. The Eligible Employees may be employees of the Company, the Canadian Subsidiaries or the U.S. Subsidiaries. The Plan will be effective as of XXXXXXXXXX, subject to the receipt of favorable advance income tax rulings from CRA.

14. The Plan shall be administered by the Board. The Board is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Board deems necessary or desirable. Any decision of the Board in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. Neither the Board or any member thereof, nor any officer or employee of the Company, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the officers and employees of the Company shall be entitled to indemnification by the Company in respect of any claim, loss, damage or expense (including legal fees and disbursements) arising there from to the fullest extent permitted by law. The expenses of administering the Plan shall be borne by the Company. Notwithstanding the above, the Board may not change, amend or terminate the Plan, retroactively or otherwise, in such a way that any Grantee would lose any accrued benefit or vested benefit.

15. From time to time until the termination of the Plan, the Board may grant Stock Appreciation Rights under the Plan to Eligible Employees (each hereinafter referred to as a "Grantee") as it determines are warranted. Stock Appreciation Rights granted shall be subject to the following terms and conditions:

(a) Grant date. Stock Appreciation Rights shall only be granted on XXXXXXXXXX of each year. In all cases, the Value of the Stock Appreciation Rights granted at anytime under the Plan will be equal to zero as determined under 17 below.

(b) Vesting. A Stock Appreciation Right shall automatically vest on the Termination Date.

(c) Attribution. On the Termination Date, a Grantee shall be entitled to receive XXXXXXXXXX of the value of the Stock Appreciation Rights granted to such Grantee pursuant to an Agreement provided that such Grantee has one full year of service with the Company or any subsidiary of the Company as of XXXXXXXXXX preceding the Termination Date, XXXXXXXXXX of the value of the Stock Appreciation Right granted to such Grantee pursuant to an Agreement provided that such Grantee has two full years of service with the Company or any subsidiary of the Company as of XXXXXXXXXX preceding the Termination Date and XXXXXXXXXX % of the value of the Stock Appreciation Right granted to such Grantee pursuant to an Agreement provided that such Grantee has three full years of service with the Company or any subsidiary of the Company as of XXXXXXXXXX preceding the Termination Date. For the purpose of this Section, years of service will be taken into account to the extent that the participant was acting during these years either as a Board member, as chairman, president or vice-president of the Company or of any subsidiary of the Company.

(d) Payments. Upon vesting of a Stock Appreciation Right, a Grantee shall be entitled to receive an amount in cash equal to the value of the Grantee's Stock Appreciation Right calculated in accordance with 17 below, net of all applicable withholding taxes. Payment will be made as to XXXXXXXXXX % of the aggregate amount payable within XXXXXXXXXX business days of the Termination Date and XXXXXXXXXX % on the XXXXXXXXXX -month anniversary of such date.

(e) Termination for Cause. In the event the employment of a Grantee with the Company or any subsidiary of the Company is terminated for Cause, such Grantee's Stock Appreciation Rights shall become null and void as of the Termination Date and such Grantee shall have no rights to any payment whatsoever in respect of the Plan.

(f) Unit Value of a SAR. The Unit Value of a Stock Appreciation Right is determined at each Valuation Date, at the date of an IPO or at the date of a Change in Control as follows:

(XXXXXXXXXX% * Amount 1) + (XXXXXXXXXX% * Amount 2) _
Number of SAR units outstanding at that time

Where:

Amount 1: is the amount, if any, by which the FMV of the Company exceed $XXXXXXXXXX US
Amount 2: is the amount, if any, by which the FMV of the Company exceed $XXXXXXXXXX US

FMV: The Fair Market Value of the Company will be determined as the case may be under (i), (ii) or (iii) below:

(i) Valuation Date: The FMV of the Company at each Valuation Date is determined as:

(XXXXXXXXXX x Adjusted EBITDA) - Funded Debt + Cash + Cumulative Corporate Distribution

Where:

Adjusted EBITDA means the sum of:

a) XXXXXXXXXX% of EBITDA for the XXXXXXXXXX months before the Valuation Date,

b) XXXXXXXXXX% of EBITDA for the XXXXXXXXXX-month period beginning XXXXXXXXXX months before the Valuation Date, and

c) XXXXXXXXXX% of EBITDA for the XXXXXXXXXX-month period beginning XXXXXXXXXX months before the Valuation Date.

EBITDA means, for any period for the Company, the sum, without duplication, of the net income for such period (excluding extraordinary or unusual gains or losses) and to the extent deducted in determining the net income for such period, interest, income taxes, total depreciation expense and amortization expense, the whole calculated on a consolidated basis.

Funded Debt means, at any time, all obligations for borrowed money plus, without duplication, all obligations for the deferred payment of the purchase of property, all capitalized lease obligations, all balances of purchase price of assets bearing interest or not and the amount of any guarantee, letter of credit or other financial assistance provided in respect of a liability to a third party, the whole calculated on a consolidated basis.

Cash means, at any time, the amount in cash or in cash equivalents in the form of short term investments maturing no more than one year after its date of issuance, and including, without limitation, certificate of deposit, commercial papers, banker's acceptance and any other investment of similar nature.

Cumulative Corporate Distribution means, for any period from the Plan inception date, the sum, without duplication of any dividends or any distributions to shareholders and excess amount over fair market value for any amounts paid to shareholders for their services or dealing with the Company and / or any subsidiary of the Company.

If one or more subsidiaries of the Company are publicly traded on a Recognized Stock Exchange, the FMV of the Company shall be determined, without duplication, by valuating these subsidiaries using the average closing price per Common Share for the immediate XXXXXXXXXX business days preceding the Valuation Date and the immediate XXXXXXXXXX business days following the Valuation Date.

(ii) IPO: On or after the date of an IPO, the FMV of the Company will be determined as the closing price per Common Share on the Recognized Stock Exchange multiplied by the number of Common Shares outstanding as of such date. The average closing price will be determined by taking the average closing price per Common Share for the immediate XXXXXXXXXX business days preceding the Valuation Date and the immediate XXXXXXXXXX business days following the Valuation Date.

(iii) Change in Control: On the effective date of a Change in Control, the Fair Market Value of the Company will be determined as the aggregate price paid or attributable to each Common Share by or on behalf of the acquirer, multiplied by the number of Common Shares outstanding as of such date.

16. The allocation of SARs to each Grantee shall be as determined from time to time by the Board of Directors. Additional attribution of SARs to a Grantee who had SARs shall be accounted separately as if he was a new Grantee, according to and as provided for in 17.

17. The value of Stock Appreciation Rights ("Vs") for a Grantee shall be calculated as follows:

Vs = A + B + C + D + E
Where: A is the basis value and is calculated as follows:
A = Y x (L1 - L0)
Where:

Y is the number of SAR Units of a Grantee at Valuation Date

L1 is the Unit Value of a SAR as determined in accordance
with 15(f) above.

L0 is the Unit Value of a SAR that exists on the Grant Date

B is the anti-dilution value and is calculated as follows:
B = ? (Y1/X1 x N x L')
Where

? is the cumulative value for any period from the Grant Date of such amount as per the calculation of the immediate following parenthesis

Y1 is the number of SAR Units held by a Grantee immediately before the Grant Date of new SAR Units

X1 is the number of SAR Units issued to all Grantees immediately before the Grant Date of new SAR Units

N is the number of new SAR Units granted

L' is the unit value of a SAR as determined immediately before the Grant Date of new SAR Units

C is the negative value for a Grantee whom employment is terminated and is calculated as follows:
C = ? (Y2/X2 x Z)
Where

? is the cumulative value for any period from the Grant Date of such amount as per the calculation of the immediate following parenthesis

Y2 is the number of SAR Units held by a Grantee immediately before the Termination Date of another Grantee

X2 is the total number of SAR Units issued to all Grantees immediately before the Termination Date of another Grantee

Z is the negative accumulated value of SAR Units of a Grantee at Termination Date

D is the value of SAR Units of a Grantee whose termination has been a Termination for Cause and is calculated as follows:

D = ? (Y3/X3 x Vs0)
Where

? is the cumulative value for any period from the Grant Date of such amount as per the calculation of the immediate following parenthesis

Y3 is the number of SAR Units held by a Grantee immediately before the Termination Date of a Grantee whose termination has been a Termination for Cause

X3 is the total number of SAR Units issued to all Grantees immediately before the Termination for Cause of another Grantee Vs0 is the value of Stock Appreciation Right of a Grantee at the date of his/her Termination for Cause

E is the value not attributed to a Grantee whose termination took place before completing 3 years of services and is calculated as follows:

E = ? (Y4/X4 x T)
Where

? s the cumulative value for any period from the Grant Date of such amount as per the calculation of the immediate following parenthesis

Y4 is the number of SAR Units held by a Grantee immediately before the Termination Date of a Grantee whose termination took place before completing 3 years of services X4 is the total number of SAR Units issued to all Grantees immediately before the Termination Date of a Grantee whose termination took place before completing 3 years of services

T is the value not attributed to a Grantee because 3 years of services were not completed at Termination Date

18. Any grant of a Stock Appreciation Right shall be evidenced by an Agreement. To accept any Stock Appreciation Right, the Eligible Employee must execute the Agreement and the Non Compete and Confidentiality Agreement and return them to the Company, failing which the grant of a Stock Appreciation Right shall be null and void.

19. In the event of a Change in Control, the Company shall terminate the Plan. Notwithstanding 15(c) above, the value of the Stock Appreciation Rights shall be paid by the Company to each Grantee at the effective date of the Change in Control.

20. Stock Appreciation Rights shall not be transferable or assignable other than by will or the laws of succession. Notwithstanding the foregoing, the rights of a Grantee to receive cash on or after the Termination Date in accordance with the terms hereof shall expire upon the Grantee's death unless such rights devolve either by will or the laws of succession to a legal representative, dependant or relation of the Grantee. In the latter case, the rights of the deceased Grantee may be exercised by such legal representative, dependant or relation, as the case may be, and all references in the Plan or the relevant Agreement to the Grantee shall be considered to refer to such person. Neither participation in the Plan nor any action under the Plan shall be construed to give any Grantee a right to be retained in the service of the Company.

21. The Plan shall be unfunded. The Company's obligation hereunder shall constitute a general, unsecured obligation, payable solely out of its general assets, and no Grantee or other person shall have any right to any specific assets of the Company. The Company shall not segregate any assets for the purpose of funding its obligations with respect to Stock Appreciation Rights credited hereunder. Neither the Company nor the Board shall be deemed to be a trustee of any amounts to be distributed or paid pursuant to the Plan. No liability or obligation of the Company pursuant to the Plan shall be deemed to be secured by any pledge of, or encumbrance on, any property of the Company or any affiliate of the Company.

22. No Grantee or other person shall have any claim or right to be issued Common Shares on account of his/her rights pursuant to the Plan and under no circumstances shall a Stock Appreciation Right entitle a Grantee to exercise any voting rights or other rights attaching to the ownership of Common Shares.

23. The Plan shall be binding on all successors and assigns of the Company and a Grantee, including without limitation, the estate of such Grantee, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Grantee's creditors.

24. The Board may amend the Plan as it deems necessary or appropriate provided, however, that no amendment shall reduce the value of the Stock Appreciation Rights credited to the Grantees in accordance with the terms of this Plan prior to such amendment.

25. The Board may terminate the Plan at any time, upon which full payment of each Grantee's Stock Appreciation Rights shall be made within XXXXXXXXXX days of the Plan Termination Date. However, in the event the Plan is terminated, the Plan shall not be deemed officially terminated unless all Grantees receive the value of the SAR in accordance with the terms of this Plan calculated up to the last Valuation Date preceding the date of termination of the Plan, and any amount payable in accordance with 27 below hereof failing which all SAR Units not so redeemed shall continue to benefit from the applicable terms and conditions of the Plan as if the Plan had never been terminated.

26. In the event of a Change in Control or IPO within XXXXXXXXXX months after the Plan has terminated by the Board pursuant to 26 above, the Company shall make proportionate payments to each Grantee present at the date the Plan was terminated for any excess that would have resulted in the calculation of the unit value of Stock Appreciation Right had the Fair Market Value of the Company been determined in accordance with ii) or iii) of 15 (f) above. Payments such as determined above shall be made by the Company to each Grantee either at the effective date of Change in Control or at the date of the IPO. The amount paid by the Company to a Grantee that was an employee of a Canadian or a US subsidiary will be charged back by the Company to the particular subsidiary.

Purpose of the Proposed Transactions

The purpose for establishing the Plan is to enhance the Company's ability to attract and retain high quality individuals and to provide them with an opportunity to benefit from the appreciation of the value of the Company. For greater certainty, no SAR Unit will be made in lieu of or in satisfaction of salary or wages to which a participant is otherwise entitled.

Additional Information

To the best of your knowledge and that of the responsible officers of the parties identified above, none of the issues raised in this ruling request is:

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

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

(c) under objection by any of the Company or a related person,

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or

(e) the subject of a ruling previously issued to the Company or a related person by the Income Tax Rulings Directorate of the CRA.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed transactions, that the transactions are legally effective and that the transactions are completed as proposed, we rule as follows:

A. As long as a Grantee is not entitled to receive the value of a Stock Appreciation Right granted to such Grantee, the Plan will not constitute a salary deferral arrangement, as defined in subsection 248(1). When a Grantee is entitled to receive the value of the Stock Appreciation Right granted to such Grantee, it will be a question of fact as to whether or not the Plan constitutes a salary deferral arrangement at that time.

B. Provided the Plan remains unfunded, the Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1).

C. No amount will be included in the income of any Grantee pursuant to subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subparagraph 115(1)(a)(i) solely as a result of the granting of SAR Units under the Plan to such Grantee.

D. Any amount received under the Plan by or on behalf of a Grantee who is resident in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Grantee as employment income pursuant to section 5 and paragraph 6(1)(a) in the year of receipt to the extent that the Plan is not a salary deferral arrangement.

E. Any amount received under the Plan by or on behalf of a Grantee who is not resident in Canada, to the extent attributable to services performed in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Grantee pursuant to paragraph 6(1)(a) and subparagraph 115(1)(a)(i) in the year of receipt to the extent that the Plan is not a salary deferral arrangement.

F. Any deferred amount that a Grantee will have the right to receive at the end of a taxation year under the Plan that would constitute a salary deferral arrangement in respect of the Grantee will be included in the income of the Grantee for the year pursuant to paragraph 6(1)(a) and subsection 6(11) to the extent that the deferred amount is not otherwise included in computing the Grantee's income for the year or any preceding taxation year.

G. Subject to paragraph 18(1)(a) and section 67, any amount paid or payable in a year under the Plan, including any amount withheld in respect of taxes and other source deductions, will be deductible in computing the Company's income in the year in which the amount is paid or payable, in accordance with section 9.

H. All amounts payable under the Plan to or on behalf of the beneficiary of a Grantee, as a result of the death of a Grantee, will constitute a right or thing held by the deceased Grantee at the time of death for the purposes of subsections 70(2) and 70(3).

I. All amounts invoiced by the Company to its Canadian Subsidiaries as reimbursement of payments under the Plan made to employees of such subsidiaries will be included in computing the Company's income and deductible in computing the Canadian Subsidiaries income, in accordance with section 9.

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 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are implemented by or before XXXXXXXXXX. An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch