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 amount received as a result of "cashing out" of a stock option be eligible for 110 (1) (d) deduction?
Position:
Yes
Reasons:
Provided conditions in 110 (1) (d) are satisfied, the amount will be eligible for the deduction.
XXXXXXXXXX 970433
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed transactions is as follows:
1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation.
XXXXXXXXXX.
The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
2. XXXXXXXXXX
3. In conjunction with the IPO, XXXXXXXXXX created the XXXXXXXXXX Stock Option Plan (the "Plan"). XXXXXXXXXX has provided its management, officers and key employees with options to acquire its common shares under the Plan. The stated purpose of the Plan is to:
(a) promote a proprietary interest in XXXXXXXXXX and its subsidiary and affiliated corporations (hereinafter referred to as the "XXXXXXXXXX Group") among its management, officers and key employees;
(b) align the interests of the XXXXXXXXXX Group's management, officers and key employees with those of its public shareholders;
(c) encourage management, officers and key employees to further the development of the XXXXXXXXXX Group; and
(d) attract management, officers and key employees necessary for the long term success of the XXXXXXXXXX Group.
4. The principle features of the Plan are as follows:
(a) The Plan is administered by the Board of Directors of XXXXXXXXXX (the "Board"). The Board has full and complete authority to interpret the Plan and to prescribe such rules and regulations and make such other determinations as it deems necessary and desirable for the administration of the Plan. All decisions and determinations of the Board respecting the Plan is binding and conclusive on the Plan and its participants.
(b) The Board may, in its sole discretion, designate any management, officers and employees of the XXXXXXXXXX Group as participants in the Plan. The Board will designate from time to time individuals ("Optionees") to whom options to acquire shares shall be granted, the number of shares that may be acquired and the date the option becomes effective.
(c) The aggregate number of XXXXXXXXXX shares of XXXXXXXXXX (the "Option Shares") for which options may be granted under the Plan cannot exceed XXXXXXXXXX Option Shares. Option Shares not delivered under an option which expires or terminates continue to be available for other options under the Plan. The aggregate number of Option Shares available to any one person under the Plan cannot exceed XXXXXXXXXX% of the number of all the then outstanding Option Shares.
(d) The exercise price under the options granted under the Plan is equal to the market price (the "Market Price") of the Option Shares on the day prior to the date that the option is granted to the Optionee. "Market Price" is defined as the selling price for the Option Shares on The XXXXXXXXXX Stock Exchange at the close of business on the day prior to the day the option is granted or, if no such sale is reported on that day, the simple average of the closing bid and ask quotations for such Option Shares on The XXXXXXXXXX Stock Exchange at the close of business on that particular day.
(e) The Board will at the time of granting an option under the Plan specify a particular time period or periods following the date the option is granted during which an Optionee may exercise his or her option and may designate the number of Option Shares in respect of which such Optionee may exercise during certain time periods. All options issued under the Plan will expire on a date determined by the Board which cannot be later than XXXXXXXXXX years from the date of the option being granted.
(f) The Optionee is required to pay the full amount required under the Plan on the exercising of his or her option to acquire Option Shares. The Board may, in its sole discretion, give financial assistance by means of a loan, guarantee or otherwise to any Optionee to enable him or her to exercise any or all of the options granted under the Plan.
(g) When an Optionee ceases to be an employee of the XXXXXXXXXX Group, the Optionee (or in the case of death, the Optionee's estate) has XXXXXXXXXX months (XXXXXXXXXX months in the case of death or long-term disability) to exercise any options that he or she is entitled to exercise, under the term of the option granted, as of the date of termination.
(h) The Board may amend or terminate the Plan at any time but in any such event, the rights of Optionees related to any granted but unexercised options will be fully preserved and maintained. No amendment to the Plan can confer additional benefits to Optionees or other eligible employees without prior approval of regulatory authorities and shareholders of XXXXXXXXXX.
5. Options under the Plan have been granted to approximately XXXXXXXXXX employees of the XXXXXXXXXX Group. All options granted under the Plan are rights to acquire Option Shares which are traded on XXXXXXXXXX. Other than certain additional options granted to the XXXXXXXXXX and options granted to individuals whose employment with the XXXXXXXXXX Group commenced after XXXXXXXXXX, all options under the Plan were granted in conjunction with the IPO. The initial options were granted at the IPO issue price of the Option Shares and the additional options were granted at the Market Value of the Option Shares on the date of each grant in accordance with the terms of the Plan.
XXXXXXXXXX
6. XXXXXXXXXX and employees related to XXXXXXXXXX (hereinafter referred to as "Related Employees") are related to XXXXXXXXXX for purposes of the Act. Employees not related to XXXXXXXXXX will be referred to as the "Arm's Length Employees".
7. XXXXXXXXXX
Proposed Transactions
8. The Board will identify certain key executives and members of management as key employees (the "Key Employees") for purposes of the Plan.
9. In accordance with its authority under the Plan as described paragraph 4(a) above, the Board will provide each Key Employee with the right to surrender to XXXXXXXXXX all or any part of an option which could be exercised
XXXXXXXXXX
The limited time frames correspond with the period during which shareholders who would be designated as insiders may trade. Any expansion of this period could result in unfavourable market reaction. For this reason the Board proposes to limit the periods during which employees may elect to receive cash in lieu of exercising the option to purchase shares. Furthermore, due to the restricted availability of excess cash for this purpose, the Board also proposes to limit the right to make this election to the Key Employees.
10. Where the Key Employee is employed by a subsidiary or affiliated corporation, the particular subsidiary or affiliated corporation will reimburse XXXXXXXXXX for any amounts paid by XXXXXXXXXX to its employees that have exercised their Cash Out Rights.
11. XXXXXXXXXX is of the view that the provision of the Cash Out Right, as described in paragraph 9 above, would not constitute an amendment or modification to the Plan requiring prior approval of regulatory authorities and shareholders of XXXXXXXXXX.
Purpose of the Proposed Transactions
12. The purpose of the Cash Out Right is to allow XXXXXXXXXX to use its excess cash to fund the payment of the Cash Out rights thereby avoiding any potential negative effects that the sale of a large number of XXXXXXXXXX shares may have on the market immediately after the XXXXXXXXXX.
13. To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, that the Plan constitutes an agreement to issue shares to employees for the purposes of section 7 of the Act, and that the proposed transactions are completed in the manner described herein, we rule as follows:
14. Where an Arm's Length Employee exercises his or her Cash Out Right:
(a) the amount received from XXXXXXXXXX by the Arm's Length Employee in respect of the economic value of the Cash Out Right exchanged for the cancellation of certain options to acquire shares under the Plan will be taxable in the Arm's Length Employee's hands in accordance with paragraph 7(1)(b) of the Act; and
(b) provided the conditions of paragraph 110(1)(d) of the Act are satisfied, the amount received by the Arm's Length Employee will be eligible for the deduction under paragraph 110(1)(d) of the Act.
15. XXXXXXXXXX will be entitled to claim a deduction in computing its income from business under subsection 9(1) within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act for the amounts paid to Arm's Length Employees employed by XXXXXXXXXX for the Cash Out Rights, as described in ruling A above. For greater certainty, paragraph 7(3)(b) will not apply to deny the deduction for the amount paid to the Arm's Length Employees by XXXXXXXXXX.
16. A subsidiary or affiliated corporation of XXXXXXXXXX will be entitled to claim a deduction in computing its income from business under subsection 9(1) within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act for the amounts paid to XXXXXXXXXX as a reimbursement of the amounts paid by XXXXXXXXXX to Arm's Length Employees, as described in ruling A above, that are employed by the particular subsidiary or affiliated corporation. For greater certainty, paragraph 7(3)(b) will not apply to deny the deduction for such amounts paid by the subsidiary or affiliated corporation.
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 Amendments to the Plan are implemented within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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