6 September 1990 Internal T.I. 900199 F - Phantom Stock 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.

September 6, 1990

Dear Sirs:

Re:  Phantom Stock Plan

We are replying to your letters of December 15, 1989 and February 7, 1990, concerning the conversion of an employee stock option plan to an equity participation incentive plan and vice versa.  We apologize for the delay in providing a response to your questions.

In our conversation of February 19, 1990, you indicated that you were primarily interested in the consequences relating to the situation described in your letter of February 7, 1990.  In that letter, you described a situation  24(1)

From the exhibits in your letter, it is apparent that you have an actual proposed transaction in mind.  We are reluctant to comment on proposed transaction in mind.  We are reluctant to comment on proposed transactions except by way of an advance income tax ruling as described in Information Circular 70-6R "Advance Income Tax Rulings".  Please note that the current rate for advance rulings is $80 per hour and the minimum fee has been replaced by a $400 deposit.  However we can offer the following general comments.

There are no rollover provisions applicable to an exchange of employee stock options for units in a phantom stock plan or vice versa.  The value of the equity participation units received in exchange for the forfeited stock options would be deemed to be a benefit received by the employee by virtue of his employment under paragraph 7(1)(b) of the Act.

At the 1988 Canadian Tax Foundation Conference, the Department confirmed that a phantom stock option plan would be considered to be a salary deferral arrangement within the meaning of subsection 248(1) of the Act where the amount to be paid to the employee on a specific date is the value of the units (rather than the increase in the value of the units in the plan.  In our view, 24(1)

In your December 15th letter, you described a situation where an employer has an equity participation plan and wants to convert it to an employee stock option plan.  You stated that the equity participation units are to be exchanged for employee stock options of equivalent value.  We understand from our telephone conversation that the total exercise price of the initial options granted under the employee stock option plan in exchange for the cancelled units would be the difference between the fair market value of the shares at the time the options were granted and the fair market value of the cancelled units.

You asked whether the exchange of the phantom stock plan units for the options to purchase stock would be considered to be a disposition of property or whether the Department would allow a rollover from one plan to the other.  As a phantom stock option plan is a salary deferral arrangement, the value of the rights under the plan would have already been included in the employee's income and therefore there would be no further tax consequences.

You also asked whether the exchange would have any effect on the cost of the options acquired, on the application of section 7 of the Income Tax act or on the eventual disposition of the shares. In this regard, we draw your attention to clause 4 of the draft amendments to the Income Tax Act as released by the Department of Finance in July, 1990.  It is proposed that section 7 will be amended to reduce the benefit determined thereunder by the amount paid or payable to the corporation by the employee.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch