2001 Ruling 2000-0057243 - OPTION EXCHANGE, PARENT MERGER

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: 1) Can an option provided by a foreign parent before its merger with another foreign corporation be exchanged for options issued by the merged corporation XXXXXXXXXX after the merger? 2) Can the merged corporation pay a bonus to Canadian employees that remain employed with the foreign parent's group of companies for XXXXXXXXXX after the merger where the conditions for receipt of the cash bonus is continued employment and the non-exercising of the exchanged options for XXXXXXXXXX ?

Position: 1) Yes. 2) Yes.

Reasons: 1) In this case the old options could be exercised during the XXXXXXXXXX period after the merger even though the corporation ceased to exist. A Special Corporate resolution provides for the issuance of shares and immediate conversion into shares of the merged corporation at the merger exchange rate. 2) Since the bonus plan is a separate and distinct plan, we can accept that the bonus is not consideration for the exchange of the options.

XXXXXXXXXX 								2000-005724

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company")
XXXXXXXXXX (the "Former Company") (XXXXXXXXXX)

This is in reply to your letters of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Company is a taxable Canadian corporation formed on XXXXXXXXXX as a result of the amalgamation of the XXXXXXXXXX (the "Competitor") under the Canada Business Corporations Act. The Company is a subsidiary in a worldwide group of companies with an ultimate XXXXXXXXXX parent, XXXXXXXXXX ("Parent"). Parent's shares are listed on the XXXXXXXXXX Stock Exchange. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").

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

2. Parent was formed on XXXXXXXXXX as a result of the merger (the "Merger") of a XXXXXXXXXX based company, XXXXXXXXXX ("Former Parent"), and another XXXXXXXXXX based company, XXXXXXXXXX ("Mergeco"). Under the terms of the Merger, each shareholder of Former Parent received XXXXXXXXXX share of Parent for each share of Former Parent held by the shareholder at the time of the Merger and each shareholder of Mergeco received XXXXXXXXXX share of Parent for each share of Mergeco held by the shareholder at the time of the Merger (the "Merger Share Exchange Rate").

3. Prior to the Merger, employees of the Former Company were granted options to acquire shares of the Former Parent under the various Former Parent stock option plans in existence at that time and employees of the Competitor were granted options to acquire shares of Mergeco under the various Mergeco stock option plans in existence at that time. Under the terms of the options granted by the Former Parent and Mergeco, all outstanding options issued by Former Parent and Mergeco vested immediately upon the Merger.

4. At the time of the Merger, the employees of the Former Company and the employees of the Competitor had four choices with respect to their options:

(a) they could have exercised their options on the date on which the Merger became effective;

(b) they could wait and exercise their options at any time within XXXXXXXXXX after the Merger;

(c) they could wait and, subject to receipt of an advance income tax ruling, exchange their options to acquire shares of Former Parent or Mergeco for options to acquire shares of Parent within the period that ends XXXXXXXXXX after the Merger; or

(d) they could wait and allow their options to expire XXXXXXXXXX after the Merger.

In order to allow employees of the Former Company and of the Competitor to exercise their options granted by Former Parent and by Mergeco subsequent to the Merger, the Board of Directors of Former Parent and Mergeco passed a Special Resolution on XXXXXXXXXX. This Special Resolution was approved by the shareholders of Former Parent and Mergeco on XXXXXXXXXX. Under the Special Resolution, any shares of Former Parent and Mergeco, issued in respect of the stock options exercised after the Merger, had to be transferred automatically to Parent in return for shares of Parent. The number of shares of Parent that would be exchanged for the shares of Former Parent or Mergeco would be computed based on the Merger Share Exchange Rate.

Proposed Transactions

5. Many employees of the Company will exchange their options to acquire shares of Former Parent or options to acquire shares of Mergeco for options to acquire shares of Parent on XXXXXXXXXX (the "Exchanged Options").

(a) In the case of the former employees of the Former Company, the number of shares that could be acquired under an Exchanged Option to acquire a share of Parent will be the same as the number of shares that could be acquired under the old option to acquire a share of Former Parent that has been exchanged for the particular Exchanged Option. Accordingly, all of the terms of the Exchanged Option received by former employees of the Former Company will be the same as the terms of the option to acquire shares of the Former Parent that was exchanged for the particular Exchanged Option. We note that the Exchanged Option will be fully vested because of the merger that resulted in the vesting of all of the options to acquire shares of the Former Parent.

(b) In the case of the former employees of the Competitor, the number of shares that could be acquired under an Exchanged Option to acquire a share of Parent will be equal to XXXXXXXXXX times the number of shares that could be acquired under the old option to acquire a share of Mergeco that has been exchanged for the particular Exchanged Option rounded down to the nearest whole number. Other than the amendment to the number of shares, the terms of the Exchanged Option received by the former employees of the Competitor will be the same as the terms of the option to acquire shares of Mergeco that was exchanged for the particular Exchanged Option. We note that the Exchanged Option will be fully vested because of the merger that resulted in the vesting of all of the options to acquire shares of Mergeco.

6. The Directors of Parent will establish a Cash Incentive Plan (the "Plan"). The purpose of the Plan will be to provide a monetary incentive for employees to remain with the Parent group of companies for XXXXXXXXXX following the Merger. Parent is of the view that this XXXXXXXXXX period is usually very difficult and frustrating for many employees as they try to adjust to working for the new employer. This cash incentive will help to minimize the loss of its key employees as a result of the Merger.

7. Under the terms of the Plan, a cash payment will be made on the XXXXXXXXXX anniversary of the Merger to those employees who remain with the Parent group of companies for the XXXXXXXXXX period and who do not exercise their Exchanged Options within that XXXXXXXXXX period. The amount of the payment will be equal to XXXXXXXXXX% of the aggregate strike price that the employee would have to pay if he or she exercised his or her Exchanged Options on the XXXXXXXXXX anniversary of the Merger. Parent is of the view that employees of the Parent group of companies that hold stock options will be less likely to leave their employment after the Merger and they will work harder to increase the value of Parent. The Plan allows for the payment of the cash incentive where employment is terminated under certain conditions before the end of the XXXXXXXXXX period. This would be the case where the employer terminates employment to achieve staff reductions that will result where there are unnecessary duplicate positions. In addition, an employee will qualify for the cash incentive if his or her employment ceases as a result of serious illness or death.

Purpose of the Proposed Transactions

8. The purposes of the proposed transactions are to pay a cash incentive to employees that stay with the Parent group of companies for XXXXXXXXXX after the merger and to allow employees to exchange existing options to acquire shares of Former Parent and Mergeco for options to acquire shares of Parent.

Additional Information

9. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Former Company or the Competitor or of a person related to the either of the companies;

(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Former Company or the Competitor or of a person related to the either of the two companies;

(c) is under objection by the Former Company or the Competitor or by a person related to the either of the two companies;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Former Company or the Competitor.

Rulings Given

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

A. Former employees of the Former Company and the Competitor that receive options to acquire shares of Parent in accordance with 5 above will be considered to have satisfied the conditions in paragraphs 7(1.4)(a) and 7(1.4)(b) of the Act. Provided paragraph 7(1.4)(c) of the Act is satisfied, the rules in paragraphs 7(1.4)(d) through (f) of the Act will apply in respect of the Exchanged Options received by the employees of the Company. For greater certainty, amounts paid under the Plan will not affect the application of subsection 7(1.4) of the Act.

B. The amounts received by employees of Company under the Plan will be included in the employees' income under subsection 5(1) 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 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate