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 an amended stock option plan qualify for the paragraph 110(1)(d) deduction and will paragraph 7(9)(b) be satisfied?
Position: Yes, with provisos.
Reasons: The conditions in each provision are satisfied.
XXXXXXXXXX 2001-007649
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)
This is in reply to your letter 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 registered under the XXXXXXXXXX . The Company is a taxable Canadian corporation and a public corporation. The Company is in the XXXXXXXXXX business. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Company's head office is located at the above address. 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. XXXXXXXXXX ("Parent") is the indirect parent corporation of the Company. Parent is a multi-national corporation with affiliates throughout the world. Parent is resident in the XXXXXXXXXX and its shares are publicly traded in XXXXXXXXXX.
3. Parent established the XXXXXXXXXX (the "Plan") for the benefit of employees of related corporations situated outside the XXXXXXXXXX . An employee of a related corporation is entitled to participate in the Plan after XXXXXXXXXX of continuous service with Parent's group of related companies (the "Parent Group"). During XXXXXXXXXX, approximately XXXXXXXXXX employees of the Parent Group applied to join the Plan and XXXXXXXXXX employees of the Parent Group exercised options to acquire shares. Participation in the Plan was first offered to employees of the Company and its subsidiaries in XXXXXXXXXX (hereinafter the Canadian participants will be referred to as the "Participants").
4. In a Participant's election to participate in the Plan for a year, the Participant has to decide the amount that will be deducted from his or her monthly pay for a period of XXXXXXXXXX years. Under the Plan, the payroll deduction amount is fixed in local currency and, normally, the Participant is not able to change the monthly payroll deduction amount. The Plan provides for an aggregate minimum monthly deduction and for an aggregate maximum monthly deduction in respect of all of the elections filed by a particular Participant. Consequently, the aggregate amount that may be deducted in respect of a Participant's participation in the Plan has to be within the parameters set out in the Plan. The amounts deducted from a Participant's monthly pay are converted from Canadian dollars to XXXXXXXXXX at the exchange rate applicable for that month. The deducted amounts are retained by Parent and credited to an interest-bearing savings account for the benefit of the Participant. The savings account held on the Participant's behalf is credited with interest that is computed at variable monthly market rates. A Participant is provided with annual statements showing the amounts saved under the Plan and the interest earned in the year on his or her savings under the Plan.
At the time that a Participant elects to participate in the Plan, the Participant is granted a certain number of options to acquire Ordinary US$XXXXXXXXXX shares (the "Shares") of the Parent for a purchase price equal to XXXXXXXXXX% of the market price of the Shares. The number of Shares that may be acquired under the options is computed based on the particular election. The number of Shares that a Participant is entitled to acquire under his or her options is computed by taking the Participant's projected savings (interest included) (the "Projected Savings") in respect of the particular election and dividing by XXXXXXXXXX % of the market price of the Shares of Parent on the date that the Participant elected to participate in the Plan. Under the Plan, the market price of a Share ("Market Price") is defined as the average market price for a Share over the XXXXXXXXXX days immediately preceding the particular date.
On the XXXXXXXXXX anniversary of a Participant's election to participate in the Plan for any year, the Participant has XXXXXXXXXX to exercise his or her options under the Plan. The Participant may acquire the Shares under the stock options with the amounts credited to his or her savings account or the Participant may choose to let the options expire and to have the amounts held in his or her savings account paid out in cash. Where the amount credited to a Participant's savings account is less than the amount required to acquire the Shares under the options, the Participant is required to pay the difference when the option is exercised. Where the actual savings credited to a Participant exceeds the amount required to acquire the Shares under the option, the excess amount is refunded to the Participant when the option is exercised.
5. For the year XXXXXXXXXX, the Plan has been amended. When electing to participate in the Plan, a Participant can now elect to choose a XXXXXXXXXX savings period or the normal XXXXXXXXXX savings period. Under the XXXXXXXXXX savings plan, the rights and obligations are as described in 4 above except that the Participant will be subjected to monthly payroll deductions for a XXXXXXXXXX period and the Participant's options will be exercisable during the XXXXXXXXXX period that commences after the XXXXXXXXXX anniversary of the Participant's election to participate in the Plan for that year. The XXXXXXXXXX savings plan remains as described in 4 above.
6. The Shares are prescribed shares within the meaning assigned by subsection 6204(1) of the Income Tax Regulations. However, Participants are not entitled to the deduction under paragraph 110(1)(d) of the Act because the condition in clause 110(1)(d)(ii)(A) is not satisfied (i.e., the amount payable by a Participant to acquire a Share is less than the fair market value of the Share at the time that Parent agreed to sell the Share to the Participant). All of the other conditions in paragraph 110(1)(d) of the Act are satisfied by the Participants in the Plan.
Proposed Transactions
7. In accordance with the terms of the Plan, the Parent will issue a memorandum to the Participants in the Plan allowing the Participant to choose to exercise their options at a price equal to the Market Price of the Shares on the date the options were granted under the Plan. Consequently, the Participant will be entitled to exercise his or her options at the Market Price of the Shares on the date the options were granted or the Participant will be entitled to exercise his or her options at a price equal to XXXXXXXXXX% of the Market Price of the Shares on the date the options were granted.
8. Most Participants will elect to exercise some or all of their options at a price equal to the Market Price of the Shares on the date the options were granted. Where the amount payable by the Participant to acquire the Shares under the options exceeds the amount credited to a Participant's savings account, the Participant will pay the difference in cash at the time the options are exercised.
Purpose of the Proposed Transactions
9. The purpose of the proposed transactions is to allow Participants to qualify for the deduction under paragraph 110(1)(d) of the Act in respect of the stock option benefit that the Participant will have to include in his or her income under paragraph 7(1)(a). The proposed transactions will also enable a Canadian Participant to qualify for the deferral of the recognition of the stock option benefit described in subsection 7(8) of the Act.
10. 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 Company or of a person related to the Company;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Company or of a person related to the Company;
(c) is under objection by the Company or by a person related to the Company;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Company.
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 carried out as described above, we rule as follows:
A. Provided that the conditions in paragraph 110(1)(d) are satisfied and that the Market Value represents the fair market value of a Share on the date the options were granted under the Plan, a Participant that exercises the right to pay the Market Price on the date that the options were granted under the Plan will be entitled to a deduction under paragraph 110(1)(d) of the Act and will satisfy the condition in paragraph 7(9)(b) of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information circular 70-6R4 dated January 29, 2001, and is binding on the Canada Customs and Revenue Agency provided that the proposed amendment to the Plan is completed by XXXXXXXXXX.
Since a Participant will be allowed to exercise his or her options at the discounted price or at the Market Price on the date the options were granted, we are of the view that paragraph 110(1)(d) will not apply where paragraph 7(1)(b) applies to a Participant that disposes of his or her options. Because of the two prices that can be paid under the option, clause 110(1)(d)(ii)(A) of the Act will not be satisfied by the Participant.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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