13 May 2003 External T.I. 2002-0179805 - Stock Option Benefit Reimbursement

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: A Canadian company ("Canco") and its foreign subsidiary enter into a Funding Agreement whereunder the foreign subsidiary agrees to make a payment to Canco equal to the stock option benefit ("price differential") enjoyed by the foreign subsidiary's employees on the exercise of options to acquire shares of Canco. The issue is the tax consequences of a payment which is in respect of a price differential which accrues for the period before the Funding Agreement is entered into.

Position: The payment would be included in the income of Canco.

Reasons: XXXXXXXXXX .N/A

XXXXXXXXXX 2002-017980
Fiona Francis
May 13, 2003

Dear XXXXXXXXXX:

This is in reply to your letter of December 13, 2002, wherein you requested our comments with respect to the tax consequences in a situation where a Canadian company ("Canco") issues its shares to the employees of its wholly-owned foreign subsidiary, under the terms of the foreign subsidiary's employee stock option plan, and the foreign subsidiary enters into an agreement to make a reimbursement to Canco.

You advise that, under a typical agreement between Canco and its foreign subsidiary (the "Funding Agreement"), the foreign subsidiary agrees to reimburse Canco for an amount equal to the difference between the market value of Canco's shares at the time the employee of the foreign subsidiary exercises the option and the amount received by Canco from the employee on the exercise of such options (the "price differential").

You note that it is our position that amounts reimbursed in respect of:

(a) the price differential on stock options granted after the Funding Agreement has been entered into; and

(b) the increase in the price differential on the pre-existing options (stock options granted to the employees of the foreign subsidiary before the Funding Agreement is entered into) that, in the circumstances, may reasonably be considered to have arisen after the date the Funding Agreement is entered into will not be included in the income of Canco under section 9 or 90, subsection 15(1) or 56(2), or paragraph 12(1)(x) of the Income Tax Act (the "Act").

However, you note that this position does not address a situation where, under the Funding Agreement, the foreign subsidiary reimburses Canco for the amount of the price differential that has accrued on pre-existing options from the time of grant to the date the Funding Agreement is entered into (the "Pre-Agreement Amount").

You request our views as to the tax consequences of a receipt of payment for the price differential under a Funding Agreement that also provides for the payment of a Pre-Agreement Amount.

It is our position that an amount received by Canco as a reimbursement of a Pre-Agreement Amount will be included in the income of Canco under subsection 15(1) of the Act.

The above comments are an expression of opinion and, as noted in Information Circular 70-6R5 issued on May 29, 2002, are not binding on the Canada Customs and Revenue Agency.

Yours truly,

Manager
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate
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