1999 Ruling 9919173 - STOCK OPTIONS

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 the addition of a cash-out right, at the employee's discretion, to a stock option plan have any immediate tax consequence?

Position: No.

Reasons: The agreement remains an agreement to issue shares such that section 7 continues to apply and the addition of the cash out right is not a fundamental change to the plan such that a disposition of rights occurs.

XXXXXXXXXX 			991917

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

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

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer.

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

Relevant Facts

1. The Company is a corporation incorporated under the laws of XXXXXXXXXX and is a "private corporation" and a "taxable Canadian corporation" as defined for purposes of subsection 89(1) of the Income Tax Act (Canada) (the "Act").

2. The Company's registered office is located at XXXXXXXXXX.

3. The Company files its tax returns at the XXXXXXXXXX Tax Center and it deals with the XXXXXXXXXX Tax Services Office. Its tax account number is XXXXXXXXXX.

4. The Company and its wholly-owned subsidiary are primarily engaged in the XXXXXXXXXX.

5. The authorized capital of the Company includes common shares (the "Shares") of which XXXXXXXXXX Shares are outstanding. Approximately XXXXXXXXXX% of the outstanding Shares of the Company are owned by XXXXXXXXXX (the "Parent"), a corporation which is not a resident of Canada for purposes of the Act.

6. The Plan was established on XXXXXXXXXX, for officers and other designated employees of the Company and its subsidiaries.

7. The purpose of the Plan is to encourage and enable officers and key members of management to increase their share ownership of the Company commensurate with their accountability for and contribution to the Company's performance. The Plan also provides other employees with at least five years of service the opportunity for share ownership in order to increase employee identification with the interests of the Company and its shareholders. Increased share ownership is also intended to provide additional incentive for individuals to achieve long-range performance goals.

8. The principal features of the Plan are as follows:

(a) The Plan is administered by the Board of Directors of the Company (the "Board") which has authority to grant options under the Plan (the "Options") and to establish the terms and conditions applicable to the Options. The Board also has authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable and to interpret the provisions of the Plan.

(b) Subject to the provisions of the Plan, the Board may grant Options (subject to a maximum number of Shares) to eligible officers and employees of the Company (the "Participants"), determine the number of Shares to be covered by each Option and the option price thereof and determine the conditions and limitations applicable to the exercise of the Options.

(c) The Board establishes the option price at the time each Option is granted which price shall not be less than 100% of the fair value of the Shares on the date of the grant or on such other date as is specified by the Company.

(d) The Board has retained an independent professional valuation firm (the "Valuator") to provide a monthly valuation of the Shares based on a detailed analysis of various factors affecting the Company. The exercise price for the Options under the Plan is based on the then current valuation of the Shares provided by the Valuator.

(e) For the purpose of the Plan, "fair value" means the fair value of the Shares as determined by the Board, through the engagement of the Valuator.

(f) The time period during which an Option may be exercised is specified at the time of the grant of the Option. All Options granted on XXXXXXXXXX have a maximum duration of ten years.

(g) The right to exercise the Options is limited in the event of the death or disability of the particular Participant or the termination of the employment of the Participant in various circumstances.

(h) On an exercise of an Option, financial assistance may be provided to the Participant by the Company for the purpose of the payment of the option price of the Shares.

(i) In certain circumstances the Company has a right of first refusal to purchase Shares acquired by a Participant pursuant to the exercise of an Option, at the fair value of the Shares as determined by the Valuator.

(j) The Board has the right to amend the Plan subject to certain limitations, including a limitation prohibiting any amendment adverse to an employee holding any outstanding Option.

9. Options under the Plan have been granted to approximately XXXXXXXXXX employees of the Company and its wholly-owned subsidiary, XXXXXXXXXX. All outstanding Options were granted for a ten year period from XXXXXXXXXX subject to earlier termination in circumstances referred to above.

10. No person, including the Company and the Parent, has any obligation to purchase Shares acquired under the Plan by a Participant with the result that Participants have limited liquidity for the Shares.

Proposed Transactions

11. Pursuant to the terms of the Plan, the Board proposes to amend the Plan to give Participants the right either to exercise their Options or to surrender their Options for cancellation and receive a cash payment equal to the economic value of the Options (i.e. the excess, if any, of the fair value of the exercisable Shares under the Option over the option price) (the "Cash Out Right") less any amounts required to be withheld from such cash payment at law. Participants will be entitled to exercise the Cash Out Right in whole or in part and in lieu of any other right under the Plan.

Propose of the Proposed Transactions

12. The proposed amendment to the Plan is intended to provide liquidity for Participants who do not wish to otherwise acquire illiquid Shares. The Company believes that Participants may be reluctant to exercise Options due to the lack of liquidity for Shares and therefore it is desirable to amend the existing Plan to enhance the effectiveness of the Plan.

Other Information

13. To the best of our knowledge and the knowledge of the Company, none of the issues relevant to the rulings being requested is:

(a) raised in an earlier return filed by the Company or a related person,

(b) being considered by a tax services office or tax center in connection with a previously filed tax return of the Company or a related person,

(c) under objection by the Company or a related person,

(d) before the courts in respect of the Company or a related person, or

(e) the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate to the Company or a related person.

Rulings Given

A. The Cash Out Right described in 11 above will not constitute a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act.

B. No amount will be included in the income of a Participant under subsection 5(1), paragraph 6(1)(a) or paragraph 7(1)(a) of the Act by reason of the implementation of the proposed amendment or prior to receipt of any cash payment by a Participant pursuant to the exercise of the Cash Out Right.

C. Cash payments received under the Plan by a Participant pursuant to the exercise of the Cash Out Right will be included in the income of a Participant for the year in which the payments are received pursuant to paragraph 7(1)(b) or subparagraph 115(1)(a)(i) of the Act.

D. Provided the conditions of paragraph 110(1)(d) of the Act are satisfied, the amount received by a Participant pursuant to the exercise of the Cash Out Right will be eligible for the deduction under paragraph 110(1)(d) of the Act.

E. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in ruling C above that are paid by the Company to Participants who are employees of the Company in a particular year will be deductible by the Company in accordance with section 9 of the Act. For greater certainty, paragraph 7(3)(b) of the Act will not apply to deny the deduction for the amount paid by the Company to a Participant pursuant to the exercise of a Cash Out Right by the Participant.

The above advance income tax 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 provided that the proposed amendment to the Plan is made within 6 months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate