XXXX
Tel: (613) 957-2139 C. Tremblay
April 2, 1987
Dear Sirs:
Re: Restricted Stock Plan
This is in reply to your letter of November 12, 1986 concerning the tax implications of a hypothetical case involving Mr. A, a U.S. citizen, resident in Canada and the use of a restricted stock plan.
Our understanding of the hypothetical situation is as follows:
1) Mr. A is a U.S. citizen, 44 years of age.
2) Mr. A had been employed by a private corporation resident in the U.S. ("USCO") for 15 years, most recently in a managerial position.
3) Mr. A was transferred to the Canadian branch operation of USCO in 1984. He is general manager of the Canadian branch, a senior management position.
4) Mr. A will likely remain in Canada until about 1990 at which time he will transfer back to USCO.
5) Mr. A is paid by USCO in U.S. dollars. His salary is charged to the Canadian branch.
6) Mr. A is a resident of Canada for income tax purposes for the period from 1984 through 1990.
7) In 1986, USCO awards Mr. A "bonus units" under a "restricted stock plan" (pursant to I.R.S. Code Section 83) at no cost to Mr. A. The stated purpose of the award is to "compensate personnel of experience and ability in the employ of USCO for their contributions to the growth and profits of USCO and thereby encourage them to continue to make contributions in the future". Bonus units consist of stock of USCO. Share certificates are issued by USCO registered in the name of Mr. A. Each such certificate bears a legend referring to the restrictions under the plan. Certificates are held by USCO until such time as the restrictions are removed.
8) Under the plan, Mr. A has all the rights of a stockholder (including the right to vote the shares and to receive all dividends or other distributions). However, until such time as the release date, neither stock received nor any interest therein may be sold, exchanged, assigned, transferred, discounted, pledged or otherwise disposed of. Subsequent to the date the restrictions lapse, shares may only be transferred or disposed of in accordance with the bylaws of USCO.
9) In order for the restrictions to lapse, certain conditions must be met, as follows:
a) The employee must not have violated the terms and conditions of a written employment agreement since the date bonus units were awarded.
b) The employee must have been continually employed by USCO during the entire period since the date bonus units were awarded until the "release date".
The release date is the month the employee reaches age 57. Certificates will be released from the restrictions in five annual instalments (i.e. 1/5 age 57, 1/5 age 58, and so on).
10) The plan indicates that, in the event of death of Mr. A, the underlying stock will be delivered to his designated beneficiary and all restrictions are automatically released.
11) USCO has the right to terminate employment at any time, with or without cause. If employment is terminated, all rights under the plan are cancelled and the stock returned to treasury stock of USCO.
You have requested our views with regards to the following questions:
(A) It is your understanding that the granting of the stock plan under the conditions set out above may result in an immediate benefit to the employee under section 7 of the Income Tax Act (the "Act") notwithstanding the fact that the shares are held conditionally. You ask whether, in computing the amount of the benefit, it is appropriate to apply a discount factor for both the time value of money and the likelihood of forfeiture.
(B) Assuming the discount factor is applied as described above, you ask if any additional benefits would result in respect of the same award under the plan pursuant to section 7 of the Act in subsequent years, given that the discount factor should decrease over time.
(C) You also wanted to know how the taxpayer should treat amounts included in income in a previous taxation year(s) pursuant to section 7 of the Act if he should leave the employ of USCO and thereby forfeit any rights awarded under the plan.
It is our view that the following income tax consequences would result:
(A) The employee, in this case Mr. A, is deemed to have received a benefit pursuant to paragraph 7(1)(a) of the Act. As stated in paragraph 6 of IT-113R2 , if the employee acquires shares pursuant to an agreement, the provisions of which prohibit transfer of the shares for a period of time, the employee is considered to have "acquired the shares". The value of the shares is considered to be the fair market value at the time of acquisition less an appropriate discount in respect of the restriction.
(B) The discounted amount added to the employee's income in the year the shares are acquired would not change in subsequent years to include any additional benefits, in respect of that year, given that the discount factor should decrease over time. Furthermore, no amount would be included in income in subsequent taxation years as an employment benefit to reflect the fact that the shares have increased in value after the year of acquisition.
(C) If the taxpayer leaves the employ of USCO and thereby forfeits any rights awarded under the plan, the shares are considered to be disposed of pursuant to subsection 54(c) of the Act at nil. The taxpayer, by virtue of paragraph 53(1)(j) of the Act may add the amount included in income under section 7 of the Act to the adjusted cost base of the shares. This could result in a capital loss in the year of termination.
We trust these comments will be of assistance to you in this matter.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch