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Highlights
INCENTIVES AND BENEFITS
Stock Option Deduction Under Paragraph 110(1)(d):
Unexpected Issues Arising in the Context of Corporate Acquisitions
Anu Nijhawan
For employees of public corporations, stock options have traditionally represented the "holy grail" of equity-based compensation. This preference for stock options has, at least in part, been driven by the preferential tax treatment afforded to employee stock options under the provisions of section 7 and paragraph 110(1)(d) of the Income Tax Act. In particular, in order to parallel the treatment given to capital gains, paragraph 110(1)(d) allows an employee optionholder a deduction equal to one-half of the amount of the employment benefit deemed to have been received by the employee at the time of exercising and/or surrendering the option if certain conditions are met, including: the employee optionholder must deal at arm's length with the employer, the entity granting the option, and the entity whose shares can be acquired under the option immediately after the option has been granted. In the context of a corporate acquisition or takeover of a TargetCo, it has become relatively commonplace for the vesting of employee stock options to be accelerated, thus giving the TargetCo optionholders the opportunity to exercise the options and tender the TargetCo shares so received to the bid or, alternatively, to surrender the options in exchange for a cash payment equal to the in-the-money amount. In ensuring that employee optionholders who elect under either of these alternatives remain entitled to claim the 50% deduction permitted by paragraph 110(1)(d), it is critical that the TargetCo shares underlying the options constitute "prescribed shares" at the time the option is exercised or surrendered. Anu Nijhawan discusses the potentially unexpected issues which can arise in ensuring this requirement is satisfied in the context of a take-over bid or other acquisition structure.
COMPENSATION PLANS
Equity-based Compensation for Income Funds – Part
I
David W. Ross
Many, but not all, of the compensation plans which are used in the corporate world can be used for income funds. In Part I of this article, David Ross provides a comparison of equity-based compensation plans and highlights some of the differences in plans as between the corporate world and the income fund world. The author discusses variables, option plans, appreciation rights, performance units and deferred stock units. Equity-based compensation plans as applied to income trusts have a few differences as compared to their corporate cousins. Options for shares or units are essentially the same but in many cases option plans for units provide for a declining price to factor in the large distributions on the units. Appreciation rights plans often known as SARs, UARs, PSUs or PUs all essentially provide a formula for calculating additional cash compensation and can essentially be similar for both income funds and corporations. Many of these types of plans rely on advance tax rulings to ensure that they are not considered salary deferral arrangements. Preferred stock unit plans, however, are unique to the corporate world and are not directly translatable for income fund purposes. Part II of this article will examine some of the alternatives to deferred stock units that can be used by income funds.
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Board
Randy V. Bauslaugh
Blake, Cassels & Graydon LLP
Toronto
General Editor, Pensions
William R. Holmes
Thorsteinssons LLP
Vancouver
General Editor, Practice
Julie Y. Lee
Osler, Hoskin & Harcourt LLP
Toronto
General Editor, Incentives and Benefits
Elizabeth M. Brown
Hicks Morley Hamilton Stewart Storie LLP
Toronto
Caroline L. Helbronner
Blake, Cassels & Graydon LLP
Toronto
Mariette Matos
Buck Consultants
Toronto |