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Highlights
STOCK OPTIONS
Imperial Tobacco Canada Limited v. R.: Re-opening the
Debate on the Deductibility of Stock Option Cash-Out Payments in the Course of
Corporate M&As
Anu Nijhawan, David Mercier
In order to eliminate all previously
issued employee stock options of a target corporation, many corporate
acquisitions are structured such that optionholders are permitted to surrender
their vested and unvested options in exchange for a cash payment equal to the
"in-the-money" value of the options. Where a cash payment is made to compensate
an employee for the surrender of a stock option, a critical issue, from
TargetCo's perspective, is whether TargetCo (or, after the transaction,
AcquirorCo) will be permitted a deduction for what is often a large cash outlay.
The key issue is whether the payment is on account of capital, in which case a
deduction is precluded by virtue of paragraph 18(1)(b) of the Income Tax
Act. The position generally taken by taxpayers is that this type of cash-out
payment is in the nature of an employment compensation expense and accordingly,
should be deductible pursuant to subsection 9(1). Indeed, that position has been
accepted by the Canada Revenue Agency with respect to cash-out payments made in
the ordinary course. That position notwithstanding, prior to Imperial
Tobacco, the only two cases on point – Kaiser and Canada
Forgings – raise significant concerns about the deductibility of
cash-out payments made in the course of takeover transactions. Anu Nijhawanand David Mercier discuss the recent decision of the Tax Court in
Imperial Tobacco in which a cash-out payment was held to be deductible and outline some of the structuring alternatives which may strengthen a
deductibility argument.
INDIVIDUAL PENSION PLANS
"Super-sized" Retirement Plan: the Benefits of an
Individual Pension Plan
Shelby L. Anderson
Shelby Anderson looks at the
benefits of an individual pension plan ("IPP"). An IPP is a "super-sized"
retirement plan, one that is designed to provide superior immediate tax benefits
and superior retirement benefits than its more popular cousin, the registered
retirement savings plan ("RRSP"). An IPP is typically an employer-sponsored
defined benefit pension plan that is generally created for the benefit of one
person (although that person's spouse or child may also be a beneficiary of the
IPP if they are also employed by the same employer). The annual benefits payable
under an IPP are defined by the terms of the plan, which can be customized to
suit the individual needs of the member, and are based on the individual's
annual employment income. An IPP can be funded by both the employer and the
member; however, the employer must fund at least 50%, to a maximum of 100%, of
the benefits accruing in the IPP. If both are used to their maximum potential,
using a combination of an IPP and an RRSP to fund retirement may yield optimal
retirement benefits available to high-income earners. The author notes that at
retirement, there are many ways through which the retirement benefits can be
paid. Income can be paid directly from the IPP's trust fund or can be
transferred to be paid out from a life income fund, a locked-in retirement
income fund, a locked-in retirement income account or an
annuity.
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Board
Elizabeth H. Boyd
Blake, Cassels & Graydon LLP
Toronto
General Editor, Pensions
Julie Y. Lee
Osler, Hoskin & Harcourt LLP
Toronto
General Editor, Incentives and Benefits
Gregory J. Winfield
McCarthy Tétrault LLP
Toronto
General Editor, Practice
Elizabeth M. Brown
Hicks Morley Hamilton Stewart Storie LLP
Toronto
Caroline L. Helbronner
Blake, Cassels & Graydon LLP
Toronto
Mariette Matos
Buck Consultants
Toronto |