IBA 2001 CANCUN COMMITTEE NP STRUCTURING INTERNATIONAL EQUITY COMPENSATION PLANS CASE STUDY

IBA 2001 CANCUN COMMITTEE NP STRUCTURING INTERNATIONAL EQUITY COMPENSATION PLANS CASE STUDY CANADIAN APPROACH BY ALAIN RANGER FASKEN MARTINEAU DuMOULIN LLP Stock Exchange Tower Suite 3400, P.O. Box 242 800 Place Victoria Montreal, Québec H4Z 1E9 Tel: (514) 397-7555 Fax: (514) 397-7600 E-mail : aranger@mtl.fasken.com Vancouver Toronto Montréal Québec New York London

STRUCTURING INTERNATIONAL EQUITY COMPENSATION PLANS* A CANADIAN APPROACH Remuneration of employees through an equity compensation plan has become increasingly popular in recent years in the context of multinational corporations and Canadian employers and employees have been active participants in this phenomenon. Canadian corporations have expanded their activities abroad in the past ten years like never before and have established operations or subsidiaries in various countries. Similarly, during the same period, foreign corporations have discovered Canada as a new market and an increasing number of Canadian corporations have been the object of take-overs so that many Canadian employees have now become part of international groups. As a result of that globalization, Canadian practitioners have been faced with several tax, legal and other issues arising either in helping Canadian corporations and their subsidiaries to implement equity compensation plans for their Canadian and foreign employees, or in adapting foreign equity compensation plans to the Canadian tax and legal framework. Notwithstanding these developments and recent amendments, the Canadian tax system dealing with equity compensation has remained, in comparison with other countries, a very limited and simple structure. This paper will deal with the principal Canadian income tax and other legal aspects of international equity compensation arrangements affecting Canadian employees of foreign corporations rather than the rules applicable to Canadian corporations with regards to their foreign employees. 1 In the first part, we will summarize the principal rules applicable to stock option arrangements and other forms of equity compensation. The second part will address in greater detail the various questions raised by the case study. Part I Canadian Perspective on Equity Compensation Plans 1. Income Tax a) introduction As a preliminary remark, it is worth mentioning that residence, by opposition to citizenship for example, is the basis of assessment under the Canadian tax regime. An individual who is subject * The author would like to thank Thomas Copeland for his precious collaboration and Daniel Yelin for his comments. 1 The term employer used in the paper refers to a Canadian corporate employer which is an affiliate of the foreign issuer and the term employee refers to a Canadian participant in an equity compensation plan. Such a plan is referred to herein as an arrangement.

to tax in Canada will be taxed at graduated rates, i.e. the rate of tax increases in proportion to the annual income of the taxpayer. In addition to the tax payable to the Canadian federal government, individuals residing in Canada are subject to provincial income tax, which is based on the province of residence of the individual at the end of a calendar year. Historically, the provincial income tax has generally been calculated as a percentage of the Canadian federal tax. However, the province of Quebec, which has its own income tax legislation, establishes the income of an individual under its own rules (in most instances, these rules are similar to the federal rules) and levies tax at its own gradual rates. Other provinces are now beginning to adopt their own income tax rules and rates as well. In 2001, an individual residing in Canada is taxable on his or her income (including employment income) at a maximum rate that ranges between approximately 39% to 48.6% depending on the province of residence at the end of the year. An individual residing in Canada in any given year is liable to pay tax in Canada on his or her worldwide income, including his or her income for the year from each office and employment. An individual s income for a taxation year from an office or employment is composed of the salary, wages and other remuneration, including gratuities, received by the individual during the year. For purposes of the Income Tax Act (Canada) ( ITA ), an employee includes an officer. Furthermore, the definition of office at subsection 248(1) of the ITA provides that this term includes the position of a corporation director and adds that officer means a person holding such an office. b) taxation of employment benefit - general The taxation of an employment benefit pursuant to an employee stock option arrangement is provided for under section 7 of the ITA, which constitutes a system of taxation in and of itself within the broader section of the ITA dealing with employment income. 2 The rules of section 7 apply to both domestic and foreign arrangements with respect to shares issued or sold by a Canadian or a foreign employer, or by any corporation with whom the employer does not deal at arm s length. Therefore, section 7 determines the income tax consequences for an employee participating in a domestic stock option arrangement or an international stock option arrangement 3. Given the definitions of employee and office found in the ITA 4, the rules of 2 Where the conditions of application of section 7 are met, paragraph 7(3)(a) states that, except as provided by section 7, an employee is deemed to have neither received nor enjoyed any benefit under, or because of, the stock option arrangement. 3 Section 7 applies where a particular corporation has agreed to sell or issue its own securities or securities of another corporation with which it does not deal at arm s length to one of its employees or to an employee of a corporation with which it does not deal at arm s length. The Canada Customs and Revenue Agency ( CCRA ), the agency responsible for the administration of the ITA, gives a broad meaning to the word agree and takes the position that section 7 also applies to shares issued under a bonus plan or without any formal written agreement. 4 Supra, section a). 2

the ITA dealing with employee stock arrangements apply to ordinary employees as well as to officers and directors. Under section 7 of the ITA, the benefit deemed to be received pursuant to a stock option arrangement is calculated at the time of exercise of the option and acquisition of the securities (or at a later date in certain circumstances 5 ), and not at the time at which the rights are granted under the stock option arrangement. 6 As a general rule, paragraph 7(1)(a) provides that if the employee has acquired shares under the arrangement, the employment benefit is equal to the difference between the fair market value ( FMV ) of the shares at the time they are acquired by the employee and the aggregate of (i) the amount paid, or to be paid, for the shares at the time the employee acquired them and (ii) the amount, if any, paid by the employee to acquire the right to acquire the shares. Additional rules exist in order to deal with various changes in ownership of the stock option 7. For instance, paragraph 7(1)(b) of the ITA states that if the employee has transferred or otherwise disposed of rights under the stock option arrangement in respect of some or all of the shares to a person with whom the employee was dealing at arm s length, a benefit is deemed to be received by the employee because of his or her employment in the taxation year in which the disposition occurred. The value of the deemed employment benefit is equal to the excess of the value of the consideration received for the disposition of the rights over the amount, if any, paid by the employee to acquire the rights. If, however, the rights of the employee under the arrangement have, by one or more transactions between persons not dealing at arm s length, become vested in a person other than the employee who has acquired shares under the arrangement, paragraph 7(1)(c) establishes that a benefit, equal to the excess of the FMV of the shares at the time of their acquisition by the non-arm s length person over the sum of (i) the amount paid, or to be paid, to the issuer by the non-arm s length person for the shares and (ii) the amount, if any, paid by the employee to acquire the rights to acquire the shares, is deemed to have been received, in the taxation year in which the 5 Infra, section c). 6 Special rules are applicable to arrangements that provide for the issuance of shares of a Canadian-controlled private corporation where the benefit is generally taxable in the year of disposition of the shares rather than in the year of exercise of the option. Given the scope of this paper, these rules will not be reviewed. 7 Subsection 7(1.4) of the ITA allows for some changes in the ownership of the stock options on a tax-deferred basis. In general terms, where an employee exchanges his option to acquire shares of a particular issuer for an option to acquire shares of the same issuer, of a corporation with whom the issuer does not deal at arm s length after the exchange, of a corporation formed on the amalgamation or merger of the issuer and one or more other corporations or of a corporation with whom such amalgamated or merger corporation does not deal at arm s length immediately after the exchange and the FMV of the new option is not greater than the FMV of the old option, the employee is deemed not to have disposed of the old option and not to have acquired the new option and such new option is deemed to be the same option and a continuation of the old option. 3

non arm s length person acquired the shares, by the employee because of his or her employment. If the employee is deceased at the time of the acquisition of the shares by the non-arm s length person, the employment benefit is deemed to have been received by the non-arm s length person in that year as income from an employment performed by such person in that year in the country in which the deceased employee primarily performed the duties of his employment. Paragraph 7(1)(d) states that if the rights of the employee under the arrangement have, by one or more transactions between persons not dealing at arm s length, become vested in a particular person who has transferred or otherwise disposed of rights under the arrangement to another person with whom the particular person was dealing at arm s length, a benefit, equal to the excess of the value of the consideration for the disposition over the amount, if any, paid by the employee to acquire those rights, is deemed to have been received, in the taxation year in which the particular person made the disposition, by the employee because of his employment. Again, if the employee was deceased at the time of the acquisition of the rights by the arm s length person, the employment benefit is deemed to have been received by the non-arm s length person in that year as income from an employment performed by the non-arm s length person in that year in the country in which the deceased employee primarily performed his or her employment duties. Finally, if an employee who has died owned, immediately prior to his or her death, a right to acquire shares under an arrangement, paragraph 7(1)(e) provides that a benefit, equal to the amount, if any, by which the value of the right immediately after the death exceeds the amount, if any, paid by the employee to acquire the right, is deemed to have been received, in the taxation year in which the employee died, by the employee because of his or her employment. Subsection 164(6.1) of the ITA will provide relief, in certain circumstances, where the value of the stock option decreases after the death of the employee. More particularly, if the right to acquire the shares is exercised or disposed of by the employee s legal representative within the first taxation year of the estate of the employee and the representative so elects on or before a prescribed day and in the prescribed manner, the amount by which (i) the amount of the benefit deemed to have been received by the employee in respect of the stock option exceeds (ii) the amount by which the value of the right immediately before the time it was exercised or disposed of exceeds the amount, if any, paid by the employee to acquire the right 8, is deemed to be a loss of the employee from employment for the year in which he or she died. This means the deemed employment loss can be used to reduce the employment benefit otherwise calculated for the taxation year of the employee s death. c) deferral of recognition of the benefit 8 The ITA provides certain adjustments to the amount of the employment loss where the employee was entitled to a deduction with respect to the employment benefit in the year of death (infra, section d)), as well as to the cost of the rights for the estate. 4

While the general rule is that the employment benefit is taxable in the year the employee exercises the option and acquires the shares, a recently introduced exception 9 allows for the deferral of taxation of a portion or the full amount of the employment benefit from the date the option is exercised to the date at which the shares acquired pursuant to the stock option are sold or exchanged. More particularly, the taxable benefit may be deferred until the earlier of the year in which the employee disposes of the shares 10, the year in which the employee dies 11 or the year in which the employee becomes a non-resident of Canada 12. However, certain conditions are prescribed in order to benefit from that deferral: (i) (ii) (iii) (iv) the shares acquired under the stock option must be at risk, i.e. they must be ordinary common shares without guarantee, retraction or redemption features; the amount payable by the employee to acquire the shares under the arrangement is not less than the excess of the FMV of the shares at the time the stock option is granted over the amount, if any, payable by the employee to acquire the right to acquire the shares; the employee must deal at arm s length with the employer or any other corporation granting the stock option immediately after entering into the option arrangement; immediately after the grant of the option, the employee must not be a specified shareholder (i.e. a person that owns, directly or indirectly, at least 10% of the issued shares of any class of the capital stock of a particular corporation or a related corporation) of the entity granting the option, the employer or the entity whose shares could be acquired under the option; and 9 The deferral is available for shares acquired after February 27, 2000, without regard to the date the option relating thereto was granted or when it vested. It is therefore generally available for stock options existing on and after February 27, 2000. 10 Subsection 7(1.5) of the ITA provides for a deferral of the employment benefit where a disposition of shares occurs as part of a corporate reorganization or capital restructuring as long as the employee does not derive an economic benefit. Subsection 7(1.5) applies in situations similar to those in which subsection 7(1.4) applies (supra, footnote 7). 11 Subject to one limited exception, a taxpayer is deemed to dispose of all of his or her capital property immediately before his or her death at the FMV of the property immediately before the taxpayer s death (infra, section h)). 12 Where an individual ceases to be resident in Canada, he or she is deemed to dispose of his or her capital property for proceeds of disposition equal to their FMV at that time. 5

(v) the shares must be shares of a class of shares listed on a prescribed Canadian or foreign stock exchange. 13 The deferral, which is elective 14, is subject to an annual Cdn$100,000 limit on the value of all qualified options vested (i.e. when they first become exercisable) in a particular calendar year with respect to the employee. 15 This $100,000 limit will generally be based on the FMV of the shares subject to the arrangement at the time the option was granted. 16 Any portion of the $100,000 limit available in any given year that is not used by the employee (for example, because the FMV of the shares acquired pursuant to an option that vested in the year was less than $100,000 at the time the option was granted) cannot be carried forward to another year. For example, let us assume that an employee has an option to acquire 8,000 shares of the capital stock of his or her employer s parent corporation and that the exercise price is $20 a share, a price which corresponds to the FMV of the shares at the time the option is granted. Half of the option vests in 2002 and the other half in 2003. If the employee exercises his option in 2005 at a time when the shares have a FMV of $120 each, the employment benefit of $800,000 (8,000 x ($120 $20)) could be deferred, at the option of the employee, from 2005 to the year of disposition of the shares. Hence, since the value of the shares which were subject to the option that vested in 2002 was $80,000 (4,000 x $20) at the time that the option was granted, the $100,000 threshold for a particular year has been met with respect to the option vested in 2002. Similarly, the $100,000 threshold has been met for the option vested in 2003. If, however, the arrangement had been designed such that the option for all 8,000 shares had vested in 2002, the 13 The prescribed foreign stock exchanges include most of the American, European and Asian stock exchanges. 14 The election must be filed by the employee, in prescribed form and manner, before January 16 of the year following the year in which the acquisition of the shares occurs. Practically speaking, the employee must submit a letter to the person designated to report the employment benefit (usually the employer) containing a confirmation that (i) the employee was a resident of Canada at the time of the acquisition of the shares, (ii) the Cdn$100,000 annual vesting limit has not been exceeded and (iii) the amount of the benefit relates to shares purchased under an arrangement after February 27, 2000. 15 Since an employee may receive options from more than one employer, or more than one corporation in a group, the employee has the responsibility to ensure compliance with the limit and has to keep track of whether the Cdn$100,000 annual vesting limit has been exceeded. However, the CCRA expects that, upon request, the employer will be able to provide assistance in furnishing the employee with information relevant to the limit. Furthermore, the CCRA is of the view that when an employer accepts the election from an employee, the employer must be satisfied that the conditions for a valid election have been met. Unless the employer has reason to believe otherwise, the CCRA is of the view that it is reasonable for an employer to rely on the certification made by the employee that the Cdn$100,000 annual limit has not been exceeded and that the employee was a resident of Canada at the time of the share acquisition. Finally, it should be noted that an employee may revoke an election already filed by filing a written notification to this effect with the person (likely the employer) with whom the election was filed. As for the election, the deadline for filing the revocation is January 15 of the year following the year in which the shares are acquired. 16 When a stock option is valued in a foreign currency, the exchange rate in effect at the date the option is granted must be used. 6

employee would have been able to use the deferral only for a portion of the shares acquired in 2005 since the total value of the shares for the vesting year 2002 would have exceeded $100,000 (8,000 x $20 = $160,000). d) reduction of employment benefit The benefit realized under a stock option arrangement is fully taxable as income from employment. However, the ITA allows for a 50% deduction of the deemed employment benefit in computing the employee s taxable income to the extent that the conditions described in (i), (ii) and (iii) in section c) above are met. 17 Consequently, the 50% deduction of the benefit otherwise established is available only to the extent that the price paid by the employee to acquire the option and the shares pursuant to the stock option arrangement is at least equal to the FMV of the shares on the date the stock option is granted. 18 While Canadian equity regimes do not generally provide for a reduction or a discount of the stock option price (i.e. the option price is generally equal to the FMV of the shares at the time the option is granted 19 ), a discount is often granted under foreign equity compensation arrangements. Generally, these discounts will have a negative impact on the Canadian employees. Because of the importance of the 50% deduction available to employees under the Canadian tax regime, an exception to the discount principle will often be suggested with regards to Canadian employees. For example, let us assume that an employee has an option to acquire shares of his employer s foreign parent corporation at a 10% discount of the FMV at the time the option is granted. The FMV of the shares at that time is $100 and the shares are worth $200 at the time the employee exercises the option and acquires the shares. While the employee would need only $90 to acquire the shares, there will be a taxable benefit of $110 and the employee will have to pay approximately $55 in tax (assuming a 50% rate of tax). Therefore, while the employee saves $10 on the purchase price (in comparison with the FMV of $100 at the time the option is granted), he or she suffers a tax of $55, i.e. a net outlay of $45. If the stock option price had been set at $100 initially, the taxable benefit would have been $100, subject to a reduction of $50. The $50 taxable benefit would have created a tax liability of $25 (assuming a 50% rate of tax). As a consequence, while each share costs $10 more to the employee upon acquisition, he or she only pays $25 of tax for an aggregate cost of $35 rather than $45. In 17 Since only one-half of the capital gain (the taxable capital gain) is subject to tax under the ITA, the 50% deduction of the deemed employment benefit, when applicable, has the effect of taxing the stock option benefit as if it were a capital gain. The regime that exists under the ITA for employees of Canadian-controlled private corporations provides for less onerous conditions in order to obtain the 50% deduction. 18 It should be noted that the exercise price under an employee stock option arrangement is to be determined without reference to changes in the value of a foreign currency relative to Canadian currency after the option is granted. 19 The option price is generally the average trading price over a specific period of time. Where the employee had to pay an amount to acquire the right to acquire the shares, the amount payable for the shares must be at least equal to the excess of the FMV of the shares at the time the option is granted over the amount paid to acquire the right. 7

addition, as more fully described in section c) above, the discount will have the effect of denying the elective deferral of the recognition of the employment benefit. e) cost of shares In order to avoid double taxation, the cost of the securities acquired by an employee under a stock option arrangement is increased by the amount of the deemed employment benefit. Since the difference between the FMV of the shares at the time they are acquired and the price paid by the employee is already taxable as regular employment income (subject to the 50% deduction discussed above), an adjustment is made to the cost of the shares for the employee so that the same value will not be subject to tax on the actual disposition of the shares. The basis for calculating the capital gain (or capital loss) on a subsequent disposition of the shares is therefore the aggregate of three amounts: (i) the amount, if any, paid by the employee to acquire the rights under the arrangement; (ii) the amount paid by the employee to acquire the shares; and (iii) the employment benefit. The fact that the employee may be entitled to a 50% deduction of the employment benefit in computing his taxable income is not relevant for the determination of the cost of the shares for capital gain purposes. In the past, an additional problem occurred when an employee owned other shares of the issuer that had been acquired in the open market. When computing a capital gain, section 47 of the ITA requires that the cost of identical properties of a taxpayer be averaged. As a result, each of the properties have the same adjusted cost base and, therefore, the same potential capital gain or capital loss on the disposition of any one of them. This led to unfair results in circumstances where the employee acquired shares under a stock option arrangement and disposed of such shares immediately thereafter. If such shares were the only shares owned by the employee, no capital gain was realized on the disposition given the increase in cost allowed by the ITA to take into account the employment benefit. However, if the employee had similar shares that had been acquired in the open market, the average cost base rule would usually have reduced the cost of the shares acquired under the stock option arrangement and the immediate disposition of the shares would have resulted in the realization of a capital gain by the employee. 20 20 In the Income Tax Technical News No. 19, issued on June 16, 2000, the CCRA had stated that where it would seem obvious to conclude that the particular shares acquired under a section 7 arrangement are in fact the shares that are being disposed of by the employee, the ITA would be administered so as to permit the employee to identify the shares acquired under the arrangement as those being disposed of. However, in order to support specific identification, the CCRA insisted that the employee show the correlation between the particular acquisition and disposition of shares. For instance, where the number of shares acquired under a section 7 arrangement was equal to the number of shares disposed of and the disposition occurred immediately after exercise of the option, the CCRA stated that it would accept the employee s identification of the particular shares acquired under the arrangement as being the shares disposed of. Consequently, only the adjusted cost base of the particular shares acquired under the arrangement was relevant for computing any capital gain or loss on the disposition of such shares. However, it was clearly stated that this interpretation would not apply where the employee acquired additional shares subsequent to the acquisition of the shares under the arrangement but before the disposition. The rules for averaging the cost base would apply to spread the increase in the adjusted cost base resulting from the employment benefit over all of the identical properties held by the taxpayer. 8

To remedy this situation, the ITA was amended to exempt certain shares acquired after February 27, 2000 from the cost averaging rule by deeming such shares not to be identical to any other shares acquired by the employee. However, a particular share must satisfy the following conditions for the employee to benefit from this exception: (i) (ii) the share must be acquired under an employee stock option arrangement for which a deferral in the year of taxation of the employment benefit is available (supra section c)); 21 and the share acquired under an employee stock option arrangement must be designated by the employee to be a share that is subject to a disposition of identical shares occurring within 30 days after acquisition. The effect of the new rule is that the share will be exempted from the cost averaging rule and the capital gain or loss on its disposition will be determined without regard to the adjusted cost base of any other identical shares owned by the employee. As a final observation, the adjusted cost base of the shares acquired by an employee must be determined in Canadian dollars and the proceeds from an eventual disposition of the shares must also be calculated in Canadian dollars. f) taxation of dividends Canadian employees will be taxable on dividends received on shares acquired through a stock option arrangement. For the purposes of the ITA, a dividend includes a stock dividend. Therefore, a stock dividend received from a non-canadian corporation will also be included in the calculation of the employee s income when received, whether or not the employee has the choice of receiving a stock dividend or a cash dividend. The amount of the stock dividend constitutes the adjusted cost base of the shares for the purposes of calculating the capital gain or capital loss on a subsequent disposition of the shares (subject to the averaging rule for identical properties discussed in section e) above). In addition, there may be a non-resident withholding tax on the dividend paid by a non-resident corporation to a Canadian resident which the Canadian resident may claim as a foreign tax credit under the detailed rules of the ITA. Dividends received from foreign corporations will not be eligible for the favourable treatment afforded to dividends received from Canadian corporations to take into account tax already paid at the corporate level, i.e. subject to a gross-up inclusion in income and a tax credit. g) disposition of shares In Canada, capital gains (capital losses) are subject to a 50% inclusion (deduction) in computing a taxpayer s income. To the extent that the shares acquired under a stock option arrangement are 21 Shares acquired in exchange for such shares under one of the rollover provisions of the ITA are also eligible. 9

eventually sold at a loss, the loss will generally be characterized as a capital loss. The allowable capital loss (which is equal to 50% of the capital loss otherwise determined) can only be applied against taxable capital gains and cannot be used to reduce the employment benefit. For example, let us assume that an employee has acquired one share of the capital stock of his or her employer at $60 under a stock option arrangement at a time when the FMV of the share was $110. An employment benefit of $50 must be included in computing the employee s income and the employee is (or is not, depending on the circumstances) entitled to a 50% deduction of the employment benefit in computing his taxable income. Since the employment benefit resulting from the exercise of the option is $50 and the price paid for the share is $60, the adjusted cost base for computing the capital gain or capital loss on a subsequent disposition of the share is increased to $110. If the employee sells the share when it has decreased in value to $60, he or she will realize a capital loss of $50, 50% of which will be the allowable capital loss than can only be applied against taxable capital gains. Therefore, while the employee has an income inclusion of $50 (or $25 as the case may be), he will not be entitled to use the allowable capital loss of $25 to reduce the deemed employment benefit even though, in economic terms, no actual gain or profit was realized in the year from the stock option arrangement. Given the recent experience of the stock markets, particularly in the new economy sector, this deficiency in the system has led to major difficulties for a certain number of employees, especially in 2000 (and inevitably in 2001). The benefits that had to be reported by a number of employees were exceptionally large because the value of their employer s shares had increased significantly by the time the employees exercised their options but had decreased dramatically shortly thereafter. This has left many employees in a position of having to pay tax in respect of employment benefits that were no longer reflected in the value of the acquired shares. In many instances, employees did not have the resources to pay the tax because of the decreased value of the acquired shares. Since the ITA does not provide for relief in such circumstances, the CCRA has raised the issue with officials of the Department of Finance, which has undertaken a review of different alternatives aimed at alleviating this problem. h) death tax and administration issues As mentioned in section b) above, when an employee dies without exercising his options, an employment benefit equal to the amount by which the value of the right immediately after death exceeds any amount paid by the employee to acquire the right will be deemed to have been received by the employee because of his employment in the taxation year in which the employee died. The 50% deduction of the taxable employment benefit will be applicable as long as the prescribed conditions are fulfilled (supra, section d)). The ITA also provides relief, in certain circumstances, where the value of the options decreases after the death of the employee. Where options have been exercised prior to the employee s death and shares have been acquired, the employee will be deemed to have disposed of the shares and to have received proceeds of disposition equal to the FMV of the shares immediately before the employee s death, potentially realizing a capital gain. If a capital gain is realized, 50% of that capital gain will be included in the employee s calculation of income for the year of death. Subject to certain conditions, if an 10

employee bequests his shares to his or her spouse or to a qualifying spousal trust, resident in Canada, the employee will be deemed to have disposed of the shares for an amount equal to the adjusted cost base of the shares immediately before the death. The spouse or qualifying spousal trust will be deemed to have acquired the shares at the time of death at a cost equal to the deemed proceeds of disposition. The tax consequences arising upon death can thus be deferred until the earlier of the disposition of the shares or the death of the last surviving spouse. Administrative consequences resulting from the death of an employee will depend upon the terms of the arrangement and the policies of the arrangement administrator. Each province and territory in Canada has procedures for validating a will (probate, letters probate or appointing an administrator) or an intestacy. In the province of Quebec, the liquidator of an estate will be required to provide a Declaration of Heredity establishing his power to exercise in the name of the estate. In the other provinces, there is a probate process whereby the executor or the administrator may be required to obtain Letters Probate or Letters of Administration (the terms differ in the different provinces). There may be delays in obtaining declarations of probate, which could last several months. The probate tax imposed varies for each province and, for the most part, is determined based on the value of the assets of the deceased passing through the estate (including stock options). In the province of Quebec, there is a flat fee charged, that is not based on the FMV of the assets. There are mechanisms that could shelter stock options from probate tax. These include transfer of bare legal title to a nominee corporation or designating a beneficiary under the arrangement. Consideration should be given to providing flexibility in the arrangement to allow for such planning. i) withholding and reports The CCRA takes the position that the employment benefit realized on the exercise of a stock option constitutes salary and wages subject to regular reporting requirements and to salary withholding with regard to income tax and the payment of most social security taxes. As a result, a corporation with an establishment in Canada will be required to report the employment benefit arising from the acquisition of shares pursuant to an employee stock option arrangement and make the required withholding. The issuer corporation is required to report an employee stock option benefit to Canadian tax authorities for each employee receiving such benefit prior to the end of the month of February following the year in which the employee stock options are exercised. To the extent possible, withholding should be made from an employee s regular remuneration. The CCRA has taken the administrative position that the benefit may be prorated over the remaining pay period of the year. Furthermore, the CCRA will not require withholding if it would result in undue hardship. For instance, if the benefit is the only remuneration received by the employee from the payer, if it arises late in the year or if it is very large in proportion to the 11

employee s regular salary, no withholding is required. Quebec tax authorities have adopted similar administrative positions. In cases of hardship, the tax associated with the employment benefit will have to be paid by the employee receiving the benefit by April 30 of the calendar year following the year in which the employment benefit was realized. There is no legal requirement in Canada obliging the employee to pay income tax withholding associated with the employment benefit at the time he or she exercises the options although a contractual requirement may exist. As a result of the administrative position regarding hardship, if an employee of a Canadian based subsidiary receives shares of the foreign parent corporation, the foreign parent corporation will generally be required to report the employment benefit to the CCRA but will probably not be required to make any withholding. If the Canadian subsidiary reimburses the foreign parent for the cost of the employee stock option arrangement, however, the CCRA takes the position that it is the Canadian subsidiary that provides the remuneration to the employees. When an employee wishes to take advantage of the tax deferral with respect to options that qualify for the annual Cdn$100,000 limit (based on the value of all qualified options vested in a particular calendar year), the employee must submit a letter to the person required to report the employment benefit (usually the employer) containing a confirmation that (i) the employee was resident of Canada at the time of acquisition of the shares and that (ii) the Cdn$100,000 annual vesting limit has not been exceeded. The letter must also provide the amount of the benefit related to the qualifying shares purchased under an arrangement after February 27, 2000. While the election must be filed at the latest on January 15 of the year following the purchase of the shares, it can be filed at the time of the share purchase, in which case the CCRA permits the employer to reduce the employee s income tax withholding by the amount of tax related to the benefit being conferred. The Canada or Quebec Pension Plan withholding can also be reduced. While the employee is responsible for filing the deferral election with the employer, the responsibility for reporting the stock option benefit and its tax deferral remains with the employer (or the corporation that granted the option or the corporation from whom the shares were purchased if they are not the same as the employer). The stock option benefit and the deferral thereof have to be reported on a prescribed form. As for the employee, he or she is required to file a prescribed form with his or her tax return for each year during which he or she has an outstanding balance of deferred stock option benefits. Among other withholdings, the exercise of the employee stock option will affect the contributions that the employer is required to make pursuant to the Canada or Quebec Pension Plan unless no other cash payment is made to the employee. When an employee acquires shares and realizes an employment benefit, the amount of the benefit will be included in determining the employer contribution per employee up to the annual contribution limit per employee. Contributions under private pension plans will depend on the definition of salary used by the particular plan. Additional contributions to employment insurance are not required. 12

j) consequences for employer Under paragraph 7(3)(b) of the ITA, the income for a taxation year of any person is deemed not to be less than its income for the year would have been if a benefit had not been conferred on the employee by the sale or the issue of the shares. Thus, an employer will generally not be permitted to deduct as an expense the costs incurred in providing the employment stock benefit to the employee. The CCRA has nevertheless taken the position that a Canadian corporation will be permitted to deduct the plan administration and implementation costs where these costs are reasonable. The prohibition at paragraph 7(3)(b) applies if the shares are issued or sold pursuant to an arrangement with the employer or a related corporation. If this condition is not met, a deduction will be available. Where the employee has the option to receive cash instead of shares, for example, the CCRA has taken the position that the employer will not be restricted in its deduction. 22 The reasoning is that no shares have been sold or issued under the arrangement in such circumstances. Similarly, it may be possible to structure an arrangement whereby shares are purchased on the open market subsequent to a contribution made by the employer. In this latter situation, the employer may also be entitled to deduct the amount of expenses relating to stock benefit arrangements. Where, in respect of the participation of Canadian employees in the stock option arrangement, the Canadian corporation reimburses the foreign parent corporation for the difference between the FMV of the shares on the date of exercise over the exercise price, the Canadian corporation is considered for Canadian tax purposes to be the corporation conferring the benefit on the employees and is not therefore entitled to any deduction (subject to the exceptions mentioned above). If not properly structured, there is a risk that Canadian tax authorities will consider that the reimbursements of such expenses by the Canadian corporation to its foreign parent corporation constitutes a shareholder benefit in favour of the foreign parent corporation. If this is the case, the amount would be considered to be a deemed dividend subject to withholding tax. k) phantom stock plan A phantom stock plan is intended to allow the employees to participate in the increase in value of the shares of their employer without actually being issued any shares. Under such a plan, an employee is issued notional units corresponding to a certain number of shares as negotiated with the employer. The plan is established for a definite period of time and at the expiration of the period, the employee is entitled to receive, as a cash payment, the increase in value of his or her units. The phantom stock plan is therefore more of a bonus mechanism than a real participation in the capital of a corporation. Since no shares are issued to the employee, he or she is not 22 It should be noted that if the employee (and not the employer) can choose between receiving shares or cash, the employee can still benefit from the 50% deduction of the employment benefit when the prescribed conditions mentioned in section d) above are satisfied. 13

entitled to any voting rights nor to any dividend payments (although in certain plans, the payment of dividends is taken into account in establishing the value of the units at the end of the period). Depending on the circumstances, a phantom stock plan regime may fall within the scope of the salary deferral arrangement provisions contained in the ITA. According to these rules, where an employee has a right to receive an amount after the end of a taxation year, such amount has to be included in the employee s income in the taxation year unless it has previously been included as income of the employee. The CCRA takes the position that a phantom stock plan may constitute a salary deferral arrangement and, as a consequence, an employee is required to include in his or her income on an annual basis the accruing gain in respect of his or her units to the extent that such gain has not been previously included as income. Since section 7 of the ITA only applies where a particular corporation has agreed to sell or issue its own securities or securities of another corporation with which it does not deal at arm s length, arrangements in which the issuance of shares is not contemplated by the parties are not governed by section 7. A phantom stock plan under which only notional units are created and issued to employees does not therefore qualify for purposes of section 7. l) savings contract Certain arrangements provide for the possibility for employees to deposit a portion of their salary in a trust account to accumulate an amount of money to purchase shares of their employer or their employer s parent corporation. Generally, these arrangements also provide that the employer will match the employees contributions. Any amounts deposited by an employer pursuant to a savings contract on behalf of an employee will be part of the employee s salary and will be taxable as employment income at the time of deposit in the name of the employee. Thus, the employer making the deposits will be required to make all regular withholdings with regard to the salary paid to the employee. An employee having a right in the savings contract will likely be required to make an annual income inclusion for interest that may accrue on the savings. Under the ITA, individuals that hold an interest in an investment contract are required to include in their income for the year the interest that accrued in respect thereof each year to the extent that such interest was not otherwise included in the taxpayer s income. An investment contract generally refers to a debt obligation. Subject to specified exceptions defined in the ITA, the term debt obligation is broad and generally applies where interest is payable on a sum. This regime will likely apply if a foreign bank pays interest on the amounts deposited. The term investment contract is subject to certain specified exceptions, including arrangements under an employee benefit plan. An employee benefit plan means an arrangement under which contributions are made by an employer (or by a non-arm s length person) to a custodian and 14

under which one or more payments are to be made to, or for the benefit of, employees or former employees. If the amount paid does not constitute interest or if the savings contract does not constitute a debt obligation, the employee will likely be required to include the amount imputed in the calculation of his or her income at the time that the amount is imputed. A foreign exchange gain or loss may arise because of the fluctuation of the foreign currency relative to the Canadian dollar amounts that are deposited pursuant to a savings contract. For the purposes of determining the benefit realized under the arrangement, the value of the shares acquired will be determined in Canadian dollars at the time the employee acquires the shares. 2. Securities Law Securities law in Canada is a matter of provincial/territorial jurisdiction. 23 Each province and territory has its own securities law, policies and rules, which can significantly differ. Securities law in each province and territory of Canada is administered by a regulator (a Securities Commission ). In addition, the various Securities Commissions in Canada have co-operated to issue National Instruments and Policies which, upon adoption by the local jurisdiction, are applicable in all provinces and territories of Canada. a) general As a general principle, securities may not be distributed in Canada except pursuant to a prospectus (the prospectus requirement ) and no trade of securities may be made without the involvement of a dealer registered in the particular jurisdiction for that purpose (the registration requirement ). It is also generally true that any act in furtherance of a trade of securities is considered a trade. Since it is not practical for an issuer to prepare and file a prospectus in the context of an equity compensation arrangement, the issuer must rely on exemptions available from these requirements. Many of the exemptions contain filing requirements (and fees). It should also be noted that if securities are issued pursuant to an exemption from the prospectus requirement, the securities may not be freely tradable in the jurisdictions and may be subject to the first trade rules. However, to the extent any discretionary relief described below has not been obtained from the relevant Securities Commissions prior to the time invitations are delivered to eligible employees, those invitations should include language to the effect that applications for such relief have been made or will be made and that an eligible employee s participation in the arrangement may be 23 The use of the term jurisdiction in this section relates to the Canadian provinces of British Columbia, Alberta, Ontario and Quebec only. 15

subject to certain conditions imposed by the Securities Commission in their respective jurisdiction. In each jurisdiction (other than Quebec), an exemption is generally available for the issuance of securities by an issuer to employees of the issuer or its affiliates without the use of a Canadian prospectus or the need to make the trade through a Canadian registered dealer (the employee exemption ). The employee exemption is available for employees that qualify as employees at the time of the trade in the securities. Canadian securities laws do not provide a definition of employee, but a person would generally be considered an employee if the details and method of work of the person is subject to the control and direction of the employer and whose income tax is deducted at source. However, the issuance or transfer of shares by an issuer on exercise of options is a distribution of securities under Canadian securities law (other than in Quebec, where such issuance or transfer is viewed as being part of the initial issuance) subject to the registration requirement and prospectus requirement. The employee exemption is generally available in the jurisdictions for the issuance or transfer of shares by the issuer on the exercise of options, but only if the participant is still an employee of the issuer or its affiliate at the time of exercise. However, since the employee exemption requires an annual filing (and fee) in certain jurisdictions (discussed below), another exemption may be more preferable to permit these exercises. Generally, such trades can be done pursuant to the exemption in each jurisdiction that permits the holder of a right to purchase securities in accordance with the terms and conditions of a previously issued security (i.e. an option), provided no commission or remuneration is paid or given in respect of the trade, other than for administrative or professional services, or services performed by a registered dealer (the exchangeable security exemption ). The exchangeable security exemption would also permit exercises of options by former employees and beneficiaries of deceased employees. (i) Quebec issues An application for discretionary exemptions from the registration and prospectus requirements will be required in Quebec with respect to the grant of options. Further relief may be required in this application if, for example, the exercise price of an option is at a discount in excess of a prescribed discount of the market value of the shares of the issuer at the time of the grant of the option (e.g. 10% if the shares trade at more than Cdn$5.00 per share) 24 or to allow an employee to exercise options after three months of termination of 24 Note our comments on the tax implications of a discounted exercise price in section 1. d) above. 16

employment. In addition, beneficiaries of a deceased employee will not be able to exercise options beyond one year of the death of the employee unless relief is obtained. If there are over 50 eligible employees in Quebec, a French language Offering Notice (the Offering Notice ) summarising the stock option arrangement will be required to be filed with and approved by the Quebec Securities Commission in the form prescribed by regulation. The Offering Notice must then be sent to each employee resident in Quebec prior to any options being granted in Quebec. b) securities freely tradable The first trade of shares issued or transferred by an issuer pursuant to an exemption from the prospectus requirement (i.e. shares acquired on exercise of options) is often subject to the prospectus requirement unless they are sold (i) pursuant to another exemption from the prospectus requirement or (ii) pursuant to a discretionary exemption obtained from the relevant Securities Commission. In addition, unless an exemption is available, all subsequent sales of shares acquired on exercise of options are subject to the registration requirement (i.e. the sale must be made through a dealer registered in the jurisdiction in which the holder is resident). These first trade rules differ significantly in each of the jurisdictions. The Securities Commissions of all jurisdictions other than Quebec are scheduled to adopt a new multilateral instrument to harmonize the resale rules for securities initially distributed under an exemption. This instrument is expected to come into force on November 30, 2001. Under the new instrument, the first trade by an employee in shares of a non-reporting issuer in each jurisdiction acquired under a prospectus exemption will be exempt from the prospectus requirement if: (i) the issuer was not a reporting issuer in any jurisdiction at the distribution date; (ii) at the distribution date residents in Canada did not own more than 10% of the outstanding securities of the class of the capital stock of the issuer and did not represent more than 10% of the total number of owners, directly or indirectly, of securities of the class of the capital stock of the issuer; and (iii) the trade is made through an exchange or market outside Canada to a person or company outside Canada. Until this instrument comes into force, the following local rules will apply. (i) British Columbia The resale of shares acquired pursuant to an exemption from the prospectus requirement in British Columbia is subject to both the registration and prospectus requirements. An exemption from both the registration and prospectus requirements is available for such first trades if the 17

holder intending to resell was an employee at the time of acquisition of the shares on exercise of options. However, there is no exemption in British Columbia from the registration requirement for a person who was not an employee at the time of the acquisition of the shares on exercise of options. Consequently, unless discretionary relief is obtained from the British Columbia Securities Commission, the resale of these shares must be made through a registered dealer in British Columbia. To the extent relief is not obtained, the issuer should notify the employees in this regard at the implementation stage of the arrangement. (ii) Alberta The resale of shares issued or transferred on exercise of options by a holder in Alberta will be subject to the registration and prospectus requirements in Alberta unless an exemption order from the Alberta Securities Commission is obtained to allow such first trades without meeting the prospectus and registration requirements. (iii) Ontario The prospectus requirement does not apply to the first trade of shares by an Ontario resident (whether an employee, former employee or beneficiary of a deceased employee). The registration requirement will not apply on the first trade of shares by employees in Ontario. However, this exemption from the registration requirement is not available to a person in Ontario who is not an employee at the time of resale. Consequently, unless discretionary relief is obtained from the Ontario Securities Commission, the resale of these shares must be made through a registered dealer in Ontario. To the extent relief is not obtained, the issuer should notify the employees in this regard at the implementation stage of the arrangement. (iv) Quebec It is necessary to obtain a discretionary exemption from the resale rules in Quebec to allow shares acquired by Quebec residents on exercise of options to be resold without meeting the registration and prospectus requirements. This relief is typically requested concurrently with the exemption requests mentioned above. c) holding through nominee Shares may be held on behalf of an employee through a nominee provided that such activities do not constitute acts in furtherance of a trade under applicable Canadian securities laws. If this is not the case, discretionary relief must be obtained from the relevant Securities Commission as discussed above. In such circumstances, an employee would not appear on the issuer s shareholder register but he would nevertheless retain all rights (including dividend and voting rights) in relation to the shares as a beneficial holder thereof. d) registration of employer or participant in the arrangement 18

Any act in furtherance of a trade is regarded as a trade in many of the jurisdictions. Therefore, unless an exemption from the registration requirement is available, or unless discretionary relief from the relevant Securities Commission is obtained, an entity (i.e., an employing affiliate, plan administrator, savings carrier, nominee holding shares on behalf of employees or a foreign broker or dealer) assisting the issuer in the issue of options or the issue or transfer of shares to Canadian residents on exercise of options or assisting Canadian residents in the resale of shares may, depending upon the nature of the activities performed, be required to be registered as a dealer in the relevant jurisdiction. There are exemptions available in each of Ontario and British Columbia for the activities of an employing affiliate and an employee administrator, which would likely include the activities of a plan administrator, savings carrier, nominee holding shares on behalf of employees and a foreign broker or dealer acting on behalf of or for the benefit of employees of an issuer or its affiliates. In Quebec, relief will normally be requested in the application mentioned above. Where a third party administrator is involved in the arrangement, the application would have to specifically request relief for such third party administrator. If, however, the employee is no longer an employee of the issuer or its affiliate when the activities of the entity are performed, there would be no exemption available from the registration requirement in British Columbia and Ontario and discretionary relief would be required. To the extent the activities of these entities constitute acts in furtherance of a trade, there may not be exemptions available from the registration requirement in the other jurisdictions (whether the participant is still an employee or not). Some Securities Commissions in Canada have, however, taken the position in the past that acts in furtherance of exempt trades are exempt themselves. Discretionary relief should be applied for in this regard in these other jurisdictions and the Securities Commissions will indicate whether they would be willing to grant the relief requested. e) annual securities regulatory filings and fees Where an issuer is not a reporting issuer in a jurisdiction, there are no continuing obligations in respect of its arrangement, other than the annual filing requirements and fees described below and those that may be imposed by a Securities Commission in connection with any discretionary relief to be obtained as described above. There is currently a proposal before the Ontario Securities Commission that may substantially increase the filing fees that would be payable in Ontario for distributions of securities under a stock option arrangement. While it is unknown when, if at all, this proposal will be implemented in Ontario, it is expected that if implemented, the other Securities Commissions will follow by adopting a similar fee structure in their jurisdiction. (i) British Columbia 19

A Form 45-902F (previously Form 20) must be filed by an issuer with the British Columbia Securities Commission at the time its arrangement is commenced and options are granted in British Columbia and must be filed at least once a year thereafter if options are granted under the arrangement during that year. If the number of options distributed under the arrangement pursuant to the employee exemption in British Columbia exceed 1% of the options outstanding at the beginning of any one month, a further Form 45-902F must be filed within 10 days of the end of such month. The fee in connection with the filing of a Form 45-902F is the greater of Cdn$100 or 0.03% of the gross proceeds realized by the issuer from the distribution of the options to persons resident in British Columbia (i.e. Cdn$100 since an issuer does not typically derive any proceeds from a grant of options). (ii) Alberta There are no ongoing filing requirements or fees payable in Alberta for trades made in reliance on the employee exemption, nor are there any filing requirements or fees payable for trades made in reliance on the convertible security exemption. (iii) Ontario An issuer is required to pay a fee of Cdn$100 (less the applicable discount, currently 20%) to the Ontario Securities Commission on the date the arrangement is commenced in Ontario and on each anniversary of the date of commencement of the arrangement if securities were distributed in reliance on the employee exemption in Ontario during the 12 month period preceding the date of such anniversary. (iv) Quebec There are no annual filing requirements or fees payable in Quebec. If, however, the arrangement is amended in the future to the extent that the information in the Offering Notice would change, an amended Offering Notice should be filed with the Quebec Securities Commission and redistributed to eligible employees when it was exempted pursuant to the initial exemption. f) communications (i) general In each jurisdiction other than Quebec, there are no legal requirements to provide employees with a copy of the arrangement and generally there are no restrictions on communications, videos or seminars in connection with the arrangement, provided that no documents describing the business and affairs of the issuer are provided to employees. In Quebec, a French language Offering Notice, copies of the issuer s most recent audited financial statements and copies of any 20

other document sent to eligible employees outside of Quebec (e.g. a prospectus) are required to be sent to all eligible employees in Quebec. No advice regarding the acquisition of securities may be provided to the employees in any Canadian jurisdictions unless the person providing the advice is registered as an adviser or exempted from such registration in the jurisdiction where the person providing or receiving the advice is resident. (ii) Quebec The French language Offering Notice usually takes the form of a two-page document that contains the information prescribed by regulation. The following documents must also be filed with the Quebec Securities Commission with the Offering Notice and must be delivered to employees in Quebec with the Offering Notice: the most recent audited financial statements of the issuer make them available; if a prospectus is being used outside of Quebec, a copy of that prospectus; and a copy of any disclosure document given to eligible employees outside of Quebec. In addition, the Charter of the French Language (the Charter ) in Quebec requires that contracts pre-determined by one party, contracts containing printed standard clauses and the related documents, must be drawn up in French, unless it is the express wish of the parties thereto that such agreements be in the English language only. The Charter does not distinguish between contracts governed by the laws of Quebec and others. Accordingly, any agreements to be entered into with the employees in Quebec would, as a result of such statutory provisions, be required to be drafted in French or to indicate that the contract and any documents incorporated therein by reference were drawn up in the English language at the express wish of the parties thereto. It is therefore, recommended that if an issuer does not wish to produce French language versions of the documents relating to the relevant arrangement, the following clause be inserted at the end of the agreements to be signed by an employee resident in Quebec: The parties hereto have expressly requested that this Agreement, all documents incorporated therein by reference, any notices or other documents to be given under such Agreement, and other documents related thereto be drawn up in the English language. Les parties aux présentes ont expressément exigé que la présente convention et tout document qui y est incorporé par renvoi, ainsi que tout avis donné en vertu de ladite convention ou tout autre document qui s y rapporte, soient rédigés en anglais. The Charter also provides that any written communication with the employees shall be in the French language. In the case of stock purchase arrangements, it is customary to send employees 21

the French language version of the Offering Notice with the English language version of the arrangement. However, where there are a substantial number of employees in Quebec, the practical reality is that many of them will not speak English and may not agree to only being provided with English language documents. In these circumstances, it is advisable to provide eligible employees in Quebec with French language documents as well. (iii) prohibitions on investor relations activities Generally, securities legislation in Canada prohibits a person from doing any of the following, and in many of the jurisdictions such prohibitions are limited to the circumstances where the person is engaged in investor relations activities or the person has an intention of affecting a trade in a security: make any representation, written or oral, that the person or another person will resell or repurchase the security or refund all or any of the purchase price of the security, except where the security carries an obligation of the issuer to redeem or purchase the security or a right of the owner to require redemption or purchase of the security, or, in certain jurisdictions, where the representation is contained in a written agreement and the security has a aggregate acquisition cost of at least a prescribed amount (typically, Cdn$150,000); give an undertaking, written or oral, relating to the future value or price of a security; or make any representation, written or oral, without prior approval of the relevant Securities Commission, that a security will be listed on an exchange or quotation and trade reporting system or that an application has been made to list the security on an exchange or quote the security on any quotation and trade reporting system. (iv) electronic communications The elements provided elsewhere in this paper apply equally to electronic communications as to written (hard copy) communications. In addition, National Policy 11-201, Delivery of Documents by Electronic Means, ( NP 11-201 ) applies to any documents required to be delivered pursuant to applicable Canadian securities legislation. It should, however, be noted that NP 11-201 will not apply and the electronic delivery of documents will not be available when the method of delivery of a document is mandated by legislation. For example, proxy related materials are often required to be delivered through the use of pre-paid mail. Electronic delivery of a document may be effected in a manner that satisfies the delivery requirements imposed by Canadian securities legislation if four components to electronic 22

delivery are satisfied: (i) notice of delivery to the recipient; (ii) easy access by the recipient to the document; (iii) evidence of delivery; and (iv) non-corruption or alteration of the document in the delivery process. NP 11-201 recommends obtaining the informed consent of the recipient for the electronic delivery of documents prior to such electronic delivery. This consent should disclose to the recipient, among other things: the list of documents to be delivered electronically, the times when the documents will and will not be available to the recipient and a description of the necessary hardware and software required to view the documents. The consent must also include a notice that a paper version of the electronic document will be available, upon request, without additional charge. A consent in the proper form duly executed by a recipient is seen as sufficient to satisfy the first three required components of electronic delivery. The fourth component would require the issuer to implement security measures appropriate to ensure that the recipient receives the documents intended such that third parties cannot tamper with or alter the documents prior to delivery. To the extent an issuer intends to electronically deliver certain documents relevant to the arrangement that are required to be delivered pursuant to applicable Canadian securities legislation, the appropriate consent should be obtained from each participant in Canada prior the participant agreeing to participate in the arrangement g) duty to provide annual reports There are no legal requirements in Canada that would require an issuer that is not otherwise a reporting issuer in the jurisdiction to provide shareholders resident in Canada with a copy of the issuer s annual report, accounts and/or financial statements. However, requirements in this regard may be imposed by certain of the Securities Commissions (particularly in Quebec) as a condition of the discretionary exemptions from the registration and prospectus requirements to be obtained. h) issuer repurchasing its own shares If the arrangement provides that the issuer may repurchase or otherwise acquire shares held by its employees, it will be considered to be making an issuer bid and will be subject to the issuer bid restrictions in the jurisdictions. Issuer bid restrictions include a requirement to send and file an issuer bid circular as well as restrictions on when and how the issuer can acquire shares. In Ontario, Alberta and British Columbia, there are exemptions from the issuer bid requirements if the securities are acquired from a current or former employee of the issuer or an affiliate and if the aggregate number of securities acquired within a twelve month period in reliance on such exemptions does not exceed 5% of the issued and outstanding securities of the issuer at the commencement of the period and the consideration paid for the securities does not exceed the market price of the securities. 23

In Quebec, the exemption would not generally be applicable to employee share purchase arrangements. However, discretionary relief has been granted in the context of employee share purchase arrangements. This relief is normally requested in the application mentioned above. i) corporate restructuring If an issuer proposes a rights issue where shareholders resident in Canada may be eligible to participate, then any issuances of securities of the issuer under such transaction will likely be subject to the registration and prospectus requirements in those jurisdictions, requiring either statutory exemptions from such requirements or requiring discretionary relief from the relevant Securities Commission. The availability of exemptions will depend upon the circumstances of the transaction, and such issuances may be subject to satisfaction of certain conditions. For example, the employee exemption described above may be available to permit issuances of securities to shareholders of the issuer in the jurisdictions (other than Quebec) who are also employees of the issuer or its affiliates. If an issuer is the subject of a take-over or merger, whether such transaction will be exempt from the registration and prospectus requirements and the take-over bid requirements under Canadian securities laws will again depend upon the circumstances of the transaction. To the extent that any of the foregoing transactions are proposed and will involve Canadian residents, the issue should be revisited well in advance of the proposed transaction. j) dividend reinvestment programs ( DRP ) and stock dividends programs ( SDP ) The employee exemption (described above) may be available in each of the jurisdictions (other than Quebec) for additional issuances of securities of an issuer to a shareholder who is also an employee of the issuer or its affiliates under a DRP or SDP. In addition, many of the jurisdictions (other than Quebec) generally have separate exemptions from the registration and prospectus requirements relating to the implementation of DRP and SDP, with different conditions attached. To the extent an issuer proposes to implement a DRP and a SDP involving shareholders resident in Canada, the issue should be revisited well in advance of the time the DRP or SDP is to be implemented in Canada. In Quebec, discretionary relief must be obtained. 3. Exchange Controls There are no exchange controls in Canada so that the exercise price of options may be denominated in Canadian or foreign currency. 4. Employee Issues a) employee organisations 24

Although there are no requirements to consult with non-unionised employee organisations when implementing an equity compensation arrangement in Canada, such organizations should be provided with relevant information with respect to the implementation of the arrangement. If there is a trade union at the employee s place of business, the question of whether the union must be consulted depends on the terms of the collective agreement. If the arrangement changes the terms and conditions of any collective agreement between the union and the employer or conflicts with the terms and conditions of the collective agreement, the union s consent must be obtained. However, if the arrangement does not change or conflict with the collective agreement, no consultation or consent is necessary and the employer can unilaterally implement the arrangement. b) rights pursuant to an arrangement upon termination of employment In the absence of a collective agreement, an employment contract with a definite term, a binding employment contract or policy which sets out the employee s termination entitlement, the common law (and the civil law in Quebec) provides that an employer must give the employee reasonable notice of termination in circumstances where no just cause for the termination exists. Failure to provide reasonable notice of termination constitutes a breach of the employment contract or what is commonly referred to as wrongful dismissal. Generally, if an employee s employment is unlawfully terminated (i.e. terminated without cause or reasonable notice) by an employer, the employee may be entitled to benefits that would vest under the arrangement during the employee s reasonable notice period. Employers typically wish to avoid letting an employee benefit from the advantages conferred by a stock option arrangement in such circumstances. A clause inserted in the stock option excluding an issuer or the employer from any liability under the arrangement and/or stipulating that the employee s participation (notably the vesting of options) under the arrangement shall cease upon the occurrence of specific events (including wrongful dismissal), may be effective provided such provisions are clear. In drafting such an exclusion provision, the need for clarity is particularly important since the courts in certain jurisdictions have held that a clause which purports to extinguish benefits upon the termination of employment, without specifying what constitutes termination (e.g. the last day of active employment or following a set notice period), will be read to refer only to lawful termination (i.e. after the court determined notice period expires). 25

The arrangement should therefore expressly stipulate that options shall cease to vest on the day notice of termination is provided, regardless of whether the termination is effected with or without cause. Alternatively, the arrangement could provide that options shall automatically expire (or become null and void) upon the employee s receiving the notice of termination. To limit the likelihood that a court will hold that reference to a notice of termination applies to a notice that satisfies legal requirements (i.e. a reasonable notice in the absence of cause), the arrangement should provide that a notice of termination includes a notice that complies with legal requirements as well as one which does not. These approaches could be combined to provide that the employee s right to acquire options shall terminate and the options under the arrangement shall automatically expire (or become null and void) on the earlier of (i) the date upon which the employee s employment is terminated, or (ii) the date upon which the employee receives notice of termination. When the arrangement allows the employee to exercise options already vested at the time the employment is terminated within a certain period following termination, the arrangement should also include a provision whereby the employee renounces any right to receive compensation in respect of the termination of benefits and/or the expiry of options under the arrangement. Such a clause could read as follows: The participant hereby specifically understands and agrees that he shall be entitled to no compensation or indemnity on account of the expiry of his right to receive and exercise options under the plan upon termination of employment, regardless of whether such termination is voluntary or involuntary, with or without cause, or with or without notice. However, it should be noted that such provisions do not fully protect the employer from all possible claims. There is still a risk that a court could hold that an employee who is terminated without cause or reasonable notice is entitled to receive compensation for the loss of options that would have vested during the reasonable notice period. c) incorporation of arrangement in employment contract Courts in Canada may consider that an employee s right to participate in the arrangement constitutes a condition of employment and a benefit in respect of which compensation is payable upon dismissal. Generally, in calculating the amount of pay or other compensation in lieu of notice to which an employee may be entitled, a Canadian court may quantify the employer s contributions, if any, under the arrangement, over the relevant period of time, and include that amount in the calculation of such pay in lieu of notice. 26

The arrangement should therefore provide express language to the effect that the benefits are to be excluded from compensation for this purpose and that this rule will apply irrespective of whether termination is voluntary or involuntary, with or without cause or with or without notice. However, Canadian courts have traditionnally interpreted exclusion clauses restrictively and here again, such provisions may not be upheld by Canadian courts, especially where the termination is without cause or reasonable notice. d) pension rights The specific terms of any private pension plan must be considered when establishing whether benefits under an arrangement must be included in the calculation of an employee s remuneration where pension contributions or benefits are calculated on the basis of such remuneration. When an employee acquires shares and realizes an employment benefit, the amount of the benefit will be included in determining the required contributions to either the Canada or the Quebec Pension Plan up to the annual contribution limit per employee, unless the employer has no other obligations with regard to the employee. If there is no charge back to an employer in Canada, it may be possible to take the position that no contribution is required on the part of the issuer. This question may be theoretical given the fact that no contributions are required on the annual remuneration of an employee that exceeds Cdn$38,300 in 2001. e) discrimination Pursuant to the Canadian Human Rights Act (Canada) (and the Quebec Charter of Human Rights and Freedoms), it is a discriminatory practice to differentiate adversely in relation to an employee on a prohibited ground of discrimination, i.e. race, national or ethnic origin, colour, religion, age, sex, sexual orientation, marital status, family status, disability and conviction for which a pardon has been granted. A discriminatory practice may be the object of a complaint by any individual or group of individuals to the Canadian Human Rights Commission which could order that the person found to be engaging in a discriminatory practice cease such practice and take measures to redress the practice. 5. Other Issues a) financial assistance The Canada Business Corporations Act (the CBCA ) currently prohibits an employer governed by the CBCA from, amongst other things, directly or indirectly, giving financial assistance to an employee for the purpose of, or in connection with, a purchase of shares issued by an issuer where there are reasonable grounds to believe that, (i) the employer is or, after giving the financial assistance, would be unable to pay its liabilities as they become due; or (ii) the realizable value of the employer s assets, excluding the amount of any financial assistance in the 27

form of a loan and in the form of assets pledged or encumbered to secure a guarantee, after giving the financial assistance, would be less than the aggregate of the employer s liabilities and stated capital of all classes. 25 An employer governed by the CBCA could give financial assistance to its employees to purchase shares of an affiliate issuer pursuant to an arrangement if such shares were to be held by a trustee. When there is no trustee involved in the arrangement, the tests described above must be fulfilled to allow an employer governed by the CBCA to reimburse the issuer for the difference between the FMV of the shares on the date of exercise and the exercise price of the options. An employer governed by the Business Corporations Act (Ontario) (the OBCA ) may give financial assistance to any person and for any purpose, by means of a loan, guarantee or otherwise. However, the shareholders of that corporation must be notified, to the extent required by the OBCA, of any financial assistance provided to its employees that is material to the corporation. This disclosure should be provided to the shareholders or sole shareholder of the employer within 90 days after such financial assistance was granted. Under the Companies Act (Quebec), an employer may not grant a loan, give security or furnish any other form of financial assistance to a shareholder, a shareholder of a parent corporation, or a person to assist him in purchasing its shares if there are reasonable grounds to believe that as a consequence, (i) the employer could not discharge its liabilities when due; or (ii) the book value or the FMV of its assets would be less than the sum of its liabilities and its issued and paid up capital account. An employer governed by this Act may, however, grant financial assistance to a shareholder who is an employee or an employee of its parent corporation within the framework of a share purchasing arrangement. It would also be eligible to provide reimbursements to its parent corporation issuer under such arrangement. b) data protection In Canada, the applicable legislation regarding the protection of personal information includes the federal Personal Information Protection and Electronic Documents Act (Canada) (the Federal Act ) and, for any organisation carrying on an enterprise in the Province of Quebec, the Act Respecting the Protection of Personal Information in the Private Sector (Quebec) (the Quebec Act ). Other Canadian jurisdictions may adopt similar legislation in the near future that will become applicable in such jurisdictions. As a general rule, employees in Canada will need to give written consent if the employer wishes to pass information about the employees (for example names, addresses and payroll details) to another party (including, for example, a savings carrier or plan administrator). 25 There is a proposal to repeal this restriction in the CBCA. If adopted, financial assistance decisions shall remain subject to the general fiduciary duties of directors. 28

(i) Federal legislation As of January 1, 2001, the Federal Act applies to federal works and undertakings as well as personal data being collected, used or disclosed inter-provincially or internationally by organisations for consideration. As of January 1, 2004, it will also apply inter-provincially in provinces that have not enacted substantially similar legislation. Where the Federal Act applies, an employer and the issuer may not collect, use or disclose personal information without the prior knowledge and consent of the employees, subject to specific exemptions set out in the Federal Act. Before obtaining an informed consent and obtaining the personal information from an employee, the employer and issuer will be required to identify and document to the employee the limited purposes for which the personal information is being collected. These identified purposes will act to restrict the collection, use and disclosure of the personal information that is necessary to fulfil those identified purposes only. It is recommended that this consent be in the form of a hard copy signed by the employee. The employee will be entitled to receive information in a generally understandable form about the information policies and practices of the employer and issuer. The information must be as accurate, complete and up-to-date as necessary for the identified purposes. The employee will also be entitled to assistance in preparing written access requests, and upon receipt of such written request, the employer and issuer will be required (i) to inform the employee of the existence, use and disclosure of his or her personal information and (ii) to provide the individual with access to this information. Employees will also be entitled to have inaccurate information rectified. Under the Federal Act, organisations must also name a privacy officer within the organisation responsible for the application of this Act and adopt policies and procedures regarding the protection of personal information, as well as security measures appropriate to the level of sensitivity of the information. (ii) Quebec legislation The Quebec Act tackles the protection of personal information concerning individuals and the treatment of such information. This legislation provides, among other things, that every person carrying on an enterprise in Quebec who communicates information outside of Quebec that relates to persons residing in Quebec, or entrusts a person outside of Quebec with the task of holding, using or communicating such information, must take all reasonable steps to ensure that the information will not be (i) used for purposes not relevant to the object of the file or (ii) communicated to third persons without the consent of the persons concerned. In addition, under the Quebec Act, the knowledge and consent of the individual are required for constituting a file containing personal information on an individual, and for the use or 29

communication of such personal information, subject to specific exceptions. In requesting such consent (e.g. an application form for a savings contract with a savings carrier), the following information must be given to the employee: (i) the object of the file; (ii) the use for which it will be made; (iii) the categories of persons that will have access to it; (iv) the place where the file will be kept; and (v) the right of access and rectification. 6. Jurisdiction Generally, an action to enforce the provisions of an arrangement could be commenced in a court of competent jurisdiction in Canada, in which event a Canadian court would recognise the choice of foreign law under the arrangement as a valid choice of law to govern the arrangement and would apply the foreign law to all issues that a Canadian court characterised as substantive under the conflict of laws rules of the laws of the Canadian jurisdiction, assuming that: (i) (ii) (iii) there is no reason for avoiding such choice of law on the grounds of public policy in the Canadian jurisdiction as determined by the Canadian court; the foreign law was specifically pleaded and proved as a question of fact before the Canadian court; and certain other conditions (which may vary from Canadian jurisdiction to jurisdiction) are satisfied. However, a Canadian court will apply the applicable laws of its jurisdiction to those issues that the Canadian court characterizes as procedural or administrative under the conflicts of laws rules of the laws of that jurisdiction. In addition, certain remedies available under the foreign law may not be available from a Canadian court. A judgement of a Canadian court may be awarded only in Canadian currency. Part II Analysis of the Proposed Plans The following pages analyse the proposed plans and address the questions in the order they are presented. Where required, distinctions are made between the Share Grant, the Share Purchase and the SAR plan. A SAR often exists in conjunction with an employee stock option arrangement. Where the employee elects to exercise rights pursuant to the SAR, the rights under the stock option arrangement are cancelled. In the case at hand, we have assumed that the SAR is a stand alone plan for which there is no accompanying employee stock option arrangement. Individual Taxation 1. What is the timing of taxation to the participant (grant/vesting/sale)? On what amount? Share Purchase/Share Grant 30

A participant who is employed in Canada will be taxed on the employment benefit in the year the option is exercised and not in the year the option is granted. The employment benefit is equal to the difference between the fair market value of the Shares at the time of acquisition and the combined amounts (if any) paid by the employee to acquire the right to the option and to exercise the option. 26 A discount in calculating the fair market value of the Shares is permissible where the share agreement prohibits transfers of the Shares for a period of time. Generally, Canadian tax authorities have been willing to accept a discount of approximately 5%. Based on experience, the maximum discount appears to be in the area of 15%. Subject to certain conditions, an employee may be entitled to defer up to Cdn$100,000 of the employment benefit annually until the year in which the employee disposes of the Shares (at which time the employee must also report any capital gain or loss realized on the sale of the Shares). The annual limit is determined using the value of the stock options that vest in the employee each year. 27 As such, stock options that vest in another year are not taken into consideration for the purposes of calculating the $100,000 limit. Neither the Share Grant nor the Share Purchase, as described in the facts that were provided, qualifies for the deferral. Among other requirements for deferral, the total amount paid to acquire the right to the option and to acquire the Shares by the employee must be equal to the fair market value of the Shares at the time the stock option arrangement was made. In the case of both the Share Grant and the Share Purchase, the employee will be taxed at the time that the trust or the bank acquires the Shares. Where a share is held by a trustee in trust or otherwise, whether absolutely, conditionally or contingently, for an employee, the employee is deemed to have acquired the share at the time the trust began to hold the share. 28 If IBA subsequently reacquires the Shares from the trust under a buy-back stipulation, it may be possible for the employee to deduct the amount of the employee benefit already included in the employee s income to compute the employee s income for the year in which the reacquisition occurs. This would have the effect of negating the earlier inclusion of the deemed employment benefit in the calculation of the employee s taxable income. To apply, the following conditions must be fulfilled: (i) the employee must be deemed to have disposed of a share held by a trust (which will be the case when the trust holding the share disposes of the share back to the issuer corporation); 26 27 28 Paragraph 7(1)(a) of the ITA. Subsections 7(8) and following of the ITA. Paragraph 7(2)(a) of the ITA. 31

(ii) (iii) (iv) the trust disposes of the share to the person that issued the share; the disposition occurs as a result of the employee not meeting the conditions necessary for title to the share to vest in the employee; the amount paid by the person that issued the share to reacquire the share from the trust does not exceed the amount initially paid to the issuing person for the share. 29 Where these conditions are fulfilled, the employee will be allowed to deduct the amount of the employment benefit minus the amount already deducted pursuant to paragraph 110(1)(d) of the ITA in the calculation of his or her employment income. Two other special rules also apply. The participant s loss arising due to the disposition of the share will be deemed to be nil. Furthermore, specific anti-avoidance provisions of the ITA that may have deemed a dividend to be received will not be applicable. If the requisite conditions for this deduction are not fulfilled, the employee will not be able to deduct any amount from the calculation of the employee s employment income for the year in which the disposition occurred. For example, if the buy-back is undertaken by an entity other than the issuer of the share, the conditions for the deduction will not be fulfilled. In this case, the employee would likely realize a capital loss on the employee s right in the trust holding the Shares. The employee will be considered to have acquired a participating unit in the trust holding the Shares. Upon the buy-back, the trust will generally pay the employee the amount of the original purchase price of the Shares in satisfaction of the capital interest in the trust. If the unit price of the employee s participation in the trust is adjusted upward to take into account the deemed employment benefit, the employee should realize a capital loss equal to the amount of the deemed employment benefit. Unfortunately, this capital loss cannot be applied against the employee s employment income to offset the deemed employment benefit that has already been included in the employee s income. The capital loss can only be deducted against capital gains of the employee. Even this unsatisfactory result is not guaranteed due to a technical problem in the ITA. The provisions that deem the participant to have incurred an employment benefit only apply with regard to the specific sections dealing with employee stock option arrangements. There is no provision that explicitly permits the increase in the adjusted cost base of the employee s participating unit in the trust to reflect the amount of the employee benefit already included in the employee s income. Some authors have expressed the opinion that the CCRA should exercise leniency to permit an upward adjustment in the adjusted cost base of the employee s part in the trust. 29 Subsection 8(12) of the ITA. 32

SAR Where properly structured, a SAR should not cause an employee to realize a taxable benefit until the year in which the corporation makes a cash payment to the employee. At such time, the entire amount received by the employee will be taxed as an employment benefit. If the employee is not already taxed at the highest marginal tax rate, the effect of receiving the payment on the SAR may cause the employee to pay a higher rate of tax for that year. There is a danger that a SAR will be treated as a salary deferral arrangement by the CCRA. Generally, a salary deferral arrangement is a plan or arrangement, which may or may not be funded, under which any person has a right to receive an amount after a year. It must be reasonable to consider that one of the main reasons for the plan or arrangement is to postpone tax in respect of an amount that is salary or wages of the taxpayer for services rendered in the year or a preceding taxation year. If this is the case, the ITA works to eliminate any deferral advantage. As such, the benefits under the plan would be taxable to the employee on the granting of the rights in the SAR as well as on the increase in value of the rights each year. The CCRA has taken the administrative position that a phantom stock plan will not be considered to be a salary deferral arrangement where the employee is only entitled to receive an amount representing the appreciation in the share value from the time that the notional shares were issued to the employee. Generally the following conditions should be fulfilled to minimize the risk that a SAR would be considered to be a salary deferral arrangement: (i) (ii) (iii) no value should be attributed to the rights or the units provided to the employee so that any amount received relates to future services; the plan should not include provisions to reimburse the employee for losses or which attempt to guarantee a minimum amount of future benefits under the plan; the units should mature on a fixed date. The employee can only receive a cash payment representing the appreciated amount from the time of the grant of the rights or notional units under the SAR. If the employee is issued a notional amount of shares and receives the full value of the notional shares, the plan will likely be considered to be a salary deferral arrangement. It is also important to ensure that the employee not be considered to have received constructive receipt of any amount prior to maturity. This could be the case, for example, where an employee can have an amount credited to his or her account prior to maturity. Similarly, if the employee has the right to cash out prior to maturity, the CCRA would likely take the position that the employee had constructive receipt of those amounts from the time that cash out right was effective. 33

2. How is the income characterized? Ordinary/compensation income or capital gains? What if the employer is not a corporation but rather a partnership or joint venture? Share Purchase/Share Grant The benefit realized under a stock option is characterized as employment income or ordinary income. If certain conditions are met, the employee can benefit from a 50% reduction of the benefit so that the net result is that the benefit is taxed as if it were a capital gain. 30 However, neither the Share Grant nor the Share Purchase is eligible for this deduction. The amount of the benefit (before calculation of the deduction) will be added to the adjusted cost price of the shares. In this way, the deemed employment benefit will not be included in the capital gain (or loss) that would be realized upon the subsequent disposition of the shares by the employee. 31 The treatment of dividends paid on the Shares will depend upon the terms of the trust. Under Canadian tax law, trusts are treated as taxable persons. However, they can serve as a flow through entity if the revenue received by the trust is paid or payable to the beneficiary. In all likelihood, the trust will declare that the dividend is paid or is payable to the employee beneficiary of the trust so that the trust is not taxable on dividends received. As such, the full amount of the dividends will be taxable in the hands of the employee. Dividends from Canadian corporations are subject to gross-up and tax credit rules to take into account the tax already paid at the corporate level. However, dividends from corporations that are not resident in Canada do not benefit from these rules. The CCRA has taken the position that employees of a partnership can be considered to be employees of the corporate partner. Where the facts permit to conclude that an employee is employed by a particular corporate taxpayer, the employee stock option provisions at section 7 will apply. SAR A SAR enables the deferral of income taxes but does not allow for a reduction of tax. On maturity, the full amount of the benefit received will be included in the income of the employee as employment income. 3. Can the taxation timing be delayed past the point of vesting by any plan design features? 30 31 Paragraph 110(1)(a) of the ITA. Paragraph 53(1)(j) of the ITA. 34

Share Purchase/Share Grant As stated above, the employment benefit realized on the Share Grant or the Share Purchase as currently structured will be taxable in the year the share is acquired by the trust or the bank on behalf of the employee. The ITA does permit the deferral of taxation of the deemed benefit from the date the stock option is exercised to the date the shares are sold in certain circumstances. The deferral is subject to an annual Cdn$100,000 limit on the value of all eligible options vested in a calendar year with respect to a particular employee. This $100,000 limit will generally be based on the FMV of the shares subject to the arrangement at the time the option was granted. Among the conditions required for the deferral are: (i) the shares must be listed on a prescribed stock exchange; 32 (ii) (iii) (iv) the shares acquired under the stock option must meet certain prescribed conditions (essentially, the shares must be ordinary common shares); the amount paid to acquire the shares is not less than the FMV of the shares on the date the stock option is granted; and the employee must deal at arm s length with his or her employer and the corporation granting the stock option immediately after entering into the option agreement. 33 Furthermore, where these conditions (other than the requirement to be listed on a prescribed stock exchange) are fulfilled, the employee may be permitted to deduct 50% of the deemed employment benefit in the calculation of the employee s income. Another means of delaying the timing of taxation would be to have the trust acquire the Shares and hold them for a subsequent sale to the employee. While this technique would delay taxation in the case at hand, it would not delay the timing past the point of vesting of the Shares of the employee. 34 SAR 32 The Paris Bourse was a prescribed stock exchange pursuant to Regulation 3201 of the Income Tax Regulations. However, the Euro Next Stock Exchange, which has replaced the Paris Bourse, has yet to be prescribed. This is a technical problem that will likely be rectified in the near future. 33 34 Subsections 7(8) and (9) and paragraph 110(1)(d) of the ITA. Subsection 7(6). 35

Deferral of the employment benefit may be achieved if the employee has the right to defer receipt of the amount payable to a moment subsequent to the maturity date. For deferral to be achieved, the employee must make this election prior to the initial maturity date. Furthermore, the value of the SAR must not be fixed. Rather, the employee must be subject to the risk that the value of the SAR will decrease depending upon the value of the actual Shares of the corporation. 4. Does the participant s right to receive dividends and voting rights on the Shares jeopardize the delay of taxation until the point of vesting? In the case at hand, it is likely that subsection 7(2) of the ITA will apply to deem the Shares held by the trustee (or the Bank in trust for the employees) to have been acquired by the employees at the time the trust acquired the Shares. As such, the participant s right to receive dividends and voting rights has no effect on the timing of taxation. If the plan was structured to defer recognition of the employment benefit until disposition of the Shares in the manner described in the answer to question 3, the right to receive dividends and voting rights on the Shares would not jeopardise the deferral of taxation. This deferral is specifically designed to allow an employee to hold Shares without being subject to immediate taxation on the employment benefit. If the Shares were held by a trust to be subsequently sold to an employee, taxation of the deemed employment benefit would occur on the acquisition of the Shares. The moment of acquisition of the Shares does not necessarily coincide with the issue of the Shares. In this case, the participant s right to receive dividends and voting rights on the Shares would be taken into account in determining the moment of acquisition. 5. How is the taxable amount of restricted Shares income calculated? There are no special rules that apply specifically to restricted Shares. As such, the employment benefit will be calculated in the same manner as any other employee stock option program. Where an employer grants shares to employees at no cost, paragraph 7(1)(a) of the ITA will apply at the time the shares are acquired by the employees or are acquired by a trust to be held absolutely, contingently or conditionally on behalf of the employees. If the employee pays nothing to acquire the Shares, the deemed employment benefit will be equal to the FMV of the Shares at the time of acquisition. A discount in calculating the FMV of the Shares is permissible where the share agreement prohibits transfers of the Shares for a period of time. Generally, the CCRA has been willing to accept a discount of approximately 5%. Based on experience, the maximum discount appears to be in the area of 15%. An employee who exercises a stock option and enters into an agreement to pay for the Shares over an extended period may or may not acquire the Shares within the meaning of paragraph 7(1)(a) at the time the option is exercised. The date of acquisition of the Shares in these circumstances is a question of fact. Generally, the acquisition will be considered to have taken 36

place when title passes or, if title remains with the vendor as security for the unpaid balance, when all the incidences of title (such as possession, use and risk) pass. 6. How will the dividends from Shares be taxed? Dividends received from taxable Canadian corporations are taxable in the year they are received and are subject to a gross-up and an income tax credit. The effect of this manoeuvre is to take into account tax already paid at the corporate level. Dividends received from a foreign corporation are fully taxable in the year they are received and they do not entitle the recipient to any particular favourable regime such as a dividend gross-up and tax credit. In the case of IBA, consideration must also be given as to whether the dividend payments will be subject to withholding tax in France. The Canada-France Income Tax Convention limits the withholding on a dividend payment to 15% in cases other than that of a corporation holding more than 10% of the shares. 7. Is the income tax payable required to be withheld by the employer or is it payable by the employee when he or she files his or her income tax return? Share Purchase/Share Grant An employer is required to withhold taxes in respect of salary, wages or other remuneration earned by its employees. The amount of the required withholding is computed with reference to the aggregate of the amounts included in a taxpayer s income pursuant to an employee stock option arrangement to which section 7 of the ITA applies. The person making the payment is required to make an information return in respect of such payment. If the Canadian subsidiary does not reimburse IBA for the amount of the stock option, IBA will be required to report the remuneration. However, IBA will probably not have to make any withholding. Canadian tax authorities recognize that withholding can only be effected through deductions at source from amounts actually paid to the employee. As such, requiring additional withholding from cash payments, such as normal salary, may create hardship to the employee. This will be the case where the employment benefit realized due to the exercise of the stock option is either very large in proportion to the individual s normal salary or if the stock option is exercised later in the year. Tax authorities require that employers make withholdings from an employee s cash remuneration to the extent possible without imposing actual hardship upon the individual. Where the non-cash benefit is the only form of income received from that employer, the employer will not be required to withhold tax on the amount of such benefits. If there is a reimbursement arrangement in place, the CCRA s position is that the benefit is conferred by the Canadian subsidiary. As a result, the Canadian subsidiary would be required to both report and withhold on the benefit. 37

SAR Since the SAR requires a cash payment, the payer will be required to report the payment made and make the required withholding at the time of the payment. 8. If income tax is required to be withheld are there any limitations on the amount that can be withheld? i.e. can the highest marginal rate be used? The amount of actual withholding is determined under the terms of the Income Tax Regulations. The following steps are to be undertaken: (i) (ii) (iii) (iv) (v) determine the stock option benefit taxable in the year (i.e. that the employee does not elect to defer); if permitted, determine the reduction in the stock option benefit as per paragraph 110(1)(d) of the ITA; divide the employment benefit by the number of pay periods remaining in the current year; determine the gross remuneration for the period by adding the amount obtained immediately above to the gross cash earned for the period; determine the maximum withholding for the individual without imposing undue hardship. As such, the highest marginal rate will only be used if the individual s income so warrants. 9. Are social taxes applicable in each alternative? Is the employee s share of social tax required to be withheld by the employer? Canadian tax authorities take the position that the employment benefit realized on the exercise of a stock option generally constitutes salary and wages for which salary withholdings are to be made on income tax. Furthermore, a payment must be made on account of most social taxes to the extent that the Canadian employer provides or contributes to the employment benefit. In the case of an employee based in the province of Quebec, the following are the principal social security statutes that may apply to require either an employer contribution or the withholding of an amount on the employee s salary: Canadian Statutes Employment Insurance Act Quebec Statutes 38

Quebec Pension Plan (employees in other provinces would be subject to the Canada Pension Plan, which is similar in nature) An Act Respecting the Régie de l assurance maladie du Québec An Act Respecting Industrial Accidents and Occupational Diseases Health Services Fund Contribution to the financing of the Commission des Normes du Travail Contribution to the Fonds national de formation de la main-d oeuvre. The granting or acquiring of an employee stock option will not require an additional contribution under the Employment Insurance Act (Canada). Employee stock option benefits are considered to be non-cash remuneration that is excluded from any employment insurance calculation. Where the Canadian corporation reimburses IBA in respect of the participation of Canadian employees in a stock option arrangement, the Canadian corporation is considered for Canadian tax purposes to be the corporation conferring the benefit on the employees. As such, the Canadian corporation would be responsible for: determining the appropriate withholding amount, withholding the appropriate amount from the employee s income and reporting and remitting the amount to Canadian tax authorities. If the Canadian corporation does not contribute to the employee stock option plan, the position can be taken that withholding does not have to be made with regard to most social payments. Most of these laws require a contribution for an employee that is paid to an employee working in an establishment in Quebec. In the case at hand, the employees work at an establishment of the Canadian subsidiary and not in an establishment of IBA. Section 34.0.0.2 of an Act Respecting the Régie de l assurance-maladie du Québec establishes that where an employee is not required to report to work at an establishment of the employer, the employee is deemed to report for work at an establishment of his or her employer in Quebec. However, this provision should not apply in the case of IBA since the position can be taken that this particular section should only be applicable where the foreign corporation has another establishment in Quebec. The reasoning under the Quebec Pension Plan is slightly different. To be subject to the Quebec Pension Plan, one must first be an employee. An employee is required to make a contribution for salary earned for work done in Quebec. The employer is required to make an equivalent contribution. In the case at hand, it should be possible to take the position that the individual does not execute work for IBA and that there is no work or labour contract between the two. The Quebec Pension Plan does have a provision which deems a person to be the employee of a payer. However, this section only applies where the remuneration is paid from an establishment situated 39

in Quebec. As such, IBA should not be required to make a contribution. The position of the employee is somewhat more nebulous. However, the question is likely theoretical with regard to the Quebec Pension Plan (and the Canada Pension Plan). Contributions are capped at 4.3% of an employee s salary to a maximum annual contribution of Cdn$1496.40 for 2001. 10. Are there any payroll and other taxes due by the employer on the stock income? See response to question 9. 11. What are the reporting obligations for the employer and the employees with respect to the stock income. In Canada, the payer of remuneration is generally required to withhold and report the amount paid in the form of salary, wages or other remuneration. If the Canadian subsidiary reimburses IBA, the Canadian subsidiary will be required to report an employee stock option benefit to Canadian tax authorities and to each employee receiving the benefits by the end of February following the year in which the employee stock options are exercised. Otherwise, IBA will be required to report the remuneration. 12. Are there tax consequences to the Share purchase loans (e.g. if it is interest free)? Share Purchase/Share Grant The employee will be deemed to receive a benefit on a low or no interest loan by virtue of subsection 80.4(1) of the ITA. In this case, the employee will be required to include in income the excess of the deemed interest that is computed at the prescribed rate over the interest actually paid by the employee to the employer. The amount included as interest is deemed by section 80.5 of the ITA to be paid or payable pursuant to a legal obligation to pay interest on borrowed money. As such, the employee may be able to offset the inclusion by deducting the interest by virtue of paragraph 20(1)(c) of the ITA as the interest will likely constitute an amount paid in the year pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a property. If the loan is forgiven, and the Shares are vested (even though they may be held through a trustee as share), the loan forgiveness will be treated as a separate taxable event giving rise to a benefit conferred on the employee. The value of the benefit would equal the face amount of the loan. An employer may not be able to deduct a forgiven loan by virtue of paragraph 20(1)(p) of the ITA, which requires that bad debts be established before being deductible. If the loan is forgiven on a right to acquire Shares that have yet to be acquired, the benefit of the loan forgiveness will be calculated at the time the Shares are acquired. SAR 40

In 1984, the CCRA took the position that a SAR could constitute a debt obligation giving rise to the interest accrual rules. According to the CCRA, a debt obligation arises whenever a binding liability is created and the principal amount of the liability can be quantified. As such, a SAR must not be structured as a debt obligation or else it may be subject to interest accrual rules. No debt should be created until maturity. Thus, the employee must not be able to demand payment of an amount prior to maturity. Corporate Tax Deductibility Reporting and Financing 13. Is a tax deduction available to the local entities for any set-up or administrative costs related to the plan? Share Purchase/Share Grant Paragraph 7(3)(b) of the ITA generally applies to deny a tax deduction to an employer in the context of an employee stock option arrangement. This paragraph states that the income for a taxation year of any person is deemed not to be less than its income would have been if an employment benefit had not been conferred on an employee by the sale or issue of shares. However, the CCRA has taken the position that plan administration and implementation costs with regard to a stock option plan that are charged by a parent corporation to its subsidiary corporation are deductible by the subsidiary corporation where these charges are reasonable pursuant to paragraph 18(1)(a) of the ITA. However, the CCRA also noted that where a foreign parent acquires its shares on the open market and such shares are held in a special treasury account until they are distributed to employees under the foreign parent s stock option arrangement, the acquisition of such shares on the open market does not constitute an administration expense of the stock option plan. SAR There are no specific provisions of the ITA that relate to the deductibility of the costs associated with a SAR. An employer will not be able to claim a deduction for payments made under the plan until the employee s rights in the regime are redeemed and the funds are paid to the employee and included in the employee s taxable income for the year. The deductibility of an amount is permitted to the extent that the expense is made for the purpose of producing income from a business. No amount is deductible in respect of an amount that is otherwise deductible under the ITA 14. Would the local subsidiary in your jurisdiction be entitled to a corporate tax deduction for the payment of the company cost of the Shares at vesting under a recharge or trust structure? Share Purchase/Share Grant The local subsidiary would not be entitled to a corporate tax deduction for the payment of the cost of the Shares at vesting under a recharge agreement. Paragraph 7(3)(b) of the ITA generally 41

applies to deny a tax deduction to an employer in the context of an employee stock option arrangement. This paragraph states that the income for a taxation year of any person is deemed not to be less than its income would have been if an employment benefit had not been conferred on an employee by the sale or issue of shares. Although paragraph 7(3)(b) is broadly worded, arrangements can be structured so that a deduction is available. For this to be possible there cannot be an agreement to sell or issue shares to employees. One means of accomplishing this may be to purchase Shares on the open market after an employer contribution has been made. Paragraph 11 of Interpretation Bulletin IT-113R4 describes certain situations where the CCRA permits an employer to benefit from a tax deduction. Where, under a stock option arrangement, an employer elects to pay cash instead of issuing shares, subsection 7(1) of the ITA will not apply. Instead the employee will be taxed on a benefit under the general provisions of the ITA relating to employment benefits. The restriction on deductions established at paragraph 7(3)(b) will not apply to deny the employer a deduction for the payment. This is because paragraph 7(3)(b) denies a deduction with regard to the sale or issue of shares. In the situation where the employer makes a cash payment to the employee, no shares were sold or issued under a stock option arrangement to the employee or to a person in whom the employee s rights under the agreement have become vested. However, the employee in this scenario suffers an important disadvantage as he or she will not be able to deduct 50% of the deemed employment benefit pursuant to paragraph 110(1)(d) of the ITA. This disadvantage can be avoided if the employee has the right to choose cash instead of shares pursuant to the terms of the stock option arrangement. In this case, the deemed benefit is included in the calculation of the employee s taxable income by virtue of paragraph 7(1)(b). Furthermore, the employee may be entitled to a deduction under paragraph 110(1)(d). Nevertheless, the employer is still permitted a deduction for the payment since no shares were sold or issued. Given this situation, it is not rare for a SAR to be combined with an employee stock option arrangement. SAR There are no specific provisions of the ITA that relate to the deductibility of the costs associated with a SAR. An employer will not be able to claim a deduction for payments made under the plan until the employee s rights in the regime are redeemed and the funds are paid to the employee and included in the employee s taxable income for the year. The deductibility of an amount is permitted to the extent that the expense is made for the purpose of producing income from a business. No amount is deductible in respect of an amount that is otherwise deductible under the ITA. 15. Is a formal recharge agreement between IBA and the subsidiary in your location required? 42

Not applicable due to response in question 14. 16. Is there specific documentation that could be put in place in order to support the recharge (e.g. board minutes of the local subsidiary documenting approval to the recharge)? Not applicable due to response in question 14. 17. Are there any exchange control restrictions which would impact the ability of the local subsidiary to pay monies to IBA in settlement of the recharge? No. 18. Would a dividend withholding tax be levied on the payment to IBA by the local subsidiary? This would depend on the circumstances. Part XIII of the ITA imposes a withholding of 25% of various payments made by a Canadian resident to a non-resident for payments that include management fees and dividends. Furthermore, where a benefit is deemed to have been conferred upon a shareholder pursuant to subsection 15(1) of the ITA, paragraph 214(3)(a) deems that the benefit conferred on the non-resident is deemed to be a dividend. The CCRA has taken the position that it would not expect that a reimbursement by a Canadian employer to its parent corporation for the value of benefits provided to the Canadian employer s employees under a stock option plan would constitute a type of payment that would be subject to withholding taxes under Part XIII of the ITA. The CCRA has cautioned that the payment of the FMV of the share does not necessarily constitute a reasonable amount. The following scenario was given as an example. The FMV of a share at the time the stock option is exercised is $25 and the option price is $15. The nonresident parent acquires an inventory of its own shares at a cost of $20 in anticipation of settling the stock options. If the subsidiary reimbursed the foreign parent on the basis of the FMV of the share ($25) rather than on the basis of the amount paid by the foreign parent to acquire the share ($20), a benefit will have been conferred on the foreign parent. Paragraph 212(1)(a) establishes a 25% withholding on management or administration fees paid by a resident of Canada to a non-resident. However, paragraph 212(4)(b) excludes payments in satisfaction of a specific expense incurred by the non-resident person for the performance of a service that was for the benefit of the payer from the required withholding to the extent that the amount was reasonable. 19. Is the parent or the subsidiary responsible for reporting to tax authorities the employee s Share income? 43

The amount of any stock benefit received by an employee in a year is required to be reported as a taxable benefit from employment. Where the issuer of the Shares is the direct employer of the employee who exercises the option, the issuer must report the amount of the benefit and, to the extent that cash remuneration is also paid by the issuer to the employee, the issuer should withhold the required tax on the stock option benefit from the cash remuneration payable. In circumstances where the option is held by an employee of a subsidiary of the issuer of the Shares, and there is no arrangement whereby the subsidiary reimburses the issuer for the amount of the stock option benefit conferred on its employees, the parent corporation must report the taxable benefit. 35 However, if the parent corporation is not paying any cash remuneration to the individual who has exercised the option there is no cash remuneration paid to such employee by the issuer out of which withholding is practically possible. As such, withholding on the benefit is not required. If there is a reimbursement arrangement in place, the CCRA s position is that the benefit is being conferred by the Canadian employer and the subsidiary should both report and withhold on the benefit. Securities Law 20. Will the grant or purchase of the shares require IBA or the local subsidiary to file a prospectus or other notification with local government agencies? If so, what documents would have to be filed and when? What type of information must be disclosed (i.e. financial information)? As a general principle, securities (including options to subscribe shares) may not be distributed in Canada (through a Share Grant or a Share Purchase) except pursuant to a prospectus (the prospectus requirement ) and no trade of securities may be made without the involvement of a dealer registered in the particular jurisdiction 36 for that purpose (the registration requirement ). However, an exemption is generally available in the provinces of Ontario, Alberta and British Columbia for the issuance of securities by IBA to employees of its Canadian affiliate without the use of a prospectus or the need to make the trade through a Canadian registered dealer (the employee exemption ). The employee exemption is available for employees that qualify as employees at the time of the trade in the securities. This employee exemption requires an annual filing (and fee) in certain jurisdictions. In the province of Quebec, an application for discretionary exemption from the prospectus and registration requirements is required with respect to the grant of shares and of options. 35 Regulation 200(1) Income Tax Regulations. 36 The use of the term jurisdiction in this section relates to the Canadian provinces of British Columbia, Alberta, Ontario and Quebec only. 44

Additional relief would be required in the application since the exercise price pursuant to the Share Purchase includes a discount in excess of the prescribed discount. Furthermore, to the extent that the offering is made to over 50 eligible employees in Quebec, a French language Offering Notice summarizing the arrangement must be filed and approved by the Quebec Securities Commission and sent to each employee resident in Quebec prior to any shares or options being granted in Quebec. The following documents must be filed with the Quebec Securities Commission with the French language Offering Notice and they must also be delivered to employees in Quebec with the Offering Notice : the most recent audited financial statements of IBA; if a prospectus is being used outside of Quebec, a copy of that prospectus; and a copy of any disclosure document given to eligible employees outside of Quebec. The issuance or transfer of shares by IBA on the exercise of options by the employees is a distribution of securities under the Canadian securities laws of Ontario, Alberta and British Columbia subject to the prospectus requirement and registration requirement. The employee exemption is however generally available in these jurisdictions for the issuance or transfer of shares by IBA on the exercise of options, but only if the participant is still an employee of the Canadian affiliate at the time of exercise. Such trades can also be done pursuant to the exemption in each jurisdiction that permits the holder of a right to purchase securities in accordance with the terms and conditions of a previously issued security (i.e. an option), provided no commission or remuneration is paid or given in respect of the trade, other than for administrative or professional services, or services performed by a registered dealer (the exchangeable security exemption ). The exchangeable security exemption would also permit exercises of options by former employees and beneficiaries of deceased employees. In Quebec, the issuance or transfer by IBA is viewed as being part of the initial issuance and should be covered by the exemption obtained from the Quebec Securities Commission. 21. If IBA or the local subsidiary has a filing requirement, how often must the filing be updated? The employee exemption requires an annual filing and fee in certain jurisdictions. If IBA is not a reporting issuer in a jurisdiction, there are no continuing obligations other than the annual filing requirements and fees that may be imposed by the Securities Commissions in connection with any discretionary relief obtained. There are no legal requirements in Canada that require IBA to provide shareholders resident in Canada with a copy of its annual report, accounts and/or financial statements. 45

22. What exemptions exist from the registration and/or disclosure requirements? See response to question 20. 23. What is the process for obtaining an exemption? In British Columbia, Alberta and Ontario, IBA benefits from an automatic employee exemption. In Quebec, an application must be filed with the Quebec Securities Commission in order to obtain the exemption. 24. Are there any restrictions of IBA selling or purchasing its own Shares? Will it be treated as a broker/dealer under local law? If IBA wants to repurchase or otherwise acquire its own shares held by its Canadian affiliate s employees, it will be considered to be making an issuer bid and will be subject to the issuer bid restrictions applicable in the jurisdictions, which include a requirement to send and file an issuer bid circular as well as restrictions on when and how IBA can acquire shares. In British Columbia, Alberta and Ontario, there are exemptions from the issuer bid requirements if the shares are acquired from a current or former employee of the affiliate and if the aggregate number of shares acquired within the 12 month period in reliance on such exemptions does not exceed 5% of the issued and outstanding securities of IBA at the commencement of the period and the consideration paid for the shares does not exceed the market price of the shares. While this exemption will not generally be applicable in Quebec, discretionary relief has been granted in the context of employee share purchase arrangements. 25. Are there any restrictions on employees selling the Shares they purchase? The first trade of shares issued or transferred by IBA pursuant to an exemption from the prospectus requirement (i.e. shares acquired on exercise of options) is often subject to the prospectus requirement unless the shares are sold (i) pursuant to another exemption from the prospectus requirement or (ii) pursuant to a discretionary exemption obtained from the relevant Securities Commission. In addition, unless an exemption is available, all subsequent sales of shares acquired on exercise of options are subject to the registration requirement (i.e. the sale must be made through a dealer registered in the jurisdiction in which the employee is resident). These first trade rules differ significantly in each of the jurisdictions. However, the Securities Commissions of all jurisdictions other than Quebec are scheduled to adopt a new multilateral instrument to harmonize the resale rules for securities initially distributed under an exemption. This instrument is expected to come into force on November 30, 2001. 46

Under the new instrument, the first trade by an employee in shares of a non-reporting issuer in each jurisdiction acquired under a prospectus exemption will be exempt from the prospectus requirement if: (i) the issuer was not a reporting issuer in any jurisdiction at the distribution date; (ii) at the distribution date residents in Canada did not own more than 10% of the outstanding securities of the class of the capital stock of the issuer and did not represent more than 10% of the total number of owners, directly or indirectly, of securities of the class of the capital stock of the issuer; and (iii) the trade is made through an exchange or market outside Canada to a person or company outside Canada. 26. Are there any stock market related concerns? No Employment Law 27. If an employment contract exists, will the existing employment contract need to be modified to incorporate the employee s right to purchase Shares, or receive restricted Shares or the SAR. There are no modifications required to existing employment contracts. However, references to the Share Grant, the Share Purchase or the SAR may be made in employment contracts with future employees. 28. Are there any discrimination issues with respect to certain levels of share ownership being required or suggested? Granting differing number of shares will not raise any discrimination issues provided that the distinctive treatment is not based on race, national or ethnic origin, colour, religion, age, sex, sexual orientation, marital status, family status, disability or conviction for which a pardon has been granted. 29. Is there a legal requirement for the plan document or ancillary documentation to be distributed to participating employees, to be translated into official language of the country? In Quebec, the Charter of the French Language (Quebec) imposes on every employer the obligation to provide its written communications to its staff in French. Furthermore, a French language Offering Notice must be sent to all eligible employees in Quebec for securities law purposes in certain circumstances. 30. Is the local works council or union required to approve or consult on the plan? Whether the union must be consulted depends on the terms of the collective agreement. If the plan changes the terms and conditions of any collective agreement between the union and the 47

Canadian affiliate or conflicts with the terms and conditions of the collective agreement, the union s consent must be obtained. If the plan does not change or conflict with the collective agreement, no consultation or consent is necessary and IBA and the Canadian affiliate can unilaterally implement the plan. 31. Is the company required to obtain written consent from an employee prior to the transfer of personal data to a third party? As a general rule, employees in Canada will need to give written consent if the Canadian employer wishes to pass information about the employees (e.g. names, addresses and other details) to another party (including, for example, IBA, a savings carrier or plan administrator). 32. Are there any restrictions under local law relating to the ability of the subsidiary to deduct from the employee s paycheck the repayments on the loan? Restrictions as to the ability of the Canadian affiliate to deduct from the employee s pay cheque the repayment of the loan may be imposed by the relevant provincial jurisdiction. For instance, section 49 of An Act Respecting Labour Standards (Quebec) provides that no employer may make deductions from wages unless it is required to do so pursuant to an act, a regulation, a court order, a collective agreement, an order or decree or a mandatory supplemental pension plan, or unless it is authorized to do so in writing by the employee. However, the employee may at any time revoke that authorization. Exchange Control 33. Are there any exchange controls or limitations which may affect the program? Are there any opportunities available to design the program so as to avoid the application of exchange controls? There are no exchange controls in Canada and as a result, the exercise price of the options under an arrangement may be stated in Canadian or foreign currency. Electronic Communication 34. Are there any legal requirements relating to electronic signatures and the validity of contracts concluded over the Internet? If so, what are these requirements? Depending on the province of residence of the employee, there may be legal requirements relating to electronic signatures. While most of the Canadian provinces have adopted legislation dealing with electronic commerce, most of them tend to regulate transactions between individuals and a public body. There are currently no legal requirements relating to the validity of contracts concluded over the Internet. However, on May 25, 2001, federal, provincial and territorial ministers responsible for 48

consumer affairs approved a new approach to harmonized consumer protection legislation in electronic commerce. A common template covering contract formation, cancellation rights and information provision was endorsed by the Ministers and may serve as a guideline in establishing an Internet procedures for the plan. While the template does not have any legal validity, it nevertheless gives a good idea of the information that may be eventually required. 35. Does the law permit retention of electronic records in lieu of traditional paper records? In Quebec, as a result of articles 2840 to 2842 of the Civil Code of Quebec as well as An Act to Establish Legal Framework for Information Technology (Quebec), scanned documents will be given the same evidentiary weight as their original paper equivalents. In those provinces where the model Uniform Electronic Evidence Act (the UEEA ) has been implemented, scanned documents will likely be granted full evidentiary value. In the remaining provinces, it is simply a matter of time before the UEEA or similar legislation is implemented. Pending such implementation, it is likely that courts will consider the reliability of the electronic systems used to store the electronic versions of documents. Assuming reliable systems are used, it is likely that courts will feel compelled to follow the trend and allow the introduction of scanned copies into evidence as secondary evidence when the original is not available. Conflict of Laws/Choice of Law 36. Is jurisdiction accepted? A Canadian court will generally recognize the choice of foreign law under an arrangement as a valid choice of law to govern the arrangement to the extent that there is no reason for avoiding such choice of law on the grounds of public policy in the Canadian jurisdiction as determined by the court, the foreign law was specifically pleaded and proved as a question of fact before the court and certain other conditions (which may vary from Canadian jurisdiction to jurisdiction) are satisfied. 49