2000 Ruling 2000-0021013 - SDA PARAGRAPH K EXCLUSION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. An arrangement provides for the determination of a bonus in respect of an employee's services rendered in a fiscal year that ends in a particular calendar year. The arrangement then provides for the conversion of the bonus into deferred units which will be redeemed within a period that ends three years after January 1 of the calendar year immediately following the particular calendar year. Will the arrangement satisfy the conditions of paragraph (k) of the definition of an SDA?

2. The proposal provides for the payment of cash to the employees on redemption of the units. However the Employer can, at its discretion, choose to issue shares from treasury to satisfy the claim. Will the Plan be subject to section 7 if shares are issued?

3. The proposal provides for the creation of additional units in the event dividends are paid by the employer or the share capital of the employer is altered. What period will such rights be considered to be in respect of.

Position:

1. Yes.

2. Yes.

3. We will accept they are in respect of the calendar year in which they are awarded.

Reasons:

1. We previously stated in file E55767 that a lump sum deferred bonus payable under an arrangement in respect of a fiscal period that ends in a particular calendar year will be excluded from the SDA definition if the arrangement provides that the bonus will be paid within the three year period following the calendar year in which the right to receive the bonus arose. Based on this opinion, we stated in file E9619137 that services rendered in a fiscal year will be considered to be in respect of the calendar year in which the fiscal year ends. We will continue to apply these positions so the proposed arrangement will satisfy the conditions of paragraph (k).

2. We have previously accepted that where the employer can elect to pay cash or issue shares and pays cash, the arrangement will not constitute an agreement to issue shares. Where shares are chosen by the employer, section 7 applies. This is consistent with the position stated in paragraph 7 of IT 113R Benefits to Employees - Stock Options.

3. Consistent with the above positions.

XXXXXXXXXX
XXXXXXXXXX 2000-002101
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted Corporation.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Applicable Law" means any applicable provision of law, domestic or foreign, including, without limitation, applicable securities legislation together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder and stock exchange rules;

(c) "Board" means the board of directors of the Corporation;

(d) "Corporation" means: XXXXXXXXXX;

(e) "Committee" means the XXXXXXXXXX Committee of the Board;

(f) "Determination Date" means the date determined by the Board at the time of a grant of DSUs on which the DSUs will be redeemed and payable;

(g) "DSU" means a deferred share unit issued under the Plan by means of a bookkeeping entry. A DSU will not entitle a Member to any shareholder rights, including without limitation any voting rights, dividend entitlements or rights on liquidation;

(h) "Employee" means an employee of the Corporation or any other company or other entity affiliated with the Corporation through more than 50% direct or indirect ownership of its outstanding voting securities by the Corporation;

(i) "Member" means an Employee who becomes a participant in the Plan in accordance with XXXXXXXXXX of the Plan;

(j) "Plan" means the Deferred Share Unit Plan which is the subject of this ruling;

(k) "Regulations" means the Income Tax Regulations;

(l) "Share" means a common share in the capital of the Corporation as it is presently constituted and such other share as is added thereto or substituted therefore as a result of amendments to the articles of the Corporation, reorganization or otherwise;

(m) "Trading Day" means any date on which the XXXXXXXXXX Stock Exchange (XXXXXXXXXX) is open for the trading of shares;

(n) "Value of a DSU" means at any particular time, the aggregate value of each trade of Shares on the XXXXXXXXXX during the 10 trading days preceding such time (which value shall be determined for each trade by multiplying the volume of Shares by the trading price) divided by the aggregate total volume of Shares traded on the XXXXXXXXXX during such 10 trading days;

Facts

1. The Corporation is incorporated under the laws of XXXXXXXXXX. The Corporation's shares trade principally on the XXXXXXXXXX stock exchanges.

2. The Corporation proposes to establish the Plan to enhance the Corporation's ability to attract and retain talented employees and to promote a greater alignment of interests between such persons and shareholders of the Corporation. A copy of the Plan was provided with your request.

Proposed Plan

3. For the purposes of this ruling, the more significant features of the Plan are as follows:

(a) The arrangement will apply in respect of bonuses approved after XXXXXXXXXX;

(b) From time to time, the Board may designate Employees to become Members of the Plan as of a specified date and specify the terms of any grant of DSUs to the Members including the vesting conditions applicable to each grant;

(c) A DSU will never be vested before the Determination Date set for the DSU.

(d) Members will be granted specified numbers of DSUs by the Board as bonuses at such times as the Board may choose;

(e) An account shall be maintained by the Corporation for each Member and will be credited and debited with grants and redemptions of DSUs granted and redeemed from time to time;

(f) A Member will be credited with additional DSUs whenever cash dividends are paid on Shares. The number of additional DSUs credited to a Member in connection with the payment of dividends on the Shares will be based on the actual amount of dividends that would have been paid to such Member if the Member had held actual Shares rather than DSUs and on the Value of a DSU on the day on which the dividends are declared on the Shares;

(g) In the event of a subdivision, redivision or consolidation of the Shares or the issue of Shares as a stock dividend, or a reorganization or recapitalization of the Corporation or its amalgamation, merger or consolidation into or with another corporation, or the sale of all or substantially all of the assets of the Corporation, such proportionate adjustments, to reflect such change or changes, shall be made with respect to the number of DSUs outstanding under the Plan. In addition, the Board may, in its discretion, make proportionate adjustments where there are other changes affecting the Shares;

(h) If a Member ceases to be an Employee prior to the Determination Date set in respect to any DSU, the Member will forfeit all unredeemed DSUs standing to the Member's credit;

(i) The Determination Date of any DSU will never be later than three years following the date on which the DSU was granted;

(j) If a member has died prior to the Member's Determination Date, the DSUs shall be redeemed on the date of the Member's death;

(k) All amounts to be paid or satisfied on the redemption of DSUs by or in respect of a Member shall be satisfied by (in the case of (B) below) or paid to the Member (or, if the Member has died, to the Member's estate) (in the case of (A) or (C) below), in the form of, as elected by the Corporation:

(A) a lump sum cash payment equal to the Value of the DSUs on the relevent Determination Date multipied by the number of DSUs being redeemed;

(B) shares issued from treasury of the Corporation equal to the number of DSUs being redeemed; or

(C) shares purchased by the Corporation through a registered broker on behalf of the Member equal to the number of DSUs being redeemed net of any applicable withholdings, on the earliest of:

(D) the third business day following the Member's relevent Determination Date; or

(E) December 31st of the third year following the year in which the fiscal year of the Corporation in which services were provided by the Member for which the DSUs were awarded ended;

(l) Unless otherwise determined by the Board, the Plan shall remain an unfunded obligation of the Corporation;

(m) The Plan will be administered by the Committee;

(n) The Corporation will be responsible for all costs relating to the administration of the Plan;

(o) From time to time the Board may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or terminate the Plan or amend any of the terms of the DSUs granted under the Plan; provided however, that

(A) any approvals required under Applicable Law or stock exchange rules are obtained; and

(B) no such amendment or termination shall be made at any time which has the effect of adversly affecting the existing rights of a Member under the Plan without the Member's consent in writing;

(p) Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan will continue to meet the conditions of paragraph (k) of the definition "salary deferral arrangement" in subsection 248(1) of the Act;

(q) The Corporation's issuance or provision of Shares in accordance with the terms of the Plan and any DSUs granted under the Plan is subject to compliance with any Applicable Law. As a condition of participation in the Plan, each Participant agrees to comply with all Applicable Law and agrees to furnish to the Corporation all information and undertakings as may be required to permit compliance with the Applicable Law; and

(r) The assignment or transfer of the DSUs, or any other benefits under the Plan, shall not be permitted other than by operation of the law.

Purpose of the Proposed Plan

4. The purpose of the Plan is to enhance the Corporation's ability to attract and retain talented individuals as Employees of the Corporation and to promote a greater alignment of interests between Employees and the shareholders of the Corporation.

Additional Information

5. To the best of your knowledge, none of the issues involved in this ruling:

i) are in an earlier return of the Corporation or a person related to the Corporation;

ii) are being considered by a tax services office or tax centre in connection with a previously-filed tax return of the Corporation or a person related to the Corporation;

iii) are under objection by the Corporation or a person related to the Corporation;

iv) are before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; and

v) are the subject of a ruling previously issued by the Directorate.

Rulings

Provided the above statement of facts and proposed plan are accurate and constitute a complete disclosure of all relevant facts and provided the Plan is established as proposed, we rule as follows:

A. The Plan will not constitute a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act;

B. The Plan will not constitute an "employee benefit plan" as that term is defined in subsection 248(1) of the Act;

C. The Plan will not constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act;

D. Except for the amounts described in Rulings E and F below, no amount will be included in the income of a Member pursuant to section 3, subsection 5(1), paragraph 6(1)(a), subsection 6(3), section 7 or paragraph 56(1)(a), of the Act, solely as a result of the implementation of the Plan, the participation of the Member in the Plan or the payment by the Corporation of the costs relating to the administration of the Plan as provided under 5(m) above;

E. An amount paid under the Plan in accordance with 5(j)(A) and (C) above, to a Member will be included in the income of the Member pursuant to subsection 5(1) and section 6 of the Act for the year in which the amount is received; an amount satisfied under the Plan in accordance with 5(j)(B) above, to a Member will be included in the income of the Member pursuant to section 7 of the Act;

F. The amount payable by the Corporation to the estate of a Participant as a result of the death of the Participant will constitute a right or thing held by the deceased Participant at the time of death for purposes of subsection 70(2) of the Act; and

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in Rulings E and F that are paid in a particular year by the Corporation in respect of an Employee of the Corporation or by a subsidiary of the Corporation in respect of an Employee of that subsidiary will be deductible by the Corporation or by the subsidiary of the Corporation, as the case may be, for that year in accordance with section 9 of the Act to the extent the amount is paid in respect of services rendered to the Corporation or the subsidiary as the case may be.

These rulings are given subject to the limitations and qualifications set forth in Canada Customs & Revenue Agency (the "Agency") Information Circular 70-6R3 dated December 30, 1996, and are binding upon the Agency provided the Plan is implemented on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch