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: Will the payment of Director fees in the form of deferred share units result in an SDA?
Position: No.
Reasons: 6801(d) is satisfied.
XXXXXXXXXX 2000-003675
Attention: XXXXXXXXXX
XXXXXXXXXX , 2000
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:
Facts
1. The Corporation was incorporated under the laws of Canada and its head office is located in XXXXXXXXXX. The Corporation is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Corporation files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
2. XXXXXXXXXX.
3. The Corporation's common shares are listed and traded on the XXXXXXXXXX Stock Exchange. The Corporation had XXXXXXXXXX common shares outstanding as at XXXXXXXXXX.
4. The Corporation currently pays members of its board of directors (the "Board") an annual retainer, fees for serving on a committee of the Board, fees for chairing a committee of the Board and fees for attending meetings of the Board or committees of the Board. These fees are paid quarterly in arrears on January 1, April 1, July 1 and October 1.
Proposed Plan
5. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its resident and non-resident directors. The Plan will be unfunded and will be administered by the Compensation Committee of the Corporation's Board. The Corporation will be responsible for all costs relating to the administration of the Plan.
6. Certain terms used in the Plan are generally defined as follows:
(a) "Annual Board Retainer" means the annual retainer payable by the Corporation to a Director in a year for service on the Board together with Board committee fees and additional fees and retainers to committee chairs, but excluding Attendance Fees defined below;
(b) "Attendance Fees" means the fees paid by the Corporation to a Director in a year for attendance at meetings of the Board or committees of the Board;
(c) "Board" means the board of directors of the Corporation;
(d) "Deferred Share Unit" means a unit equivalent in value to a Share, credited to the Member's notional account on a deferred basis;
(e) "Director" means a director of the Corporation;
(f) "Member" means a Director who elects to participate in the Plan;
(g) "Share" means a common share of the Corporation and such other share as is added thereto or substituted therefore as a result of amendments to articles of the Corporation, reorganization or otherwise; and
(h) "Trading Day" means any date on which the XXXXXXXXXX Stock Exchange is open for the trading of shares.
7. The terms of the Plan are as follows:
(a) The effective date of the Plan will be XXXXXXXXXX.
(b) A notional account will be established for each Member who participates in the Plan in order to carry out the objectives of the Plan, more particularly described below.
(c) Each Director has the right to elect to be a Member of the Plan. The written election will have to be filed with the Corporation's Secretary at least thirty days before the commencement of a fiscal quarter of the Corporation. The election will permit the Director to choose to receive his or her Annual Board Retainer and/or Attendance Fees in one of the following forms:
(i) all cash;
(ii) one-half in Deferred Share Units and one-half in cash; or
(iii) entirely in Deferred Share Units.
An election will apply until the Member files a notice to change his or her elected percentage or files a notice to terminate his or her participation in the Plan. A Member is only entitled to file a notice to change or to terminate once per calendar year. Where a Member elects to terminate his or her participation in the Plan, all Deferred Share Units credited to his or her notional account will remain in the Plan and will be redeemable only in accordance with the terms of the Plan.
(d) A Member will be allocated the elected proportion of his or her Annual Board Retainer and/or Attendance Fees payable for a quarter in the form of Deferred Share Units which will be credited to the Member's notional account. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited will be determined by dividing (a) the amount of the applicable portion of the Annual Board Retainer and/or Attendance Fees to be credited in Deferred Share Units on that date by (b) the five day average closing price on the XXXXXXXXXX Stock Exchange of a Share on the last five Trading Days of the preceding fiscal quarter.
(e) A Member's notional account will be credited with additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Corporation on its Shares. The number of additional Deferred Share Units will be computed by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Share by the number of Deferred Share Units recorded in the Member's notional account on the record date for the payment of such dividend, by (b) the five day average closing price for a Share on the XXXXXXXXXX Stock Exchange on the day immediately before the dividend payment date.
(f) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than ordinary course cash dividends) of Corporation assets to shareholders, or any other changes affecting the Shares, such proportionate adjustments, to reflect such change or changes shall be made with respect to the number of Deferred Share Units outstanding under the Plan.
(g) The Deferred Share Units credited to a Member's account shall be redeemed by the Member (or, where the Member has died, his or her estate) on the earliest date on which both of the following conditions are met (the "Termination Date"):
(i) the Member has ceased to be a Director for any reason whatsoever, including the death of the Director; and
(ii) the Member is neither an employee of the Corporation, a person related to the Corporation or an affiliate (as that term is used in 3 of the Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3) nor a member of the board of directors of a corporation which is related to or an affiliate of the Corporation.
The Member or his or her estate will file a written notice of redemption with the Corporation specifying a redemption date within the period commencing on the Termination Date and ending on XXXXXXXXXX of the first calendar year commencing after the Member's Termination Date (the "Redemption Date").
(h) The Corporation will make a lump-sum cash payment, net of any applicable withholding taxes, to the Member or his or her estate, as soon as practicable after the Redemption Date, provided that in any event such payment date shall be no later than XXXXXXXXXX of the first calendar year commencing after the Member's Termination Date. The amount of the lump-sum cash payment will be determined by multiplying the number of Deferred Share Units credited to the Member's notional account on the Redemption Date by the five day average closing price of a Share on the XXXXXXXXXX Stock Exchange on the day immediately before the Redemption Date.
(i) No amount will be paid to, or in respect of, a Member under the Plan or pursuant to any other arrangement, and no additional Deferred Share Units will be granted to such Member to compensate for a downward fluctuation in the price of the Corporation's Shares, nor will any other form of benefit be conferred upon, or in respect of, a Member for such purpose.
8. The terms of the Plan will provide that the Board can unilaterally amend or terminate the Plan at any time except with respect to rights that have accrued to a Member at the date of the amendment or termination. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.
Purpose of the Proposed Plan
9. The Plan will be established to provide the Corporation's Directors with the opportunity to acquire share equivalent units which will be convertible to cash upon their ceasing to be employed, as Directors or otherwise, by the Corporation, an affiliate or any person related to the Corporation. Acquiring such units is intended to promote a greater alignment of interests between the Directors and the shareholders.
10. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or of a person related to the Corporation;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Corporation or of a person related to the Corporation;
(c) is under objection by the Corporation or by a person related to the Corporation;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate to the Corporation.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and purpose of the proposed plan, and provided that the terms of the Plan are as described above, we rule as follows:
A. The Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.
B. The Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.
C. Except for those amounts identified in Rulings D and E below, no amount will be included pursuant to section 3, subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of a Member in respect of the Deferred Share Units credited to his or her notional account under the Plan.
D. When cash is received in satisfaction of a resident Member's Deferred Share Units as described in 7(h) above, the resident Member will include the amount paid by the Corporation, before any applicable withholding taxes, in his or her income under paragraph 6(1)(c) of the Act.
E. When cash is received in satisfaction of a non-resident Member's Deferred Share Units as described in 7(h) above, the non-resident Member will include the amount, to the extent attributable to services rendered in Canada, paid by the Corporation, before any applicable withholding taxes, in his or her income under paragraph 6(1)(c) and subparagraph 115(1)(a)(i)of the Act.
F. The amount payable by the Corporation to the named beneficiary or estate of the Member as a result of the Member's death will constitute a right or thing held by the deceased Member at the time of death for purposes of subsection 70(2) of the Act.
G. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be exempted from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.
H. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D and E above that are paid by the Corporation in a particular year in respect of Member will be deductible by the Corporation in accordance with section 9 of the Act.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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