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's fees in the form of deferred stock units result in an SDA?
Position: No.
Reasons: 6801(d) is satisfied.
XXXXXXXXXX 2000-005105
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling (the "Ruling") on behalf of XXXXXXXXXX (the "Corporation"). Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:
Facts
1. The Corporation is a public corporation and a taxable Canadian corporation as defined in the Income Tax Act (Canada) (the "Act").
2. The Corporation's shares are listed for trading on a public stock exchange.
3. The Corporation is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. Its Business Number is XXXXXXXXXX and its mailing address is XXXXXXXXXX.
4. The Corporation pays the members of its board of directors (the "Directors") fees for their services, including an annual retainer, meeting fees for board and committee meetings attended, and supplemental fees for committee chairmanships, all payable quarterly in arrears (the "Fees").
5. The Directors are employees of the Corporation for income tax purposes.
6. The Corporation's fiscal year end is XXXXXXXXXX.
Proposed Plan
A. The Corporation proposes to establish a Directors' Deferred Stock Unit Plan (the "Plan") so that all or part of a Director's Fees may, at the Director's election, be deferred and allocated as Deferred Stock Units (the "Units") under the Plan, rather than be taken as cash payments. You enclosed a copy of the draft Plan document with your request for this Ruling.
B. Certain terms are defined as follows for the remainder of this Ruling:
Beneficiary: A dependant or relation of the Participant who is a designated beneficiary, properly appointed and designated in the form and manner prescribed by the Plan administrator and in accordance with applicable law.
Board: The board of directors of the Corporation.
Business Day: A day on which banks are open for business in the City of XXXXXXXXXX, Canada.
Committee: The Corporate Governance Committee of the Board of the Corporation.
Director: A member of the Board or a member of the board of directors of a Subsidiary and who is, in that capacity, entitled to Fees for services.
Election Notice: An election made in writing by a Director with respect to participation in the Plan and the Participation Percentage, or changes to or termination of a continuing election, in the prescribed or acceptable form in accordance with the Plan.
Fees: Gross fees payable in respect of serving as a Director, including, without limitation, annual retainer fees, meeting attendance fees and supplemental fees for committee chairmanships.
Fee Payment Date: The date(s) during each Fiscal Quarter on which the determination of quarterly Fees is finalised.
Fiscal Quarter: The three-month periods ended XXXXXXXXXX in each year.
Fiscal Year: The Corporation's fiscal year as defined under the Act. The Corporation currently has a Fiscal Year-end of XXXXXXXXXX
Participant: A Director who participates in the Plan.
Participation Percentage: Percentage of Fees allocated to the Plan pursuant to an Election Notice, which participation percentage will be one of the following: XXXXXXXXXX
Redemption Notice: A notice in writing to redeem all or part of a Participant's Units under the Plan, in the prescribed or acceptable form in accordance with the Plan.
Retirement Date: The date on which a Director is neither a Director nor an employee or other officer with the Corporation or with a subsidiary or other related corporation or "affiliate" as that term is described in paragraph 3 of the Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3 (as revised and in effect from time to time), whether by reason of resignation, loss of election or other loss of directorship, office or employment, retirement, or death.
Share: A common share of the Corporation.
Subsidiary: A subsidiary of the Corporation within the meaning of the XXXXXXXXXX and which is a related company under the Income Tax Act.
Units: The deferred stock units allocated to Participants in accordance with the Plan.
C. Subject to receiving a favourable Ruling, the Corporation proposes to establish the Plan effective XXXXXXXXXX, in order that the Directors may be provided with the option, commencing with the Corporation's XXXXXXXXXX fiscal year, of receiving, in lieu of cash, XXXXXXXXXX of the Fees to which they may become entitled in respect of a fiscal year.
D. The Directors will be entitled to elect by no later than the last business day of a Fiscal Year to receive all or part of the Fees to which they may become entitled in respect of the following Fiscal Year, in lieu of cash, as Units in the Plan. New Directors may elect no later than the last business day of a Fiscal Quarter to receive, commencing with the next following Fiscal Quarter, all or part of the Fees to which they become entitled in respect of the balance of the Fiscal Year, in lieu of cash, as Units under the Plan. Once an election is made, it will be irrevocable with respect to the applicable Fiscal Year. For the XXXXXXXXXX Fiscal Year only, all Directors will be considered to be New Directors.
E. A notional account will be maintained by the Corporation for each Director to reflect the following:
a) the number of Units that will be credited to a Director's notional account will be calculated by dividing the dollar value of the Fees that the Director has elected to receive in the form of Units by the closing price of the Corporation's common shares (the "Shares") listed on a specified stock exchange on the date that his or her quarterly Fees are determined;
b) upon allocation, the Units will be fully vested in the Directors;
c) additional notional Units will be granted from time to time to reflect the notional equivalent of the cash dividends paid on the Shares. The number of additional Units credited to the Director's notional account will be determined by dividing the amount of the dividends that would have been paid on a number of Shares equal to the number of Units allocated to the Director by the fair market value of a Share on the dividend payment date;
d) in the event of a subdivision or consolidation of the Shares, or a stock dividend, or other distribution (other than normal dividends) of the Corporation's assets to its shareholders, a reclassification or conversion of the Shares, recapitalization, reorganization, or any other change affecting the Shares, the number of Units held in the Director's notional account may be adjusted to reflect the particular event;
e) upon redemption (in the manner described below), the value of the Units in the Director's notional account will be paid in cash by the Corporation; and
f) the value of the Units at redemption will be based on the fair market value of the Shares as at the date that the Redemption Notice is received or deemed received by the Corporation. The value of the Units will be determined by taking the product of the number of Units allocated to the Director's notional account and the fair market value of a Share (determined by the closing price on a specified stock exchange) at that date.
F. Directors will only be entitled to redeem the Units after their Retirement Date. In the event of the Director's death, the Director's Beneficiary or legal representative will be entitled to redeem the Units. Redemption of the Units will, in any event, take place no later than the end of the first calendar year commencing after the year in which Director's Retirement Date occurs.
G. There will be no Shares issued, authorized, reserved or sold by the Corporation (or a related corporation) at any time in connection with any Units under the Plan. The Corporation (or a related corporation) will not purchase any Shares at any time in connection with any Units under the Plan.
H. Directors will not be entitled, either immediately or in the future, absolutely or contingently, to receive or obtain any amount or benefit designed to reduce the impact of any reduction in the fair market value of the Corporation's Shares.
I. The terms of the Plan will provide that the Corporation's Board or a delegated committee can unilaterally amend, suspend, or terminate the Plan at any time, except to materially adversely affect rights with respect to Units that have been allocated to a Director under the Plan prior to the date of amendment, suspension or termination. Any such amendment or suspension will be such that the Plan will continue to comply with the requirements of paragraph 6801(d) of the Income Tax Regulations and Units allocated under the Plan will only be redeemed in accordance with the Plan terms in existence prior to any termination.
Purpose of the Proposed Plan
The purpose of the proposed Plan is to aid the Corporation in securing and retaining Directors with outstanding ability and to provide the Directors with compensation opportunities that are consistent with shareholder interests.
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 the Corporation;
C. is under objection by of 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 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 be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and will therefore be excluded from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.
B. Except for those amounts identified in Ruling C below, no amount will be included in the income of a Participant pursuant to subsection 5(1) or section 6 of the Act by reason only of the implementation and operation of the Plan.
C. When cash is received in satisfaction of a Participant's Units as described in 11(e) above, the Participant will include the amount paid, before any applicable withholding taxes, in his or her income under paragraph 6(1)(c) 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 on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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