2001 Ruling 2001-0102193 - DEFERRED SHARE UNIT PLAN - DIRECTORS

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 CCRA.

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

Principal Issues:

Will the creation of a Deferred Share Unit Plan result in an SDA?

Position: No.

Reasons: Requirements of Regulation 6801(d) are met.

XXXXXXXXXX 		2001-010219

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - Directors' Deferred Share Unit Plan
XXXXXXXXXX ("Holdco")
XXXXXXXXXX ("Subco")

This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of Holdco and Subco (collectively the "Companies").

DEFINITIONS

For the purposes of this request for an advance tax ruling, the relevant definitions are the following:

(a) "Act" means the Income Tax Act (Canada), as amended from time to time.

(b) "Affiliate" means an affiliate of either of the Companies as that term is defined in paragraph 3 of Canada Customs and Revenue Agency's ("CCRA's") Interpretation Bulletin IT-337R3, Retiring Allowances.

(c) "Beneficiary" means the person who at the time of an Eligible Director's death is entitled, under the terms of the Plan and applicable law, to receive the value of any DSUs standing to the credit of the Eligible Director at that time.

(d) "Board" means those individuals who serve from time to time as the Board of Directors of Holdco.

(e) "Committee" means the Corporate Governance and Nominating Committee of the Board, or such other persons or other Committee of the Board as may be designated by the Board.

(f) "Conversion Date" means, with respect to any Quarter, the date used to determine the Fair Market Value for purposes of determining the number of DSUs to be awarded in respect of that Quarter to an Eligible Director, which date shall be the date recommended by the Committee and confirmed by the Board and which shall for the Quarter commencing on the effective date of the Plan be the last day of that Quarter and thereafter shall generally be the last day of each Quarter and, in any event, shall not be earlier than the first business day, or later than December 31, of the year in respect of which the DSUs are being provided.

(g) "Directors' Annual Remuneration" means all amounts payable to an Eligible Director by Holdco and/or Subco in respect of the services provided to Holdco and/or to Subco by the Eligible Director in a calendar year, including without limitation (i) the annual base retainer fee for serving as a director, (ii) the annual retainer fee for serving as a member of a board committee, (iii) the annual retainer fee for chairing a board committee, (iv) the fees for attending meetings of the board of directors or board committees, but, for greater certainty, excluding amounts received by an Eligible Director as a reimbursement for expenses incurred in attending meetings.

(h) "DSU" means a unit credited by Holdco or Subco to an Eligible Director by way of a bookkeeping entry in the books of Holdco or Subco, as determined by the Committee and administered pursuant to the Plan, the value of which, on a particular date, shall be equal to the Fair Market Value at that date.

(i) "Eligible Director" means all directors of Holdco and Subco who are not otherwise employees of Subco or any Affiliate.

(j) "Entitlement Date" with respect to an Eligible Director who had a Termination Date, shall be the day specified by the Eligible Director in an election filed with Subco no later than XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date, which date shall not be before the later of the date on which the election is filed and XXXXXXXXXX days after the Eligible Director's Termination Date and shall not be later than XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date. Where an Eligible Director fails to make an election within the permissible period set out in this definition, his or her Entitlement Date shall, subject to the subsequent paragraphs of this definition, be XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date.

Notwithstanding the foregoing, if an Eligible Director's Entitlement Date falls between the record date and the payment date for dividends on Shares, such Eligible Director's Entitlement Date shall be deemed to be the date immediately following the dividend payment date.

Notwithstanding the foregoing, if the Committee is unable to calculate the value of DSUs credited to an Eligible Director's account due to the lack of necessary data, such Eligible Director's Entitlement Date shall be the next following trading day on which such data is available to the Committee.

Notwithstanding the foregoing, if, on an Eligible Director's Entitlement Date, such Eligible Director is, in the opinion of the Committee, in possession of material undisclosed information regarding Holdco and/or the Shares, the Eligible Director's Entitlement Date shall be delayed until the earliest of the date on which (i) the Committee is satisfied the Eligible Director is no longer in possession of any such material undisclosed information, or (ii) XXXXXXXXXX of the year following the year of the Eligible Director's Termination Date.

In any event, DSUs will be redeemed and amounts payable under the Plan to or in respect of an Eligible Director will be paid to the Eligible Director or the Eligible Director's Beneficiary on or before December 31st of the calendar year immediately following the year in which the Eligible Director's Termination Date occurred.

(k) "Fair Market Value" means, with respect to any particular date, the average closing price of a Share on XXXXXXXXXX Stock Exchange, or if the Shares are not listed on XXXXXXXXXX Stock Exchange, on such other stock exchange in Canada on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market, on the ten trading days prior to that date on which at least one board lot of the Shares was traded.

(l) "Plan" shall have the meaning ascribed thereto in 5. below.

(m) "Quarter" means a fiscal quarter of Holdco or Subco, as the context requires, which until changed by Holdco or Subco, as the case may be, shall be the three month period ending March 31, June 30, September 30 or December 31 in any calendar year.

(n) "Related Corporation" means a corporation related to Holdco for the purposes of the Act and, unless inconsistent with the context, includes Subco.

(o) "Share" means a common share, without nominal or par value, of the capital stock of Holdco.

(p) "Termination Date" means the earliest date on which both of the following conditions are met: (1) the Eligible Director has ceased to be a member of the Board or the Board of Directors of Subco, and (2) the Eligible Director is not an employee of Holdco, Subco or an Affiliate, nor a member of the board of directors of an Affiliate.

Our understanding of the facts, proposed Plan and the purpose of the proposed Plan is as follows:

FACTS

1. Holdco and Subco are incorporated under the laws of Canada. Holdco is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. Subco became a wholly-owned subsidiary of Holdco on XXXXXXXXXX. Subco is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act. The Shares of Holdco are principally traded on XXXXXXXXXX Stock Exchange. The Companies both have a fiscal year-end of XXXXXXXXXX.

2. XXXXXXXXXX.

3. The mailing address of the Companies is:

XXXXXXXXXX.

4. The tax account number of Holdco is XXXXXXXXXX and the tax account number of Subco is XXXXXXXXXX. Both companies file their income tax returns at the XXXXXXXXXX Taxation Centre.

PROPOSED PLAN

5. The Companies will establish a new incentive plan for Eligible Directors (the "Plan") effective XXXXXXXXXX, subject to receipt of an advance tax ruling from CCRA that the Plan is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations ("Regulation 6801(d)"). The Plan will comprise a plan text and written elections by each Eligible Director setting out the terms of the Eligible Director's participation in the Plan. A copy of the proposed text of the Plan was submitted with the rulings request.

6. The relevant features of the Plan are as follows:

(a) The Plan will be administered by the Committee.

(b) Each Eligible Director will be permitted to elect to receive his or her Directors' Annual Remuneration in the form of cash, or DSUs or a combination thereof by filing a written election with Subco within the time periods described below for such elections, specifying, in whole percentages, the percentage of his or her Directors' Annual Remuneration to be provided in cash and DSUs. If the Eligible Director elects to participate in the Plan, he or she may choose one of the XXXXXXXXXX following options: XXXXXXXXXX DSUs already granted to an Eligible Director pursuant to the Plan and Shares owned by or for the benefit of the Eligible Director are taken into account in determining attainment of Share ownership requirements.

Notwithstanding the Eligible Director's election as described above, the Committee may, in its sole discretion, decline to award DSUs to an Eligible Director in respect of a particular Quarter or require the Eligible Director, notwithstanding his or her election, to receive a percentage, as specified by the Committee, of the Eligible Director's Annual Remuneration in DSUs under the Plan.

(c) For the first year in which the Plan is effective, Eligible Directors will be given until the day that is XXXXXXXXXX business days before the end of the Quarter that includes the effective date of the Plan to make an election with respect to the portion of his or her Directors' Annual Remuneration payable on and after the end of such Quarter. These elections will be dependent upon the Companies receiving an income tax ruling from CCRA that the Plan is a "prescribed plan or arrangement" as described in Regulation 6801(d). In particular, the elections due before the end of the XXXXXXXXXX Quarter have been made in writing and expressly provided that the participation of the Eligible Director in the Plan and the award of DSUs thereunder was conditional upon the Companies receiving the ruling as described herein.

(d) With respect to all years commencing after XXXXXXXXXX, an Eligible Director may change his or her election with respect to the form of payment of his or her Directors' Annual Remuneration for a particular year by filing a new written election with Subco on or before the last business day of the calendar year immediately prior to the particular year, specifying, in whole percentages, the percentage of his or her Directors' Annual Remuneration for the particular year to be provided in cash and DSUs. An election under the Plan shall continue in force with respect to Directors' Annual Remuneration for subsequent years, subject to the Eligible Director's right to change his or her election, as described herein.

(e) The number of DSUs credited to an Eligible Director for a Quarter shall be equal to the amount the Directors' Annual Remuneration payable to the Eligible Director at the end of the Quarter, multiplied by the percentage of such Directors' Annual Remuneration designated by the Eligible Director as payable in DSUs, divided by the Fair Market Value on the Conversion Date for that Quarter.

(f) DSUs will be fully vested upon being awarded to an Eligible Director.

(g) In the event that any cash dividend is declared and paid by Holdco on Shares, an Eligible Director shall be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the total amount of the dividends that would have been paid to such Eligible Director if the DSUs in the Eligible Director's account, determined as at the dividend record date, were Shares by the Fair Market Value on the date on which the cash dividends are paid on the Shares.

(h) In the event of any stock dividend, stock split, combination or exchange of Shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Holdco's assets to shareholders, or any other change in the capital of Holdco affecting the Shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change shall be made with respect to the number of DSUs then recorded in each Eligible Director's account under the Plan.

(i) No amount will be paid and no other benefit will be granted to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, in order to compensate for a downward fluctuation in the price of Shares.

(j) Holdco or Subco, as determined by the Board, shall maintain in its books or cause to be maintained an account for each Eligible Director recording at all times the number of DSUs standing to the credit of the Eligible Director. Upon payment in satisfaction of DSUs credited to an Eligible Director in the manner described in 6(k) below, such DSUs shall be cancelled.

(k) On his or her Entitlement Date, an Eligible Director or the Eligible Director's Beneficiary shall be entitled to redeem the DSUs credited to the Eligible Director's account on that date and receive, an amount equal to the number of DSUs standing to the Eligible Director's credit on the Entitlement Date, multiplied by the Fair Market Value on that date. The amount payable to the Eligible Director (or the Eligible Director's Beneficiary), shall be paid by Holdco or Subco in cash, net of applicable withholdings, in any event, on or before December 31 of the calendar year following the calendar year in which the Eligible Director's Termination Date occurs.

(l) Except as specifically set out in the Plan, no Eligible Director or other person shall have any claim or right to any Shares or other benefit in respect of DSUs granted pursuant to the Plan. Neither the Plan nor any award thereunder shall be construed as granting an Eligible Director a right to be retained as a member of the Board or as a director of Subco, or a claim or right to any future grants of DSUs or other benefits under the Plan. Neither the Plan nor any action taken thereunder shall interfere with the right of the Companies to terminate the membership of an Eligible Director on the Board or the board of Subco at any time. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Eligible Director or other person to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Eligible Director or other person be considered the owner of Shares by virtue of the Plan.

(m) The Plan may be amended or terminated in whole or in part at any time by the Board, provided that no such amendment or termination shall, unless required by law, adversely affect the rights of any Eligible Director with respect to DSUs to which he or she is then entitled under the Plan without the consent of the affected Eligible Director and any amendment or termination shall be such that the Plan continuously meets the requirements of Regulation 6801(d) or any successor to such provision.

PURPOSE OF THE PROPOSED PLAN

7. The purposes of the proposed Plan are:

(a) to promote a greater alignment of interests between directors of Subco and/or Holdco and the shareholders of Holdco;

(b) to provide a compensation system for directors that is reflective of the responsibility, commitment and risk accompanying board membership;

(c) to assist the Companies to attract and retain individuals with experience and ability to act as directors; and

(d) to allow directors of Subco and/or Holdco to participate in the long-term success of Holdco.

OTHER INFORMATION

To the best of your knowledge and that of the Companies none of the issues in respect of which rulings are herein requested are:

(a) in an earlier return of either of the Companies or a related person of either of the Companies;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of either of the Companies or a related person of either of the Companies;

(c) under objection by either of the Companies or a related person of either of the Companies;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor

(e) the subject of a ruling previously issued by the Canada Customs and Revenue Agency Income Tax Rulings Directorate.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the 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 Regulation 6801(d) and will therefore be excluded from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.

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

C. Provided that the Plan remains unfunded, the Plan will not constitute a "retirement compensation arrangement" as defined in subsection 248(1) of the Act.

D. No amount will be included in the income of any Eligible Director as a result of awarding DSUs under the Plan to an Eligible Director, under subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act.

E. Amounts received under the Plan by or on behalf of an Eligible Director who is resident in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Director pursuant to paragraph 6(1)(c) of the Act in the year of receipt.

F. Amounts received under the Plan by or on behalf of an Eligible Director who is not resident in Canada, to the extent attributable to services performed in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Director pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

G. All amounts payable under the Plan to or on behalf of the Beneficiary of an Eligible Director as a result of an Eligible Director's death, will constitute a right or thing held by the Eligible Director at the time of death for purposes of subsections 70(2) and 70(3) of the Act.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, where Subco makes a cash payment to an Eligible Director, or if the Eligible Director has died, to his or her Beneficiary, in respect of services rendered by such Eligible Director as a director of Subco, in satisfaction of all or any part of the Eligible Director's interest under the Plan, Subco will be entitled to deduct the gross amount of that cash payment, including any amount withheld in respect of taxes and other source deductions, in calculating its income in respect of the year in which the cash payment was made, in accordance with section 9 of the Act.

The above advance income tax rulings, which are based on the Act and Regulations in their 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 70-6R4 Advance Income Tax Rulings, dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate