2001 Ruling 2001-0112713 - PRESCRIBED PHANTOM SHARE PLAN

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 a proposed plan satisfy the rules under paragraph 6801(d)?

Position: Yes.

Reasons: The amendments will not result in any contravention of the provisions of paragraph 6801(d).

XXXXXXXXXX 								2001-011271

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Directors' Deferred Stock Unit Plan
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXX , in respect of your request for 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) "CCRA" means: the Canada Customs and Revenue Agency;

(c) "Company" means: XXXXXXXXXX;

Account #XXXXXXXXXX,
XXXXXXXXXX Tax Services Office,
XXXXXXXXXX Tax Centre,

and any successor corporation whether by amalgamation, merger or otherwise, and a reference in the Plan to an action by the Company means an action taken with authority of the Board or such committee or person, if any, to whom the Board delegates its powers under the Plan;

(d) "Plan" means: the Directors' Deferred Stock Unit Plan; and

(e) "Regulations" means: The Income Tax Regulations.

Other terms used in this letter have the meanings set out in the Plan as described below:

(f) "Affiliate" means any corporation controlled directly or indirectly by the Company but for the purposes of determining if a Member has terminated an employment relationship, means an affiliate of the Company as the term "affiliate" is defined in paragraph 3 of Revenue Canada's Interpretation Bulletin IT-337R3, Retiring Allowances;

(g) "Annual Board Retainer" means the annual retainer which, but for the rights of Members under the Plan, would be paid in cash by the Company to a Director for service on the Board, but does not include Meeting Fees.

(h) "Beneficiary" means any person designated by the Member by written instrument filed with the Company, to receive any amount payable under the Plan in the event of a Member's death or, failing any such effective designation, the Member's estate.

(i) "Board" means the Board of Directors of the Company;

(j) "Determination" means a written notice in form prescribed by the Company from time to time signifying the Member's (or the representatives of the Member's estate) selection of the date of valuation of Units and the date of payment of amounts payable by the Company under the Plan;

(k) "Director" means a person who is a member of the Board or who is a member of the Board of Directors of an Affiliate and who is, in that capacity, entitled to Meeting Fees or an Annual Board Retainer for services;

(l) "Employee" means an employee of the Company or any Affiliate thereof;

(m) "Mandatory Portion" means the percentage of the Annual Board Retainer, as determined by the Board from time to time, that will be used to purchase Units of the Plan;

(n) "Meeting Fees" means the fees or retainer, other than the Annual Board Retainer, paid by the Company to a Director for attending meetings of the Board and committees of the Board and for chairing committees;

(o) "Member" means an individual who becomes a participant in the Plan in accordance with the Plan as described below and includes an individual whose membership in the Plan is suspended as described in 4(e) below;

(p) "Payment Dates" means the dates on which a Director would, but for the rights of Members under the Plan, receive payments of Meeting Fees or Annual Board Retainers or portions thereof, in cash;

(q) "Share" means the common shares without nominal or par value of the capital stock of the Company, listed on XXXXXXXXXX Stock Exchange and includes any shares of the Company into which such Shares may be converted, reclassified, redesigned, subdivided, consolidated, exchanged or otherwise changed. As of the date of this ruling, the Company is authorized to issue an unlimited number of common shares and there are approximately XXXXXXXXXX shares issued and outstanding;

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

(s) "Unit" means a right credited under the Plan to a Member and reflected as an entry in a Unit Account in accordance with the Plan, where such units are, subject to the terms of the Plan, fully vested in the Member, and entitle the Member to receive on a deferred basis, an amount of money, subject to and in accordance with the terms of the Plan;

(t) "Unit Account" means an account maintained by the Company for each Member in which Units that are credited to a Member from time to time are recorded; and

(u) "Value of a Unit" means for the relevant day, the five-day average closing price of a Share on the XXXXXXXXXX Stock Exchange on the immediately preceding five Trading Days.

Facts

1. The Company is a corporation governed by the Canada Business Corporations Act. The Company is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in the Act. The Shares are widely held such that no person or related group of persons owns a sufficient number of Shares to represent control of the Company for purposes of the Act.

2. The Board determines the amount of compensation that individuals receive in respect of their service as members of the Board, including, without limitation, the Annual Board Retainer, Meeting Fees, and any other amounts that the Board, in its discretion, considers appropriate.

3. At a recent meeting of the Board, it was recommended that the Company adopt the Plan for Members to provide a compensation system for Members that is reflective of the responsibility, commitment and risk accompanying Board membership.

The Plan

4. A copy of the Plan was attached to the ruling request. The salient features of the Plan are as follows:

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

(b) Every person who is a Director of the Company on XXXXXXXXXX, other than an Employee, shall become a Member as of that date.

(c) Every person who becomes a Director of the Company after XXXXXXXXXX, through election at an annual general meeting of the Company, or by appointment in accordance with the articles and by-laws of the Company, shall become a Member at that time provided the person is not an Employee.

(d) Every Director of the Company who would have become a Member in accordance with (b) or (c) above, except for the fact the person was an Employee, shall become a Member when the person ceases to be an Employee, provided the person is a Director of the Company at that time.

(e) Subject to (f) below, a person will cease to be a Member at such time as the person ceases to be a Director of the Company for any reason.

(f) If a Member becomes an Employee, the person's active membership in the Plan shall be suspended effective the date of the commencement of the Member's employment and shall resume upon termination of such employment provided the Member continues as a Director of the Company. During the period of suspension, the Member shall not be entitled to receive or to be credited with Units as described in (h) and (i) below, except as described in (o) below, in respect of cash dividends paid on Shares. Such individuals shall, for the purposes of the Plan as described in (p) and (q) below, cease to be a Member on the later of the date the Member ceases to be a Director of the Company or an Affiliate and the date the Member ceases to be an Employee.

(g) The Board will determine, from time to time, the percentage of the Annual Board Retainer that will comprise the Mandatory Portion.

(h) Each Member whose active membership in the Plan has not been suspended, as described in (f) above, shall be credited with Units under the Plan in lieu of receiving the Mandatory Portion of the Members Annual Board Retainer in cash.

(i) Each Member whose active membership in the Plan has not been suspended, as described in (f) above, may elect in the manner described in (j) below, to be credited with Units in lieu of receiving all or a portion of the Member's Meeting Fees payable for the next following fiscal year as follows:

(a) as to XXXXXXXXXX in Units and the balance in cash; or

(b) entirely in Units.

(j) Each Member will provide the Company with an irrevocable, annual election advising the Company as to the proportion of the Member's Meeting Fees to be paid in the form of Units. The election must be made in writing, by a Member for the following fiscal year.

(k) A Member will receive, in cash, that portion of the Annual Board Retainer in excess of the Mandatory Portion.

(l) Where a Director who is appointed or elected other than at an annual general meeting becomes a Member as described in (c) above, the Board may determine, at its complete discretion, that the Director may be credited with Units in lieu of receiving a portion of the Annual Board Retainer which equals the portion of the year to be served by that Director until the next fiscal year end. In this case, the Member may make an election described in (j) above, before the end of the fiscal quarter of the Company following the Director's election or appointment, for any Meeting Fees payable for the balance of that fiscal year.

(m) The number of Units to be credited to a Member in lieu of receiving the Mandatory Portion in cash will be calculated by dividing the dollar amount of the Mandatory Portion, which, but for the rights of the Members hereunder, would be payable to the Member on a Payment Date, by the Value of a Unit on such Payment Date.

(n) The number of Units to be credited to a Member in lieu of receiving the Meeting Fees in cash will be calculated by dividing the dollar amount of the Meeting Fees to be payable in Units, which, but for the rights of the Members hereunder, would be payable to the Member on a Payment Date, by the value of a Unit on such Payment Date. A Member shall be credited with the Units on the particular Payment Dates.

(o) Whenever cash dividends are paid on the Shares, additional Units will be credited to the Member's Unit Account. The number of such additional Units will be calculated by dividing the aggregate dividends that would have been paid to such Member if the Units in the Member's Unit Account had been Shares, by the Value of a Unit on the date on which the dividends were paid on the Shares.

(p) A Determination in the form prescribed by the Company will be provided to the Company by the Member or the representatives of the Member's estate, specifying the date of valuation ("Date of Valuation") of Units and the date of payment ("Date of Payment") of amounts payable by the Company under the Plan. The Date of Payment specified will not be before the date of the Member's death or retirement from, or loss of, the office or employment, if applicable, of the Member with the Company or an Affiliate and no later than the end of the first calendar year commencing thereafter. The Date of Valuation specified shall be a Trading Day that next follows the date of the Determination which falls within the period that commences one year before the Date of Payment and ends on the date the payment is received by the Member.

(q) The value of the Units credited to a Member's Unit Account, shall be payable to the Member on the Date of Payment and will be paid net of applicable withholdings no later than the end of the first calendar year commencing thereafter. If a Member dies, the value of the Units credited to that Member's Unit Account shall be paid to the Member's Beneficiary, net of applicable withholdings, no later than the end of the first calendar year commencing after the Member's death.

(r) In the event the payment described in (q) above would occur during the period commencing thirty days prior to a fiscal year quarter end of the Company and ending prior to the public disclosure of interim financial statements for the quarter, the payment of the value of the Units will be made six Trading Days following the public disclosure of the Interim financial statements for that quarter provided the amount paid will not be before the date of the Member's death or retirement from, or loss of, the office or employment, if applicable, of the Member with the Company or an Affiliate and no later than the end of the first calendar year commencing thereafter.

(s) If no Determination has been filled before the XXXXXXXXXX day preceding the last day of the calendar year commencing after the Member ceases to be a Director or an Employee, then the Member shall be deemed to have filed a Determination with the Company in prescribed form selecting the 5th day preceding the last day of the calendar year commencing after the Member ceases to be a Director or Employee as the Date of Valuation, and the last day of the calendar year commencing after the Member ceases to be a Director or Employee, as the Date of Payment of the Member or Beneficiary, as applicable. In each case, the Member (or the Member's Beneficiary) shall receive a payment equal to the Value of a Unit on the date specified in the Determination multiplied by the number of Units (including fractional Units) credited to a Member's Unit Account.

(t) If the number of outstanding Shares is increased or decreased as a result of a stock split, consolidation or recapitalization and not as a result of the issuance of Shares for additional consideration or by way of stock dividend, the Company will make appropriate adjustments to the number of Units credited to a Member's Unit Account.

(u) The Company may, add, delete or amend any of the provisions of the Plan, of the terms relating to Units credited under the Plan or terminate the Plan provided, however, that:

(i) any approvals required under any applicable law or under the applicable rules of any stock exchange in Canada upon which shares of the Company are then listed are obtained; and

(ii) no such amendment or termination shall be made at any time which has the effect of adversely affecting the existing rights of a Member under the Plan without the Member's consent in writing unless the Company, at its option, acquires such existing rights at an amount equal to the fair market value of such rights at such time as verified by an independent valuator.

Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously satisfies the requirements of Regulation 6801(d) of the Act or any successor provision thereto.

(v) Neither the establishment of the Plan, the crediting of Units nor the setting aside of any funds by the Company (if, in its sole discretion, it chooses to do so) shall be deemed to create a trust. Legal and equitable title to any funds set aside for the purposes of the Plan shall remain in the Company and no Member shall have any security or other interest in such funds. Any funds so set aside shall remain subject to the claims of creditors of the Company present or future. Amounts payable to any Member under the Plan shall be a general, unsecured obligation of the Company. The right of any Member or Beneficiary to receive payment pursuant to the Plan shall be no greater than the right of other unsecured creditors of the Company.

Purpose of the Proposed Plan

5. The purpose of the Plan is to enhance the Company's ability to attract and retain individuals to serve on its Board by permitting Members the flexibility to defer the recognition of a portion of the Member's Annual Board Retainer and/or Meeting Fees in computing the Member's income from the Member's office for purposes of the Act.

Additional Information

6. There are no significant transactions that were completed by the Company that may be undertaken after the adoption of the Plan that might be considered to be part of the series of transactions of which the Plan is part.

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

i) in an earlier return of the Company, a Participant, or any person related to the Company or a Participant;

ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company, a Participant, or any person related to the Company or a Participant;

iii) under objection by the Company, a Participant, or any person related to the Company or a Participant;

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

v) the subject of a ruling previously issued by the Directorate to the Company, other than the Rulings.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed Plan and the purpose of the proposed Plan, and provided that the terms of the proposed Plan are implemented as described, 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. Amounts received under the Plan by or on behalf of a Member 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 Member in the year received pursuant to section 6(1)(c) of the Act.

C. Amounts received under the Plan by or on behalf of a Member who is non-resident, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Member in the year received pursuant to subparagraphs 6(1)(c) and 115(1)(a)(i) of the Act.

D. No amounts will be included in the income of a Member in a year under subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act as the result of the credit in the year and under the terms of the Plan, of Units to a Member's Unit Account.

E. All amounts payable by the Company under the Plan to or on behalf of the Beneficiary as a result of a Member's death, shall constitute a right or thing for purposes of subsections 70(2) and 70(3) of the Act.

F. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Company makes a payment to a Member or a Beneficiary under the Plan, in satisfaction of the Member's interest under the Plan, the Company 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 payment is made in accordance with section 9 of the Act.

G. Amounts to be withheld as withholding taxes in respect of payments made by the Company to a Member or a Beneficiary as a non-periodic payment shall be determined pursuant to:

(a) section 103 of the Regulations in respect of amounts paid to persons who are resident in Canada at the time of making the payment; and

(b) section 105 of the Regulations in respect of amounts paid to persons who are not resident in Canada at the time of making the payment.

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