2002 Ruling 2001-0114683 - DSUS AS SECURITY FOR A LOAN

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 an amendment to a 6801(d) plan which permits participants to use the value of their deferred share units as security for a loan from their employer disqualify the plan from satisfying the conditions of paragraph 6801(d) of the Income Tax Act?

Position: No.

Reasons: The plan will continue to satisfy the requirements of paragraph 6801(d).

XXXXXXXXXX 								2001-011468

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)

This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided in our various telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge, and that of the Corporation, none of the items involved in this ruling request is:

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

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

c) under objection by the Corporation or a related person;

d) before the courts; and

e) except as described in 5 below, the subject of a ruling previously issued to the Corporation by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

Facts

1. The Corporation is a taxable Canadian corporation that is controlled indirectly by XXXXXXXXXX ("ParentCo"). The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

2. The Business Number of the Corporation is XXXXXXXXXX. The Corporation deals with the XXXXXXXXXX Tax Services Office located at XXXXXXXXXX and files its tax returns at the XXXXXXXXXX Tax Centre. The head office of the Corporation is XXXXXXXXXX.

3. The Corporation has established a comprehensive benefit program for its employees which includes a registered pension plan, a short-term bonus plan, insurance and medical programs.

4. XXXXXXXXXX (the "Employer") is a division of the Corporation. In addition to the comprehensive benefit program provided to all employees of the Corporation, certain employees of the Employer may be eligible to participate in a deferred compensation plan (the "Plan"). The eligible employees must elect to participate in the Plan (the "Participant(s)").

5. The Plan satisfies the provisions of paragraph 6801(d) of the Income Tax Regulations (the "Regulations") and was the subject of an advance income tax ruling (our file 2001-009524). Under the terms of the Plan, a Participant is not entitled to use his or her phantom stock units as security or collateral for any debt.

6. In addition, employees of the Corporation are entitled to borrow money from ParentCo under the same loan terms and at the same interest rates that Parentco offers to employees at a similar organizational level within the Corporation. Certain Participants may not have the required security or collateral required to qualify for employee loans. The Employer recognizes that these Participants may have bona fide borrowing needs and they should be able to borrow the required funds just like their fellow employees within the corporate group. In addition, the Employer wants to ensure that a Participant in the Plan with a need for cash that would normally be provided under an employee loan by ParentCo does not leave the Corporation to access the cash value of his or her interest in the Plan.

Proposed Transaction

7. The terms of the Plan will be amended to allow Participants to borrow from ParentCo for certain purposes using their interest in the Plan as security and collateral. The maximum amount that a Participant will be allowed to borrow using the interest in the Plan as security and collateral will be an amount equal to XXXXXXXXXX% of the fair market value of the Participant's interest in the Plan. The interest rate charged by Parentco on the loan will be the rate available to employees at a similar organizational level within the Corporation. The use of the interest in the Plan as security and collateral will only be allowed in circumstances of financial hardship attributable to the following events:

(a) Death or disability of a spouse;

(b) Termination of a spouse's employment;

(c) Purchase of a home;

(d) Post-secondary education expense for children;

(e) Divorce or marriage breakdown;

(f) Medical expenses; or

(g) Such other circumstances as the Employer may from time to time establish.

The Participant's units in the Plan can only be pledged as security and collateral for a loan provided by ParentCo under terms and conditions that it would normally provide to employees at a similar organizational level within the Corporation. The Participant will have to prove to the Corporation that he or she requires the borrowed money because of one of the events described above. If the loan remains unpaid, the amounts available for distribution from the Plan, after the appropriate withholdings, on a Participant's termination, retirement or death will be first used to satisfy the Participant's debt obligation to ParentCo.

Purpose of the Proposed Transaction

8. The purpose of the proposed transaction is to amend the Plan to permit a Participant who satisfies the criteria set out in 7 above, to use the value of his or her phantom stock units as security and collateral to obtain an employee loan from ParentCo.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is as described above, we rule as follows:

A. The amendment to the Plan, described in 7 above, will not, in and by itself, result in the Plan ceasing to satisfy the requirements of paragraph 6801(d) of the Regulations.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Customs and Revenue Agency provided that the amendment is implemented by XXXXXXXXXX.

Yours truly,

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