2004 Ruling 2003-0033571R3 - Plan with DSUs and 3-year bonus deferral RSUs

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 a combination deferred share unit/ 3-year bonus deferral restricted share unit plan be considered a salary deferral arrangement?

Position: No

Reasons: The DSU portion of the plan satisfies paragraph 6801(d). The RSU portion of the plan satisfies exception (k) of the definition of SDA.

XXXXXXXXXX 2003-003357

XXXXXXXXXX , 2004

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling .

XXXXXXXXXX .(the "Corporation") (XXXXXXXXXX )

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our various conversations (XXXXXXXXXX ) regarding the changes necessitated to the description of the proposed plan.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

i) in an earlier return of the taxpayer or a related person,
ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
iii) under objection by the taxpayer or a related person,
iv) before the courts, or
v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars. All references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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.

In this letter, the following terms have the meanings specified:

"Applicable Law" means any applicable provision of law, domestic or foreign, including, without limitation, the Securities Act (XXXXXXXXXX ) as amended, together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder and any applicable stock exchange rules;

"Award Agreement" means a signed, written agreement between a Participant and the Corporation, in the form attached as Schedule A to the draft of the Plan, which was submitted with your letter of XXXXXXXXXX , evidencing the terms and conditions under which an award of DSUs and/or RSUs has been granted under the Plan;

"Beneficiary" means any person designated by a Participant by written instrument filed with the Corporation to receive any amount, securities or property payable under the Plan in the event of a Participant's death or, failing any such effective designation, the Participant's estate;

"Board" means the Board of Directors of the Corporation;

"CBCA" means the Canada Business Corporations Act, as it may be amended from time to time;

"Control Change" means the occurrence of any of (i) the purchase or acquisition of shares of the Corporation and/or securities ("Convertible Securities") convertible into or exchangeable for shares of the Corporation or carrying the right to acquire shares of the Corporation as a result of which a person, group of persons or persons acting jointly or in concert, or persons associated or affiliated within the meaning of the CBCA with any such person, group of persons or any of such persons acting jointly or in concert (excluding for this purpose, any employee benefit or other plan of the Corporation) (collectively, the "Holders") beneficially own or exercise control or direction over shares of the Corporation and/or Convertible Securities such that, assuming only the conversion of Convertible Securities beneficially owned by the Holders, the Holders would beneficially own shares which would entitle the Holders thereof to cast more than XXXXXXXXXX % of the votes attaching to all shares in the capital of the Corporation which may be cast to elect Directors of the Corporation; or (ii) Incumbent Directors ceasing to constitute a majority of the Directors of the Corporation; or (iii) approval by the shareholders of the Corporation of an amalgamation, arrangement, merger or other consolidation of the Corporation with another corporation pursuant to which the shareholders of the Corporation immediately prior thereto do not immediately thereafter own shares of the successor or continuing corporation which would entitle them to cast more than 50% of the votes attaching to all shares in the capital of the successor or continuing corporation which may be cast to elect directors of that corporation; or (iv) a liquidation, dissolution or winding up of the Corporation or a sale, lease or other disposition of all or substantially all the assets of the Corporation;

"Committee" means the Corporate Governance and Compensation Committee of the Board or any other committee of the Board, as constituted from time to time, which may be appointed by the Board to, inter alia, interpret, administer and implement the Plan;

"Corporation" means XXXXXXXXXX . and its respective successors and assigns;

"Date of Grant" of a DSU or RSU means the date that the unit is granted to a Participant under the Plan as evidenced by an Award Agreement and also means the date that the unit is credited to a Participant pursuant to 19, 25 or 31, below;

"Deferred Share Unit" or "DSU" means a unit credited by means of an entry on books of the Corporation to a Participant, representing the right to receive a cash payment therefore equal to the Market Value of a Share calculated at the date of such payment, in accordance with 29, below;

"Designated Affiliated Entity" means a person (including a trust or a partnership) or corporation in which the Corporation has a significant investment and which the Corporation designates as such for the purposes of the Plan;

"Disability" means the permanent and total incapacity of a Participant as determined in accordance with the policies of the Employer of such Participant;

"DSU Account" means an account to be maintained by the Corporation for each Participant. On the Date of Grant, the DSU Account will be credited with the DSUs granted to a Participant on that date;

"DSU Entitlement Date" means the date that is 30 days after a Participant's Termination Date on which date the Market Value of the Vested DSUs credited to the Participant's DSU Account will be redeemed and paid by the Participant's Employer to the Participant or the Participant's Beneficiary, as applicable. If the Market Value is not ascertainable on the DSU Entitlement Date, the DSU Entitlement Date shall be the next following trading day on which the Market Value is ascertainable. In the event that the DSU Entitlement Date falls between the record date for a dividend on the Share and the related dividend payment date, the DSU Entitlement Date shall be the day immediately following the date of payment of such dividend;

"Employer" means, with respect to a Participant, the entity that employs the Participant or that employed the Participant immediately prior to his or her Termination Date, which entity may be the Corporation or an affiliate thereof;

"Grant Amount" means the aggregate potential dollar amount for a grant of DSUs and/or RSUs to a Participant;

"Market Value" means, on any date, the weighted average trading price of the Shares on the XXXXXXXXXX Stock Exchange (the "Exchange") during the last five trading days prior to that date on which at least a board lot of Shares has so traded or, if no trades occur on a particular day, the average of the bid and asked prices or, if the Shares are not then listed and posted for trading on the Exchange, then on such stock exchange in Canada on which the Shares are then listed and posted for trading as may be selected for such purpose by the Board, or, if the Shares are not then listed and posted for trading on any stock exchange in Canada, then it shall be the fair market value per Share as determined by the Board in its sole discretion;

"Nominal Budgeted Earnings Per Share" means a range of nominal budgeted earnings per share amounts for a fiscal year of the Corporation set annually for the purposes of the Plan by the Committee with the low end of such range being designated "Low Target Nominal Budgeted Earnings Per Share" and with the high end of such range being designated "High Target Nominal Budgeted Earnings Per Share";

"Participant" means a permanent employee of the Corporation, a Subsidiary or a Designated Affiliated Entity who has been designated by the Corporation for participation in the Plan and who has agreed to participate in the Plan on such terms as the Corporation may specify. From time to time, the Corporation may designate employees to become Participants of the Plan as of a specified date;

"Plan" means the Corporation's Executive Restricted Share Unit and Deferred Share Unit Plan, a draft of which was submitted on XXXXXXXXXX and an amended draft of which was provided by electronic correspondence on XXXXXXXXXX ;

"Potential Award Confirmation" means a confirmation provided to a Participant by the Corporation, in the form attached as Schedule B to the draft of the Plan which was submitted on XXXXXXXXXX , evidencing the basis on which a potential award of DSUs and/or RSUs may be granted;

"Regulations" means the Income Tax Regulations;

"Restricted Share Unit" or "RSU" means a unit credited by means of an entry on books of the Corporation to a Participant, representing the right to receive a cash payment therefor, or its equivalent in fully paid Shares, equal to the Market Value of a Share calculated at the date of such payment, in accordance with 34 and 35, below;

"RSU Account" means an account to be maintained by the Corporation for each Participant. On the Date of Grant, the RSU Account will be credited with the RSUs granted to a Participant on that date;

"RSU Entitlement Date" means the date on which a Participant's RSUs become Vested. On such date, the Market Value of the Vested RSUs credited to the Participant's RSU Account will be redeemed and paid by the Participant's Employer, in cash or by fully paid Shares, to the Participant or the Participant's Beneficiary, as applicable;

"Shares" means the common shares in the capital of the Corporation as presently constituted or any shares in the capital of the Corporation into which such shares are changed, reclassified, subdivided, consolidated or converted or which is substituted for such shares, or as such shares in the capital of the Corporation as may further be changed, reclassified, subdivided, consolidated, converted or substituted;

"Subsidiary" means a subsidiary of the Corporation as defined by the CBCA; and,

"Termination Date" means the date on which a Participant ceases, for any reason, to be an employee of the Corporation, a Subsidiary or a Designated Affiliated Entity.

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

Facts

1. The Corporation is a corporation formed under the Companies Act (XXXXXXXXXX ) on XXXXXXXXXX , continued under the Business Corporations Act (XXXXXXXXXX ) on XXXXXXXXXX , and continued under the CBCA on XXXXXXXXXX .

2. The Corporation is a resident of Canada and is a taxable Canadian corporation and a public corporation, as defined in subsection 89(1) of the Act. The Shares of the Corporation are listed on the XXXXXXXXXX .

3. The Corporation's head office and principal place of business is located at XXXXXXXXXX .

4. The Corporation has a fiscal year end of XXXXXXXXXX .

5. The Corporation files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. The Corporation's Business Number is XXXXXXXXXX

Proposed Plan

6. The Corporation proposes to establish the Plan, which is a restricted share unit and deferred share unit plan, for its executives. It will establish the Plan to advance the interests of the Corporation by: (i) increasing the proprietary interests of Participants in the Corporation, (ii) aligning the interests of Participants with the interests of the Corporation's shareholders generally, (iii) encouraging Participants to remain associated with the Corporation, and (iv) furnishing Participants with an additional incentive in their efforts on behalf of the Corporation.

7. The Plan shall be administered by the Corporation in accordance with its provisions. The Corporation may appoint a Committee for the purpose of interpreting, administering and implementing the Plan.

8. The Plan shall be an unfunded obligation of the Corporation.

9. The Corporation will be responsible for all costs and expenses relating to the administration of the Plan.

10. On or about the beginning of each fiscal year of the Corporation, the Corporation shall provide a Potential Award Confirmation to each applicable Participant in the Plan setting out the potential Grant Amount of DSUs and RSUs to such Participant based on the performance of the Corporation for such fiscal year.

11. XXXXXXXXXX % of the annual Grant Amount of the DSUs and RSUs shall be made outright and although based on corporate earnings in accordance with 10, above, will not be based on the degree or level of achievement of corporate earnings. The remaining XXXXXXXXXX % of the annual Grant Amount shall be calculated and made only on achievement of Nominal Budgeted Earnings Per Share for the previous fiscal year of the Corporation as follows:

a) if High Target Nominal Budgeted Earnings Per Share was achieved for the previous fiscal year of the Corporation, all of the second XXXXXXXXXX % of such grant shall be made;

b) if less than Low Target Nominal Budgeted Earnings Per Share was achieved for the previous fiscal year of the Corporation, none of the second XXXXXXXXXX % of such grant shall be made;

c) if Low Target Nominal Budgeted Earnings Per Share or greater, but less than High Target Nominal Budgeted Earnings Per Share, was achieved for the previous fiscal year of the Corporation, a prorated portion of the final
XXXXXXXXXX % of such grant for each of the DSUs and RSUs shall be made with such prorating being based on minimum XXXXXXXXXX increments in achieved Nominal Budgeted Earnings Per Share; and

d) the number of DSUs and the number of RSUs to be granted to a Participant shall each be determined by dividing the applicable finally determined Grant Amount by the Market Value on the date of grant rounded down to the nearest whole number of such units.

12. All grants of DSUs and/or RSUs under the Plan will be evidenced by Award Agreements and will be in respect of services rendered in the same fiscal year as the Date of Grant.

13. The Corporation shall designate, at the time of grant or crediting of the DSUs and/or RSUs, the date or dates on which all or a portion of the DSUs and/or RSUs shall become vested in the Participant. No Participant or any Beneficiary shall be entitled to any benefit in respect of any DSUs and/or RSUs that are not vested.

14. On the death or termination of employment by reason of Disability of the Participant, notwithstanding the vesting date designated by the Corporation, all the DSUs and RSUs of a Participant shall become vested immediately, and not terminate nor be forfeited.

15. All unvested DSUs and RSUs shall automatically become vested at the same time as a Control Change occurs, notwithstanding the vesting date designated by the Corporation.

16. Unless otherwise determined by the Corporation, on the Termination Date of a Participant, any DSUs and/or RSUs that are not vested shall terminate and be forfeited. A Participant shall also forfeit all of his right, title and interest with respect to additional DSUs and RSUs credited to his DSU Account or RSU Account pursuant to 19, 25 and/or 31 herein, to the extent that they are directly or indirectly attributable, as determined by the Corporation, to DSUs or RSUs forfeited by such Participant.

17. No cash or other compensation shall at any time be paid in lieu of any DSUs or RSUs which are forfeited under the Plan.

18. No fractional DSUs or RSUs shall be granted under the Plan and no cash or other compensation shall be paid at any time in lieu of any fractional units.

19. If the number of Shares of the Corporation is increased or decreased as a result of a subdivision, consolidation, reclassification or recapitalization, such proportionate adjustments, to reflect such change or changes, shall be made with respect to the number of DSUs and RSUs outstanding under the Plan.

20. The Employer's issuance of DSUs and RSUs and its obligation to make any payments in accordance with the terms of the Plan is subject to compliance with any Applicable Law. As a condition of participation in the Plan, each Participant agrees to comply with all Applicable Law and agrees to furnish to the Employer all information and undertakings as may be required to permit compliance with the Applicable Law.

21. A DSU or RSU will not entitle a Participant to any rights as a shareholder, including without limitation, any voting rights, dividend entitlements or rights on liquidation.

22. The interest of any Participant under the Plan or in any RSU or DSU shall not be transferable or alienable by him or her either by pledge, assignment or in any other manner whatever, otherwise than by testamentary disposition or in accordance with the laws governing the devolution of property in the event of death.

23. From time to time the Corporation may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or terminate the Plan or amend any of the terms of the DSUs and RSUs granted under the Plan, provided, however, that:

a) any approvals required under Applicable Law or stock exchange rules are obtained,

b) no such amendment or termination shall be made at any time which has the effect of adversely affecting the existing rights of a Participant under the Plan without the Participant's consent in writing,

c) no such amendment or termination shall accelerate the redemption of a Participant's DSUs prior to a Participant's Termination Date, and

d) any amendment of the Plan shall be such that it continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto

DSUs

24. The Corporation shall maintain a DSU Account in respect of each Participant, which account will be credited with DSUs granted from time to time.

25. A Participant's DSU Account will be credited with additional DSUs whenever cash dividends are paid on Shares. The number of additional DSUs credited to a Participant in connection with the payment of dividends on the Shares will be based on the actual amount of dividends that would have been paid to such Participant if the Participant had held actual Shares rather than DSUs and on the Market Value of a DSU on the day on which the dividends are declared on the Shares.

26. No amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement, and no additional DSUs will be granted to such Participant to compensate for a downward fluctuation in the value of any shares of the Corporation nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.

27. Unless otherwise determined by the Corporation or the Board, DSUs shall become vested in the Participant on the XXXXXXXXXX anniversary of the Date of Grant.

28. All DSUs recorded in a Participant's DSU Account which are not forfeited by the Participant on his Termination Date, together with any additional DSUs credited to such Participant's DSU Account in respect of dividends after such Participant's Termination Date, together with any additional DSUs which vest, are referred to herein as "Vested DSUs".

29. On a Participant's DSU Entitlement Date, the Market Value of the Vested DSUs credited to the Participant's DSU Account shall be redeemed and paid by the Participant's Employer to the Participant or the Participant's Beneficiary, as applicable. The Market Value of the Vested DSUs so redeemed shall, after deduction of any applicable taxes and other source deductions required to be withheld by the Employer, be paid in cash. All amounts payable to, or in respect of a Participant, on the redemption of DSUs shall be paid on or before December 31 of the calendar year commencing immediately after the Participant's Termination Date.

RSUs

30. The Corporation shall maintain an RSU Account in respect of each Participant, which account will be credited and debited with grants and redemptions of RSUs granted and redeemed from time to time.

31. A Participant's RSU Account will be credited with additional RSUs whenever cash dividends are paid on Shares. The number of additional RSUs credited to a Participant in connection with the payment of dividends on the Shares will be based on the actual amount of dividends that would have been paid to such Participant if the Participant had held actual Shares rather than RSUs and on the Market Value of a RSU on the day on which the dividends are declared on the Shares.

32. Unless otherwise determined by the Corporation or the Board, the RSUs of a Participant shall become vested on the XXXXXXXXXX anniversary of the Date of Grant.

33. All RSUs recorded in a Participant's RSU Account which are not forfeited by the Participant on his Termination Date, together with any additional RSUs credited to such Participant's RSU Account in respect of dividends after such Participant's Termination Date, together with any additional RSUs which vest, are referred to herein as "Vested RSUs".

34. On a Participant's RSU Entitlement Date, the Vested RSUs shall be redeemed and paid by the Participant's Employer to the Participant or the Participant's Beneficiary, as applicable. The Market Value of the Vested RSUs so redeemed shall, after deduction of any applicable taxes and other source deductions required to be withheld by the Employer, be paid in cash, subject to the comments in paragraph 35 below.

35. The Employer will have the option of satisfying its payment obligation, net of any applicable taxes and other source deductions required to be withheld by the Employer, on the redemption of Vested RSUs by having an independent broker acquire Shares on the open market on behalf of the Participant. In such a case, the Employer shall notify the independent broker of the number of Shares of the Corporation to be purchased by the broker on the Participant's behalf and the broker will purchase such Shares as soon as practical thereafter and, for greater certainty, the broker shall effect such purchase no later than the last day of the first calendar month commencing after the Participant's RSU Entitlement Date. The broker will deliver such Shares to the Participant or the Participant's Beneficiary, as applicable. The Employer will pay all brokerage fees arising in connection with the acquisition of such Shares.

36. Notwithstanding anything else contained herein, all amounts payable to, or in respect of a Participant, on the redemption of RSUs shall be paid within XXXXXXXXXX years following the end of the year in which the Date of Grant occurred in respect of the RSUs.

Purpose of the Proposed Plan

37. The purpose of the proposed Plan is to advance the interests of the Corporation by: (i) increasing the proprietary interests of Participants in the Corporation, (ii) aligning the interests of Participants with the interests of the Corporation's shareholders generally, (iii) encouraging Participants to remain associated with the Corporation, and (iv) furnishing Participants with an additional incentive in their efforts on behalf of 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. Provided that the Plan remains unfunded, the Plan will not constitute a "retirement compensation arrangement", as that term is defined in subsection 248(1) of the Act.

C. The DSU portion of 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.

D. The RSU portion of the Plan will not be considered a salary deferral arrangement as defined in subsection 248(1) of the Act by reason of paragraph (k) of that definition.

E. No amount will be included in the income of any Participant pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) of the Act solely as a result of a grant of DSUs or RSUs under the Plan to the Participants.

F. Except to the extent that Ruling H applies to amounts received by a Participant's legal representative, the amount to be included in the income of a Participant for a year under the Plan by virtue of subsection 5(1) of the Act will include any amount paid by the Employer in cash to the Participant or to his or her legal representative in satisfaction of the Participant's DSUs or RSUs. The amount paid by the Employer includes any amounts withheld in respect of taxes or other source deductions.

G. Except to the extent that Ruling H applies to amounts received by a Participant's legal representative, the amount to be included pursuant to subsection 5(1) of the Act in the income of a Participant for the year under the Plan, where the Participant or legal representative has received Shares that were purchased by the Broker on the open market in satisfaction of the Participant's RSUs as described in 35, above, will consist of the aggregate of the following amounts:

i) the amount paid by the Employer to the Broker (excluding brokerage fees or commission fees) to acquire the particular Shares that will be distributed to the Participant as described in 35 above;

ii) the amount of applicable withholding taxes withheld by the Employer as described in 35, above, and

iii) the amount of brokerage fees or commission fees paid by the Employer to the Broker for the acquisition of the Shares distributed by the Broker to the Participant as described in 35 above.

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

I. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments described in the above rulings made under the Plan in the year by an Employer from the general assets of the Employer in respect of services provided by a Participant who was an employee of the Employer, in satisfaction of all or any part of a Participant's interest in the Plan, as well as all costs incurred in establishing the Plan in respect of an Employer's employees that are paid for by an Employer, will be deductible in computing the Employer's income in the year in which the payments are made or the costs were incurred, respectively, 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CCRA provided that the proposed Plan is implemented by XXXXXXXXXX .

The above rulings are based on the draft of the Plan that was submitted with the request and which is described above. Any substantive difference between this version and the final version of the Plan would invalidate the rulings provided.

Note:

Nothing in this letter should be construed as implying that the CCRA has agreed to or has accepted that the Market Value as determined in accordance with the Plan at any time will represent the fair market value of the Share at that particular time.

This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Yours truly,

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