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:
Confirmation that the plan is a prescribed plan under paragraph (d) of Regulation 6801.
Position: Yes.
Reasons:
The plan meets all the conditions in paragraph (d) of Regulation 6801.
XXXXXXXXXX
XXXXXXXXXX 980797
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Re: Advance Income Tax Ruling
XXXXXXXXXX (the “Corporation”) (XXXXXXXXXX)
XXXXXXXXXX (the “Plan”)
This is in reply to your letter of XXXXXXXXXX and facsimile transmission of XXXXXXXXXX, in which you requested an advance income tax ruling regarding the above Plan. We also acknowledge the phone conversations (XXXXXXXXXX and XXXXXXXXXX) which resulted in amendments to the Plan as evidenced by your facsimiles dated XXXXXXXXXX and XXXXXXXXXX.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. The Corporation is a company incorporated under the laws of Canada, a resident of Canada and a public corporation. The Corporation’s common shares are listed on various stock exchanges, XXXXXXXXXX. The expression "public corporation" has the meaning assigned by subsection 89(1) of the Act.
2. The Corporation supplies XXXXXXXXXX equipment products and services, XXXXXXXXXX.
Proposed Transactions
3. For purposes of the Plan, the relevant definitions include the following:
(a) "Board" shall mean the Corporation’s Board of Directors XXXXXXXXXX. At present, there are non-resident individuals serving on the Board.
(b) "Directors Fees" shall mean the amounts payable, in U.S. dollars, to directors who are not employees of the Corporation or one of its subsidiaries for their services as members of the Board. The fees are currently as follows:
(i) an annual retainer (“Annual Retainer Fee”) of $XXXXXXXXXX;
(ii) a fee of $XXXXXXXXXX for each Board meeting attended;
(iii) a fee of $XXXXXXXXXX for each standing committee meeting attended, excluding certain exceptions; and
(iv) a fee of $XXXXXXXXXX per year for services as a member of any standing committee of the Board, excluding certain exceptions, and an additional $XXXXXXXXXX per year for services as chairman of any standing committee, excluding the chairman of the stock option plan committee for which no retainer is paid.
These fees are in effect at the date of the advance income tax ruling and may change from time to time.
(c) "Market Value” of a common share of the Corporation shall generally mean the price per common share, in Canadian dollars, computed as the average for a board lot of the common shares traded in Canadian dollars on XXXXXXXXXX on the relevant day. The Market Value shall always be established in relation to the fair market value of a common share of the Corporation.
(d) "Participant" shall mean a director that is not employed by the Corporation or a subsidiary of the Corporation.
(e) “Quarter” means, until the financial year of the Corporation is changed, March 31, June 30, September 30 and December 31.
(f) “Quarterly Retainer Fee” means twenty-five percent (25%) of the Annual Retainer Fee that would, but for the Plan, be payable in cash on the last day of each Quarter by the Corporation to a Participant.
(g) "Reference Date" shall mean, with respect to any Quarter, the last trading day of that Quarter and, where a Participant resigns during a Quarter, the Reference Date will be the date of the resignation.
(h) "Resignation Date" shall mean, in respect of a Participant, the earliest date on which both of the following conditions are met:
(i) the Participant has ceased to be member of the Board for any reason whatsoever, including the death of the Participant; and
(ii) the Participant is neither an employee nor a member of the Board of the Corporation or a subsidiary thereof.
(i) "Settlement Date" means the fourth trading day following the release of the Corporation’s quarterly or annual financial results immediately following the Resignation Date.
(j) "Share Unit" shall mean a unit credited to a Participant’s notional account in accordance with the terms and conditions of the Plan.
4. The principal features of the Plan are as follows:
(a) The Plan will be administered by a committee (“Committee”) which will be appointed by the Board and which will be comprised of members of the Board.
(b) A notional account will be established for each Participant in order to carry out the objectives of the Plan. The Corporation or an administrator appointed by the Corporation will maintain the notional accounts.
(c) Each Participant will be credited 100% of his or her Annual Retainer Fee in the form of Share Units. However, the Committee, in its sole discretion, may allow a Participant to elect to receive other fees payable in respect of services to be rendered in his or her capacity as a member of the Board in the form of Share Units. The number of Share Units credited to a Participant’s account in respect of the particular Reference Date will be determined by dividing the Quarterly Retainer Fee, converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the Reference Date, by the Market Value of a common share of the Corporation on the Reference Date.
(d) Additional Share Units will be credited to a Participant’s account on each date that the Corporation pays a dividend on its common shares. The number of Share Units credited will be equal to the number determined when the quotient of (A) divided by (B) is multiplied by the number of Share Units credited to a Participant’s account, where
(A) is the dividend, in Canadian dollars, declared per common share of the Corporation; and
(B) is the Market Value of a common share of the Corporation on the date the dividend is declared.
(e) On the Settlement Date, the Corporation will advise a broker of the number of its common shares that are to be purchased by the broker on the open market on the Participant’s behalf. This number will be equal to the nearest whole number, rounded down, of Share Units held in the Participant’s account, net of withholding taxes. As soon as practicable after receiving notice from the Corporation, the broker will purchase, on the Participant’s behalf, the Corporation’s common shares. The broker will deliver the common shares to the Participant or, in the event of death, to his or her estate or designated beneficiary. On the Settlement Date, the Corporation will make a cash payment to the Participant in an amount equal to the fair market value, on the Settlement Date, of any entitlement to a fractional common share. The Corporation will pay all costs related to the acquisition of the shares, on the Participant’s behalf, and the applicable brokerage fees. The Corporation may also make a special cash payment to the Participant in an amount sufficient to cover any income tax liability of the Participant as a consequence of the payment of such brokerage fees by the Corporation. The Participant only has the rights described in the Plan, and under no circumstances will a benefit be granted to the Participant for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Corporation’s common shares.
In the event that, at the time contemplated for the purchase of the Corporation’s common shares in the open market, there is no public market for the common shares, the obligations of the Corporation under the Plan shall be met by a payment in cash in such amount as is reasonably determined by the Committee to be fair and equitable in the circumstances, but shall always be established in relation to the fair market value of a common share of the Corporation.
(f) If a Participant is a citizen or resident of a country other than Canada, the Corporation has the right, in its sole discretion, to pay entirely in cash, the value, as computed under the Plan, of a Participant’s Share Unit entitlement (less any applicable tax withholdings or required source deductions) should it deem desirable to do so in light of the regulatory or other requirements of the applicable foreign jurisdiction associated with the purchase of, or payment in, common shares.
(g) The Plan will be carried out in the form of an agreement in writing between the Corporation and each of the Participants.
5. The Board may from time to time amend, suspend or terminate the Plan in whole or in part and amend the terms of Share Units credited in accordance with the Plan.
Purpose of Transaction
6. A recent trend among public companies is to pay all or a portion of a director’s compensation in shares of stock instead of cash. The Corporation is contemplating the establishment of the Plan to promote a greater alignment of interests between non-employee members of the Board and the shareholders of the Corporation.
7. None of the issues involved in this ruling request is, to the best of your knowledge, being considered by a Tax Services Office or Taxation Centre in connection with any tax return already filed by the employer, the executives or a related person, and none of the issues involved is the subject of any Notice of Objection or is under appeal.
Rulings
Provided the above facts and proposed transactions are accurate and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the terms of the Plan are as described above, we rule as follows:
A. The Plan will not constitute an employee benefit plan or a retirement compensation arrangement, within the meanings assigned to those terms under subsection 248(1) of the Act.
B. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and will therefore be exempted from the definition of a "salary deferral arrangement" as contained in subsection 248(1) of the Act.
C. The amount to be included in the income of a resident Participant for a year under the Plan will consist of the aggregate of the following amounts:
(a) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation in the year to the Participant for rights related to fractional common shares described in subparagraph 4(e) above and for rights related to shares where there is no public market described in subparagraph 4(e) above;
(b) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation in the year to the broker (excluding brokerage fees) to acquire the particular common shares distributed to the Participant as described in subparagraph 4(e) above;
(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholdings withheld by the Corporation in the year as described in subparagraph 4(e) above;
(d) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by the Corporation in the year for the acquisition of the common shares distributed to the Participant by the broker as described in subparagraph 4(e) above; and
(e) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation in the year to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant’s income in ruling C(d) above as described in subparagraph 4(e) above.
D. The amount to be included in the income of a non-resident Participant for a year under the Plan will consist of the aggregate of the following amounts:
(a) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation in the year to the Participant for the rights related to fractional common shares as described in subparagraph 4(e) above, for the rights to Share Units where there is no public market as described in subparagraph 4(e) above, and for the rights to Share Units where a cash payment is made as described in subparagraph 4(f) above;
(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation in the year to the broker (excluding brokerage fees) to acquire the particular common shares distributed to the Participant, as described in subparagraph 4(e) above;
(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, of applicable withholdings withheld by the Corporation in the year as described in subparagraph 4(e) above;
(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by the Corporation in the year, to the extent they are paid with respect to the acquisition of the common shares distributed to the Participant by the broker as described in subparagraph 4(e) above; and
(e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount paid by the Corporation to the Participant in the year to compensate the Participant for the income tax liability in respect of an amount included in the Participant’s income in ruling D(d) above as described in subparagraph 4(e) above.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C and D above that are paid by the Corporation in a particular year in respect of Participants will be deductible by the Corporation in accordance with section 9 of the Act.
F. The cost of the common shares acquired by a Participant that is resident in Canada will include the broker’s cost, included in the Participant’s income in ruling C(b) above, to acquire the common shares and the brokerage fees paid by the Corporation which is included in the Participant’s income in ruling C(d) above, with respect to the acquisition of such common shares.
The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the Plan is implemented within six months of the date of this letter. Furthermore, these rulings will be binding only in respect of the Plan as submitted for our review and will not be binding in the event the Plan is amended as outlined in paragraph 5 above.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
7
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