1999 Ruling 9922093 - 6801(D), DEFERRED SHARE UNITS

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 the payment of Directors' fees in the form of deferred share units ( which may, at the option of the employer, be redeemed on termination of employment in the form of shares purchased on the open market or in cash ) constitute an SDA for purposes of the Act?

Position: No.

Reasons: Exempted under the provisions of paragraph 6801(d) of the Regulations.

XXXXXXXXXX 						992209

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

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

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

Our understanding of the facts and proposed transactions is as follows:

Facts

1. The Company is a resident of Canada and has a XXXXXXXXXX year end. It is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act.

The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. The common shares of the Company are publicly traded on the XXXXXXXXXX stock exchanges. The authorized capital of the Company consists of an unlimited number of common shares without nominal value and an unlimited number of preferred shares issuable in series.

3. XXXXXXXXXX.

4. The Company has XXXXXXXXXX active "subsidiary wholly-owned corporations" and acquisitions will remain a key element of the Company's growth strategy. The expression "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Income Tax Act (Canada) (the "Act").

5. 6. The Company has a Board of Directors composed of XXXXXXXXXX directors. Certain of these directors are not employees of the Company, a subsidiary of the Company or any other related corporation ("non-employee directors"). The Company pays its non-employee directors an annual retainer fee in the amount of $XXXXXXXXXX. At present, only one of the current non-employee directors is eligible to participate in the proposed plan described below.

6. A recent trend among leading public companies is to pay a portion of each director's compensation in shares of stock instead of cash, thereby facilitating and encouraging the acquisition of a greater ownership interest in the company. In response to that trend, the Company is contemplating the establishment of a stock compensation plan, more particularly described below.

Proposed Transactions

7. The Company will establish "XXXXXXXXXX (the "Plan") for the benefit of its Canadian and non-resident directors (the "Participants"). Only non-employee directors who are appointed or elected to the Company's Board of Directors after XXXXXXXXXX will be eligible to participate in the Plan. The principal features of the Plan will be as follows:

(a) The Plan will be administered by the Committee of the Company's Board of Directors generally responsible for compensation related matters (the "Committee"). A notional account will be established for each Participant in the Plan in order to carry out the objectives of the Plan, more particularly described below. The administrator of such account is referred to herein as the "Administrator".

(b) Each Participant will be allocated XXXXXXXXXX% of his or her Quarterly Retainer Fee, within the meaning assigned in paragraph 8(e) below, in the form of share units credited to the notional account established and maintained for each Participant on a deferred basis where each share unit would represent the equivalent of a common share of the Company ("Share Units"), as more particularly described below.

(c) Under no circumstances shall the Share Units be considered common shares of the Company nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of the Company's common shares, nor shall any Participant be considered the owner of common shares of the Company until after the date of the purchase of common shares of the Company on the open market.

8. Certain terms are defined in the Plan as follows:

(a) "Annual Retainer Fees" means the amount expressed in dollars, of the annual retainer fees which would, but for the Plan, be payable in cash by the Company to a Participant for one year of service as a member of the Board of Directors, as a member and Chair of a Committee of the Board of Directors or Chair of the Board of Directors, beginning on the date of the Company's annual general meeting at which the Participant is elected and ending on the date immediately preceding the date of the following annual general meeting of the Company, and for greater certainty, Annual Retainer Fees shall exclude any other fee, which may be payable by the Company to the Participant.

(b) "Attendance Fees" means the amount, expressed in dollars, of the attendance fees in respect of which a Participant has made an election (see 11 below) under the Plan to be paid attendance fees in the form of Share Units.

(c ) "Market Value" on a particular day means the market value of one common share of the Company and shall be calculated on the basis of the average of the closing prices for a board lot of common shares of the Company on XXXXXXXXXX on the five trading days on which at least one board lot of the Company's common shares was traded immediately preceding that day; or if, at any time, the Company's common shares are no longer listed on both XXXXXXXXXX, then the Market Value shall be calculated on the basis of the closing price on the aforesaid five trading days, for a board lot of the Company's common shares on the stock exchange on which the Company's common shares are listed and had the greatest volume of trading on that particular day.

(d) "Quarter" means any of the four quarters of any financial year of the Company, currently ending on March 31, June 30, September 30 and December 31.

(e) "Quarterly Retainer Fee", means the amount, expressed in dollars, representing twenty-five percent of the Annual Retainer Fees and one hundred percent of the Attendance Fees earned in the Quarter which would, but for the Plan, be payable in cash on the last day of each Quarter by the Company to a Participant, or if, with respect to any Quarter, a Participant has served as a member of the Board of Directors for a number of days that is less than the full Quarter, the amount, expressed in dollars, of one hundred percent of the Attendance Fees earned up to the date the Participant ceases to serve as a member of the Board of Directors plus the amount which is the product of (i) the quotient determined by dividing: (A) the number of days in the particular Quarter during which the Participant served as a member of the Board of Directors of the Company, and (B) the aggregate number of days in the particular Quarter, and (ii) the amount expressed in dollars, of twenty-five percent of the Annual Retainer Fees which would otherwise have been payable for such Quarter had the Participant served as a member of the Board of Directors of the Company for the full Quarter.

(f) "Reference Date", with respect to any Quarter, means the date which shall be used to determine, on a quarterly basis, the Market Value of a common share of the Company for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's account pursuant to section 5 of the Plan, which date shall be, unless otherwise determined by the Committee and approved by the Company's Board of Directors, the last trading day of such Quarter on which the Market Value of a common share of the Company may be determined or, if a Participant's Termination of Board Service occurs during the Quarter prior to such last trading date, the date of Termination of Board Service of the Participant, provided that if the date of Termination of Board Service is not a trading day on which the Market Value of a common share of the Company may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value may be determined.

(g) "Termination of Board Service", means

(i) if the Participant has become an employee of the Company or a person related to the Company, the date that is the later of

(A) the date that the Participant ceases, for whatever reason, to be a member of the Company's Board of Directors, and

(B) the date that the Participant ceases, for whatever reason, to be employed by the Company or a person related to the Company; or

(ii) in any other case, the date the Participant ceases, for whatever reason, to be a member of the Company's Board of Directors.

9. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter and, where a Participant's Termination of Board Service occurs prior to the last trading day of the Quarter, on the date of Termination of Board Service:

(a) The number of Share Units credited to a Participant's account on a deferred basis with respect to any Quarter shall be determined by dividing: (a) the Quarterly Retainer Fee by (b) the Market Value of a common share of the Company on the Reference Date for that Quarter. The appropriate number of Share Units (including any fractional units) will be credited to the notional account maintained by the Administrator for this purpose.

(b) A Participant's notional account will be credited with dividend equivalents when dividends are paid on the Company's common shares and such dividend equivalents will be converted into additional Share Units based on the Market Value of the Company's common shares on the date the dividends are paid.

(c) Except as may be determined by the Committee and approved by the Company's Board of Directors, or except as set forth below, the entitlement date ("Entitlement Date") of a Participant with respect to whom a Termination of Board Service has occurred shall be the fourth trading day following the release of the Company's quarterly or annual results immediately following Termination of Board Service by the Participant, provided that if a Participant's Termination of Board Service shall occur on the same date as the release of the Company's results, the Entitlement Date shall, in such a case, be the fifth trading day immediately following such release of the Company's results. In no event will the Entitlement Date be later than the last day of the first calendar year commencing after the Participant's Termination of Board Service. A Participant shall receive, at the Company's sole discretion, in satisfaction of the number of Share Units recorded in the Participant's account on the Entitlement Date, one of the following:

(i) a cash payment based on the Market Value of a common share of the Company on the Entitlement Date, net of applicable withholdings; or

(ii) common shares of the Company purchased on the Participant's behalf on the open market by a designated broker.

Where the Company's common shares are purchased on the open market, the Company will pay the designated broker the amount necessary to purchase a number of common shares equal in value to the value of the Share Units credited to the Participant's account (see (d) below), net of applicable withholdings, such Share Units being valued at the Market Value of the Company's common shares on the Entitlement Date. In addition, regardless of whether or not cash or market common shares of the Company are used to satisfy the Participant's Share Units, the Company will make a cash payment to the Participant with respect to any fractional Share Units based on the Market Value on the Entitlement Date of a common share of the Company, net of applicable withholdings. The Company will also pay all brokerage fees arising in connection with the acquisition of its common shares by the designated broker on the open market and may 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 both the special cash payment for fractional Share Units and the payment of such brokerage fees by the Company.

(d) Prior to 11:00 a.m. on the Entitlement Date, the Company shall advise the designated broker, as to the number of its common shares to be purchased by the broker on behalf of the Participant on the open market. As soon as practicable thereafter the broker shall purchase on the open market the number of the common shares which the Company has requested the broker to purchase. On the settlement date for the purchase of the common shares, upon payment of the purchase price and related reasonable brokerage commission by the Company, the broker will deliver the certificate representing the common shares to the Participant or his or her estate.

(e) Whether Participants are residents of Canada or citizens or residents of a country other than Canada, the Company has the right, in its sole discretion, to pay in cash the value as computed under the Plan, of a Share Unit entitlement (less any applicable withholdings), should it deem the regulatory or other requirements of the applicable Canadian or foreign jurisdiction associated with the purchase of, or payment in, common shares of the Company too onerous to it or the Participant.

10. A Participant who becomes an employee of the Company, a subsidiary of the Company or a person related to the Company shall no longer be eligible to receive Share Units under the Plan. In that case, starting with the Quarter in which the Participant became such an employee, the payment of the Quarterly Retainer Fee, if any, shall not be governed by the Plan. However, Share Units already credited to such person's account shall remain governed by the Plan and the Agreement until the later of ceasing to be a member of the Board and ceasing to be employed by the Company or a person related to the Company.

11. Pursuant to Section XXXXXXXXXX of the Plan, the Committee may, at its discretion, allow a Participant to receive his or her fees, other than the Annual Retainer Fees, otherwise payable in cash, in the form of Share Units. In particular, a Participant may elect, in writing, annually, within ten (10) days of his or her election or appointment to receive all or part of such fees in the form of Share Units. Any such Share Units so credited to a Participant's account will be governed by the Plan.

12. The Company's Board of Directors may, from time to time, amend, suspend or terminate the Plan in whole or in part. However, any such amendment, suspension or termination shall not adversely affect the rights of any Participant under any agreement existing at the time of such amendment, suspension or termination, without the consent of the affected Participant.

Purpose of the Proposed Transactions

13. The purpose of the proposed transactions is to provide non-employee directors of the Company with a long-term stock based compensation program.

Additional Information

14. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Company or of a person related to the Company;

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

(c) is under objection by the Company or by a person related to the Company;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the terms of the Plan are as described in paragraphs 7 to 11 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. The Plan will not constitute a "retirement compensation arrangement", as that term is defined in subsection 248(1) of the Act.

C. Except for those amounts identified in Rulings D, E, F, and G below, no amount will be included pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of a Participant in respect of the Plan.

D. The amount to be included in the income of a resident Participant under the Plan for the year in which the Entitlement Date occurs, where cash is received in satisfaction of the Participant's Share Units, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Participant for the rights related to the fractional shares as described in subparagraph 9(c) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Participant in order to satisfy the Participant's Share Units described in subparagraph 9(c) above; and

(c) under paragraph 6(1)(c) of the Act, the amount of the applicable share unit withholdings withheld by the Company as described in subparagraph 9(c) above.

E. The amount to be included in the income of a non-resident Participant under the Plan for the year in which the Entitlement Date occurs, where cash is received in satisfaction of the Participant's Share Units, 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 Company to the Participant for the rights related to the fractional shares as described in subparagraph 9(c) 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 Company to the Participant in order to satisfy the Participant's Share Units described in subparagraph 9(c) above; and

(c) 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, of the applicable share unit withholdings withheld by the Company as described in subparagraph 9(c) above.

F. The amount to be included in the income of a resident Participant under the Plan for the year in which the Entitlement Date occurs, where the Participant has received common shares of the Company purchased by the designated broker on the open market in satisfaction of the Participant's Share Units, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Participant for the rights related to the fractional shares as described in subparagraph 9(c) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the broker to acquire the particular shares distributed to the Participant as described in subparagraph 9(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable share unit withholdings withheld by the Company as described in subparagraph 9(c) above;

(d) under 6(1)(a) or 6(1)(c) of the Act, the amount of brokerage fees paid by the Company for the acquisition of the particular common shares of the Company distributed to the Participant by the broker as described in subparagraph 9(c) above; and

(e) under paragraph 6(1)(c) of the Act, the special cash payment paid by the Company 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 F(a) and/or F(d) above as described in subparagraph 9(c) above.

G. The amount to be included in the income of a non-resident Participant under the Plan for the year in which the Entitlement Date occurs, where the Participant has received the common shares of the Company purchased by the designated broker on the open market in satisfaction of the Participant's Share Units, 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 Company to the Participant for the rights related to the fractional shares as described in subparagraph 9(c) 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 Company to the broker to acquire the particular shares distributed to the Participant as described in subparagraph 9(c) above;

(c) 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, of applicable share unit withholdings withheld by the Company as described in subparagraph 9(c) above;

(d) under 6(1)(a) or 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by the Company, to the extent it is attributable to services rendered in Canada, for the acquisition of the particular common shares of the Company distributed to the Participant by the broker as described in subparagraph 9(c) above; and

(e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the special cash payment paid by the Company 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 G(a) and/or G(d) above as described in subparagraph 9(c) above.

H. The adjusted cost base to the resident Participant of any common shares of the Company acquired by the resident Participant on the open market shall be the aggregate of the cost to acquire the shares which was included in the Participant's income in ruling F(b) above, and the brokerage fees paid by the Company, which were included in the Participant's income in ruling F(d) above.

I. The amount payable by the Company to the estate of a Participant as a result of the death of the Participant will constitute a right or thing held by the deceased Participant at the time of death for purposes of subsection 70(2) of the Act.

J. 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.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings D, E, F and G above that are paid by the Company in a particular year in respect of Participants, will be deductible by the Company in accordance with section 9 of the Act.

The above rulings, which are based on the Act in its 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 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Plan is implemented within six months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate