2000 Ruling 2000-0004163 - REOGANIZAITON DSU

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 6801(d) phantom stock plan still qualify where the number of deferred share units credited to notional accounts are adjusted to reflect a corporate reorganization?

Position: Where the value of the units after the reorganization equals the value of the units before the reorganization, yes.

Reasons: The conditions in 6801(d) would continue to be satisfied.

XXXXXXXXXX
XXXXXXXXXX 2000-000416
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

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 company. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

(i) is in an earlier return of the Company or a related person,

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

(iii) is under objection by the Company or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the 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, proposed amendment, purpose of the proposed transaction and purpose of the proposed amendment is as follows:

Facts

1. The Company is a public company incorporated under the laws of Canada and a resident of Canada. The expression "public corporation" has the meaning assigned by 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.

XXXXXXXXXX

3. In XXXXXXXXXX, the Company established "XXXXXXXXXX" (the "Director Plan") and "XXXXXXXXXX" (the "Executive Plan") (collectively the plans will be referred to as the "Plans"). The Canada Customs and Revenue Agency issued advance income tax rulings (#964182 dated XXXXXXXXXX, 1997 and #970236 dated XXXXXXXXXX, 1997) and supplemental advance income tax rulings (#970163 dated XXXXXXXXXX, 1997, #970613 dated XXXXXXXXXX, 1997 and #970984 dated XXXXXXXXXX, 1997) in respect of the Plans (hereinafter collectively referred to as the "Ruling Letters").

4. Under the Plans, certain Canadian and non-resident directors, officers and key employees of the Company and of related corporations have been granted share units (individually referred to as a "Participant" and collectively as the "Participants"). The Plans are administered by a committee of the board of directors of the Company generally responsible for compensation-related matters (the "Committee"). Under the Director Plan, each Participant is required to enter into an agreement with the Company and, under the agreement, 100% of the Participant's annual retainer is awarded in the form of deferred share units representing common shares of the Company. Under the Executive Plan, each Participant is required to provide the Company with an election in writing on or before the last business day of the calendar year in order to participate in the Executive Plan in the following calendar year and, where the Participant has elected to participate, the amounts allocated to the Participant under the Company's existing short-term incentive program is awarded in the form of deferred share units representing common shares of the Company. These share units are maintained in a notional account on behalf of each of the Participants. At the time of payment of dividends on the common shares of the Company, each Participant's account is credited with a dividend equivalent, which is then used to acquire additional share units. The Participant is entitled to redeem the share units no earlier than his or her retirement, termination of employment or death, and no later than the end of the first calendar year following the said events (the "Entitlement Date"). At that time, the value which a Participant will receive for the share units maintained in his or her account is based on the fair market value of the common shares of the Company, determined at a particular date. Each of the Plans is a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and is therefore exempted from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act. The principal features of the Plans are more particularly described in the above-referenced advance income tax rulings.

5. As at XXXXXXXXXX, share units have been awarded to XXXXXXXXXX Participants pursuant to the Executive Plan and XXXXXXXXXX share units in the aggregate have been issued. As at XXXXXXXXXX, share units have been awarded to XXXXXXXXXX Participants pursuant to the Director Plan and XXXXXXXXXX share units in the aggregate have been issued.

6. As at XXXXXXXXXX, the Company owned directly XXXXXXXXXX common shares in the capital stock of XXXXXXXXXX ("Investmentco"). The Company also owns an additional XXXXXXXXXX Investmentco common shares through various wholly owned subsidiaries. The Company's aggregate direct and indirect interest in Investmentco currently approximates XXXXXXXXXX% of the Investmentco common shares.

7. The Company has expressed its intention to spin-off its interest in Investmentco to a separate public company followed by the acquisition of the remaining common shares of Investmentco by such separate public company (the "Reorganization").

Proposed Amendment and Proposed Transaction

8. The Executive Plan will be amended to provide that, when a Participant files an election to participate in the Executive Plan, the election will apply to all future years until such election is withdrawn by the Participant. As a result of this amendment, Participants will longer have to provide the Company with an annual election.

9. As a consequence of the Reorganization, it is expected that the value of the common shares of the Company, immediately after such transactions, will be substantially diminished. Accordingly, the value of a Participant's share units under the Executive Plan or the Director Plan will suffer a corresponding decline. In order to reduce the impact of the anticipated decline in the value of the deferred share units caused by the Reorganization, the Committee may determine that, immediately following the Reorganization, the number of share units recorded in each Participant's account should be adjusted so that the aggregate value of the share units recorded in a Participant's account immediately after the Reorganization will be equal to the aggregate value of the share units recorded in the Participant's account immediately before the Reorganization. This adjustment to the number of share units credited to the Participant's notional account is contemplated in both the Executive Plan and the Director Plan.

Purpose of the Proposed Amendment and Proposed Transaction

10. The purpose of the proposed amendment and proposed transaction is to eliminate the requirement that an annual election be submitted to the Company in order to participate in the Executive Plan and to provide an equitable adjustment to the value of a Participant's interest in the Executive Plan or a Director Plan (as the case may be) having regard to the Reorganization.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendment, proposed transaction, purpose of the proposed amendment and purpose of the proposed transaction, and provided that the proposed amendment and proposed transaction are completed as described in 8 and 9 above, we rule as follows:

A. The amendment to the Executive Plan described in 8 above will not disqualify the Executive Plan from being a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations").

B. Provided that the value of deferred share units immediately after the Reorganization equals the value of the deferred share units in a Participant's account immediately before the Reorganization, the equitable adjustment contemplated in 9 above will not disqualify an Executive Plan or a Director Plan, as the case may be, from being a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and therefore will not disqualify such Plan from exemption from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.

C. Provided the Executive Plan and the Director Plan were implemented prior to the deadlines set out in the Ruling Letters, the rulings issued in our Ruling Letters will continue to be binding on the Agency in accordance with the practice outlined in Information Circular 70-6R3 dated December 30, 1996. However, these rulings will be binding only in respect of the Executive Plan and the Director Plan described in the Ruling Letters and may not be binding in the event such Plans are amended, other than the amendment in 8 above, as provided for under their terms.

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 the Canada Customs and Revenue Agency provided that the proposed amendment and proposed transaction are completed by XXXXXXXXXX.

Yours truly,

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