2000 Ruling 2000-0017993 - PHANTOM STOCK PLAN EXECUTIVES

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 executive bonuses in the form of deferred share units result in an SDA?

Position: No.

Reasons: 6801(d) satisfied

XXXXXXXXXX
XXXXXXXXXX 2000-001799
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
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).

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

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

(iii) is under objection by the Corporation 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 plan and purpose of the proposed plan is as follows:

Facts

1. The Corporation was incorporated under the laws of Canada and its head office is located in XXXXXXXXXX. The Corporation is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Act.

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

2. The Corporation owns operating companies in Canada and abroad, XXXXXXXXXX. The Corporation's fiscal year ends on XXXXXXXXXX.

3. The Corporation's common shares are listed and traded on the XXXXXXXXXX Stock Exchange.

Proposed Plan

4. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of Canadian and non-resident key executives of the Corporation and its affiliates. The board of directors of each relevant affiliate will adopt a resolution confirming its participation in the Plan.

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

(a) "Affiliate" means an affiliated body corporate of the Corporation within the meaning of subsection 2(2) of the Canada Business Corporations Act.

(b) "Board" means the board of directors of the Corporation.

(c) "Committee" means the XXXXXXXXXX Committee of the Board or such other committee of the Board as may from time to time be responsible for matters relating to executive compensation.

(d) "Common Share" means a common share in the capital of the Corporation.

(e) "Corporation" means XXXXXXXXXX.

(f) "Deferred Share Unit" means a bookkeeping entry, equivalent in value to one common share of the Corporation, credited to a notional account maintained for the Key Executive in accordance with the Plan.

(g) "Fair Market Value" of a Common Share on a particular date means the average closing board lot sale price per share of Common Shares on XXXXXXXXXX Stock Exchange during the last ten (10) days on which the Common Shares traded on such exchange prior to the particular date.

(h) "Incentive Compensation" means, in respect of a Key Executive, all cash incentive programs in which he or she participates, including annual short-term incentive awards and the XXXXXXXXXX.

(i) "Key Executive" means any officer of the Corporation or any president, vice-president or director-level executive of an affiliated corporation designated in writing by the chief executive officer of the Corporation.

(j) "Plan" means the XXXXXXXXXX Deferred Share Unit Plan for Key Executives.

(k) "Settlement Date" means the date chosen by the Key Executive or his or her legal representative that is after the Termination of the Key Executive but no later than the last business day in December of the first calendar year commencing after the Termination of the Key Executive.

(l) "Termination" means the earliest date on which a Key Executive ceases to be an employee of the Corporation or an affiliate thereof for any reason other than transfer to the employment of another affiliate or the Corporation, provided, however, that there will be a cessation of employment with respect to an employee of an affiliate where such affiliate ceases to be an affiliate of the Corporation.

6. The terms of the Plan are as follows:

(a) The Plan will become effective on XXXXXXXXXX and will apply to Incentive Compensation payable after that date.

(b) The Plan will be administered by the Committee. A notional account will be established for each Key Executive who participates in the Plan in order to carry out the objectives of the Plan, more particularly described below.

(c) Each Key Executive will receive all of his or her Incentive Compensation in the form of Deferred Share Units unless the Key Executive notifies the Corporation in writing that he or she elects to have all or a portion of his or her Incentive Compensation paid in cash. The Corporation will notify each Key Executive in writing of any amount of Incentive Compensation that will become payable to him or her at least ten (10) days prior to the date of payment. Only Key Executives that own Common Shares and/or Deferred Share Units having an aggregate value equal to their annual base salary will be entitled to elect to receive all or part of the Incentive Compensation in cash and only if the written election is provided to the Corporation within five (5) days following receipt of the Corporation's notification.

(d) On each date that Incentive Compensation becomes payable by the Corporation, the number of Deferred Share Units (including fractional Deferred Share Units) to be credited to a Key Executive's notional account will be determined by dividing (a) the portion of the Incentive Compensation payable to the Key Executive which is to be paid in Deferred Share Units by (b) the Fair Market Value of a Common Share of the Corporation on that date.

(e) A Key Executive's account will be credited with additional Deferred Share Units (including fractional Deferred Share Units) ("Dividend Equivalents") on each dividend payment date in respect of which ordinary-course cash dividends are paid by the Corporation on its Common Shares. Such Dividend Equivalents will be computed by dividing (a) the product obtained by multiplying the amount of the dividend declared and paid by the Corporation on its Common Shares on a per share basis (excluding stock dividends, but including dividends which may be paid in cash or in shares at the option of the holder) by the number of Deferred Share Units recorded in the Key Executive's account on the record date for the payment of such dividend, by (b) the Fair Market Value of a Common Share of the Corporation on the date the dividend is paid by the Corporation.

(f) In the event of the declaration of any stock dividend (other than a dividend which may be paid in cash or in shares at the option of the shareholder), stock split, combination or exchange of shares, merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization, spin-off or other distribution (other than normal cash dividends) of Corporation assets to shareholders or any other change affecting the Common Shares, such adjustments as are required to reflect such change shall be made with respect to the number of Deferred Share Units outstanding under the Plan.

(g) Following a Key Executive's Termination, the Key Executive or his or her legal representative will be paid a lump sum cash payment, net of any applicable withholdings, by the Corporation or the relevant affiliate on the Settlement Date equal to the number of Deferred Share Units credited to his or her notional account on the Settlement Date multiplied by the Fair Market Value of one (1) Common Share of the Corporation on the Settlement Date. A Key Executive shall not be entitled to require payment of any amount on account of Deferred Share Units credited to his or her notional account prior to his or her Termination.

(h) No amount will be paid to, or in respect of, a Key Executive under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Key Executive to compensate for a downward fluctuation in the price of the Common Shares, nor will any other form of benefit be conferred upon, or in respect of, a Key Executive for such purpose.

7. The Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan. However, any such amendment, suspension, or termination shall not adversely affect the right of any Key Executive at the time of such amendment, suspension or termination, without the consent of the affected Key Executive. If the Board terminates the Plan, no new Deferred Share Units will be credited to the notional account of a Key Executive, but previously credited Deferred Share Units shall remain outstanding, be entitled to Dividend Equivalents as provided under 6(e) above, and be paid in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Key Executive receives a cash payment in satisfaction of all Deferred Share Units recorded in the Key Executive's account. Notwithstanding the foregoing, any amendment, suspension or termination of the Plan shall be such that the Plan continuously meets the conditions of paragraph 6801(d) of the Income Tax Regulations (the "Regulations") or any successor provision thereto.

Purpose of the Proposed Plan

8. The Plan will be established to enhance the Corporation's ability to attract and retain talented individuals to serve as officers and executives of the Corporation and its Affiliates and to promote a greater alignment of interests between such officers and executives and the shareholders 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 in 4 through 7 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 and E below, no amount will be included pursuant to section 3, subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of a Key Executive in respect of the Deferred Share Units credited to his or her notional account under the Plan.

D. When cash is received in satisfaction of a resident Key Executive's Deferred Share Units as described in 6(g) above, the Key Executive will include the amount paid by the Corporation or the relevant Affiliate, before any withholding taxes, in his or her income under subsection 5(1) of the Act.

E. When cash is received in satisfaction of a non-resident Key Executive's Deferred Share Units as described in 6(g) above, the non-resident Key Executive will include the amount, to the extent attributable to services rendered in Canada, paid by the Corporation or the relevant Affiliate, before any withholding taxes, in his or her income under subsection 5(1) and subparagraph 115(1)(a)(i) of the Act.

F. 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.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D and E above that are paid by the Corporation (or the relevant Affiliate) in a particular year in respect of the Corporation's (or relevant Affiliate's) former Key Executive will be deductible by the payor 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 the Canada Customs and Revenue Agency provided that the Plan is implemented on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate