2000 Ruling 2000-0036973 - PHANTOM STOCK PLAN EMPLOYEE BONUSES

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 employee bonuses in the form of Deferred Stock Units result in an SDA?

Position: No.

Reasons: 6801(d) is satisfied.

XXXXXXXXXX
XXXXXXXXXX 								2000-003697
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

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

This is in reply to your letter of XXXXXXXXXX, requesting 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, proposed plan and purpose of the proposed plan is as follows:

Facts

1. The Company was incorporated under the laws of Canada and its head office is located in XXXXXXXXXX. The Company 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 Income Tax Act (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 Company, its subsidiaries and its related companies are involved in the XXXXXXXXXX.

3. The Company's common or variable voting shares (the "Shares") are listed and traded on the XXXXXXXXXX. There are approximately XXXXXXXXXX registered holders of the Shares.

Proposed Plan

4. The Company will establish the "XXXXXXXXXX" (the "Plan") for the benefit of certain of its officers and key employees.

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

(a) "Board" means the board of directors of the Company;

(b) "Bonus" or "Bonuses" mean amounts payable by the Company as bonuses under the Company's XXXXXXXXXX Plan and any similar plan of the Company;

(c) "Committee" means the XXXXXXXXXX Committee of the Board;

(d) "Deferred Stock Unit" means a unit equivalent in value to a Share, credited to the Eligible Employee's notional account on a deferred basis;

(e) "Deferred Stock Unit Account" means the account maintained by the Company for each Member which will be credited with notional grants of Deferred Stock Units received by the Member from time to time;

(f) "Eligible Employee" means an officer or key employee of the Company or any corporation affiliated with the Company through more than fifty percent ownership of its outstanding voting securities designated by the Company as being eligible to participate in the Plan;

(g) "Member" means an individual who becomes a participant in the Plan by electing under the terms of the Plan;

(h) "Share" means a common share or voting variable share of the Company; and

(i) "Trading Day" means any date on which the XXXXXXXXXX Stock Exchange is open for the trading of shares.

6. The terms of the Plan are as follows:

(a) The effective date of the Plan will be the beginning of the Company's final fiscal quarter of XXXXXXXXXX. The Plan will be unfunded and will be administered by the Committee. The Company will be responsible for all costs relating to the administration of the Plan.

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

(c) Each Eligible Employee has the right to elect to be a Member of the Plan. The written election will have to be filed with the Company's Secretary by December 31st of the calendar year preceding the calendar year in which the Bonus will be paid. The election will permit the Eligible Employee to choose to receive any percentage (not to exceed the lesser of 100% and the maximum bonus designated by the Company as being eligible to be received in Deferred Stock Units) of his or her Bonus payable in the next calendar year in Deferred Stock Units with the balance of the Bonus being paid in cash.

(d) The number of Deferred Stock Units that will be credited to a Member's Deferred Stock Unit Account in respect of the proportion of the Member's Bonus that he or she has elected to have paid in Deferred Stock Units will be calculated by dividing the amount of the Bonus payable in Deferred Stock Units at that time by the average of the closing price of a Share on the XXXXXXXXXX Stock Exchange on the five consecutive Trading Days ending with the Trading Day immediately prior to the date the Bonus becomes payable.

(e) A Member's notional account will be credited with additional Deferred Stock Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Company on its Shares. The number of additional Deferred Stock Units will be calculated by dividing the dividends that would have been paid to such Member if the Deferred Stock Units in the Member's Deferred Stock Unit Account had been Shares by the value of a Deferred Stock Unit on the date on which the dividends were paid on the Shares.

(f) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other changes affecting the Shares, such proportionate adjustments, if any as the Committee in its discretion may deem appropriate to reflect such change or changes, may be made with respect to the number of Deferred Stock Units outstanding under the Plan.

(g) A Member or his or her estate where the Member has died will be entitled to have the Deferred Stock Units credited to the Member's Deferred Stock Unit Account redeemed by the Company when the Member retires or terminates employment (including the death of the Member) from the Company and its affiliates (as that term is used in 3 of the Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3) (the "Termination Date").

The Member or his or her estate may file a written notice of redemption with the Company specifying a date (the "Redemption Date") within the period commencing on the Termination Date and ending on December 15 of the first calendar year commencing after the Member's Termination Date. Where a retiring Member or the estate of a deceased Member does not file a written notice of redemption with the Company, the value of the Deferred Stock Units credited to the Member's, or deceased Member's, Deferred Stock Unit Account will become payable on the date which is 15 days prior to the end of the one year period commencing with the earlier of the effective date of the Member's retirement or termination and the date of the Member's death.

(h) The amount payable to a Member or his or her estate in respect of his or her Deferred Stock Units credited to his or her Deferred Stock Unit Account will be determined by multiplying the number of such Deferred Stock Units on the Redemption Date by the average closing prices of a Share on the XXXXXXXXXX Stock Exchange on the five consecutive trading days ending with the Trading Day immediately before the Redemption Date. The Company will pay the amount payable to the Member in respect of his or her Deferred Stock Units, net of applicable withholdings, as (as elected by the Company) a lump sum cash payment and/or in Shares issued from the treasury of the Company within 15 days of the Redemption Date.

(i) No amount will be paid to, or in respect of, a Member under the Plan or pursuant to any other arrangement, and no additional Deferred Stock Units will be granted to such Member to compensate for a downward fluctuation in the price of the Company's Shares, nor will any other form of benefit be conferred upon, or in respect of, a Member for such purpose.

7. The terms of the Plan will provide that the Board can unilaterally amend or terminate the Plan at any time except with respect to rights that have accrued to a Member at the date of the amendment or termination. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.

Purpose of the Proposed Plan

8. The purpose of the Plan is to enhance the Company's ability to attract and retain talented individuals to serve as officers and key employees of the Company and to promote a greater alignment of interests between such individuals and the shareholders of the Company.

Additional Information

9. 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 Directorate to the Company.

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. 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 for the purposes of the Act in the income of a Member in respect of the Plan by reason only of the implementation and operation of the Plan. For greater certainty, no amount will be included for the purposes of the Act in the income of a Member in respect of the payment by the Company of the costs relating to the administration of the Plan.

D. When cash is paid by the Company in satisfaction of some or all of a resident Member's Deferred Stock Units as described in 6(h) above, the resident Member will include that amount paid by the Company, before any applicable withholding taxes, in his or her income under subsection 5(1) of the Act.

E. When cash is paid by the Company in satisfaction of some or all of a non-resident Member's Deferred Stock Units as described in 6(h) above, the non-resident Member will include the amount of cash, attributable to services rendered in Canada, paid by the Company, before any applicable withholding taxes, in his or her income under subsection 5(1) and subparagraph 115(1)(a)(i) of the Act.

F. When Shares are issued by the Company in satisfaction of some or all of a resident Member's Deferred Stock Units as described in 6(h) above, the resident Member will include the amount representing the fair market value of the Company's Shares issued to the Member in his or her income under paragraph 7(1)(a) of the Act; and the amount representing the withholding taxes in respect of the Shares issued by the Company will be included in the Member's income under subsection 5(1) of the Act.

G. When Shares are issued by the Company in satisfaction of some or all of a non-resident Member's Deferred Stock Units as described in 6(h) above, the non-resident Member will include the amount, attributable to services rendered in Canada, representing the fair market value of the Company's Shares issued to the Member in his or her income under paragraph 7(1)(a) and subparagraph 115(1)(a)(i) of the Act; and the amount, attributable to services rendered in Canada, representing the withholding taxes in respect of the Shares issued by the Company will be included in the Member's income under subsection 5(1) and subparagraph 115(1)(a)(i) of the Act.

H. The amount payable by the Company to the named beneficiary or estate of the Member as a result of the Member's death will constitute a right or thing held by the deceased Member at the time of death for purposes of subsection 70(2) of the Act.

I. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be exempted from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.

J. Subject to paragraph 18(1)(a) and section 67 of the Act, any cash amounts referred to in Rulings D and E and the withholding amounts referred to in Rulings F and G above that are paid by the Company in a particular year in respect of Member 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 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