2000 Ruling 2000-0041923 - Phantom Stock Plans - Directors

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 certain monies to directors in the form of Deferred Share Units result in an SDA?

Position: No.

Reasons: 6801(d) satisfied.

XXXXXXXXXX 			2000-004192

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling - XXXXXXXXXX (the "Corporation")

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the Corporation.

It is our understanding that, to the best of your knowledge and that of the Corporation, none of the issues in respect of which rulings are herein requested are:

(a) in an earlier return of the Corporation or a related person;

(b) 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;

(c) under objection by the Corporation or a related person;

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

(e) the subject of an advance income tax ruling previously issued by the Canada Customs and Revenue Agency .

Our understanding of the relevant facts, proposed plan and purpose of the proposed plan is as follows.

Definitions

1. Certain terms are defined for purposes of this ruling as follows:

a) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), as amended.

b) "Affiliate" means an affiliate of the Corporation as that term is defined in paragraph 3 of the Canada Customs Revenue Agency's Interpretation Bulletin IT-337R3, Retiring Allowances.

c) "Attendance Fees" means a Director's aggregate annual fees as determined by the Corporation for services performed as a Director during each Quarter, including committee fees and fees for attending meetings, which become payable at the end of a Quarter to the extent that they relate to services rendered during the Quarter, but excluding any Retainer Fees.

d) "Beneficiary" means an individual who, on the date of a Director's death, is the person who has been designated in accordance with the Plan and applicable law to receive benefits under the Plan upon the death of the Director, or where no such individual has been validly designated by the Director, or where the individual does not survive the Director, the Director's legal representative.

e) "Board" means the board of directors of the Corporation.

f) "Committee" means the committee of directors of the Corporation who are generally responsible for matters relating to Directors' compensation.

g) "Conversion Date" means, with respect to any Quarter, the date used to determine the Market Value of a Share for purposes of determining the number of DSUs to be credited in respect of that Quarter to a Director's account; which date shall be the date recommended by the Committee and confirmed by the Board and which shall generally be the last day of each Quarter and, in any event, shall not be earlier than the first business day, or later than December 31, of the calendar year immediately following the year in which the Director made the election in respect of which the DSUs are being granted.

h) "Deferred Share Unit" or "DSU" means a unit credited by means of a bookkeeping entry on the books of the Corporation to a Participant's account in accordance with the terms of the Plan, the value of which, on a particular date, shall be equal to the Market Value.

i) "Director" means a member of the Board who is not otherwise an employee of the Corporation or of an Affiliate of the Corporation.

j) "Entitlement Date" with respect to a Participant who had a Termination Date, means the day that is thirty (30) days after the Termination Date.

Notwithstanding the foregoing, if a Participant's Entitlement Date falls between the record date and the payment date for dividends on Shares, such Participant's Entitlement Date shall be deemed to be the date immediately following the dividend payment date.

Notwithstanding the foregoing, if the Corporation is unable to calculate the number of DSUs credited to a Participant's account due to the lack of necessary data, such Participant's Entitlement Date shall be the next following trading day on which such data is available to the Corporation.

In any event, DSUs will be redeemed and amounts payable under the Plan will be paid to the Participant or the Participant's Beneficiary on or before December 31 of the calendar year immediately following the year in which the Participant's Termination Date occurred.

k) "Market Value" on a particular day means the mean of the high and low reported price at which Shares were traded on XXXXXXXXXX Stock Exchange, or if the Shares are not listed on XXXXXXXXXX Stock Exchange, on such other stock exchange approved by the Committee and agreed upon by the Board on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market, on the trading day prior to the particular day on which at least one board lot of the Shares was traded. The Market Value shall always depend on the fair market value of a Share or a share of a corporation related to the Corporation.

l) "Participant" means a Director who has been granted DSUs under the Plan

m) "Plan" shall have the meaning described below.

n) "Quarter" means a fiscal quarter of the Corporation which is used for accounting purposes and which, until changed by the Board, shall be the three month period ending March 31, June 30, September 30 or December 31 in any calendar year.

o) "Related Company" means a corporation related to the Corporation for the purposes of the Act.

p) "Retainer Fees" means a Director's annual retainer fees as determined by the Corporation, XXXXXXXXXX% of which become payable at the end of each Quarter.

q) "Share" means a common share, without nominal or par value, of the capital stock of the Corporation.

r) "Termination Date" means the earliest date on which both of the following conditions are met: the Director (1) has ceased to be a Director as defined above for any reason whatsoever, including the death of the Director, and (2) is neither an employee of the Corporation or an Affiliate nor a member of the board of an Affiliate.

Facts

2. The Corporation is incorporated under the laws of Canada. It is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. The Shares of the Corporation are principally traded on the XXXXXXXXXX. The Corporation has a fiscal year-end of XXXXXXXXXX. The Corporation is XXXXXXXXXX.

3. The Corporation currently provides its Directors with Retainer Fees and Attendance Fees, which are payable in cash.

4. The amounts of Retainer Fees and Attendance Fees are determined for each fiscal year by the Board prior to the commencement of the fiscal year. XXXXXXXXXX of the Retainer Fees for a particular year become payable to the Director at the end of each Quarter. Attendance Fees in respect of meetings held during a Quarter at which a Director attended become payable to the Director at the end of the Quarter.

Proposed Plan

5. The Corporation will establish a deferred share unit compensation plan for Directors (the "Plan"). The Plan will comprise a plan text and written agreements between the Corporation and each Participant setting out the terms of each such Participant's participation in the Plan. You have provided us with the proposed Plan text and related election and beneficiary designation forms.

6. The relevant features of the Plan, as set out in the proposed text, are as follows:

a) The Plan will be effective with respect to Retainer Fees and Attendance Fees for the calendar year XXXXXXXXXX and subsequent years thereafter until amended, suspended or terminated.

b) A Director may elect to receive in respect of a calendar year, in lieu of cash payment, XXXXXXXXXX of the portion of his or her Retainer Fees and XXXXXXXXXX of his or her Attendance Fees for the year, in the form of DSUs. A Director wishing to elect to receive DSUs shall do so in writing, before the commencement of the calendar year for which the election is made. Once made, an election shall be irrevocable.

c) The number of DSUs credited to a Director for a particular Quarter shall be equal to:

i) the amount of the Retainer Fees payable to the Director at the end of the Quarter, multiplied by the percentage elected by the Director in respect of Retainer Fees for the calendar year, divided by the Market Value of a Share on the Conversion Date;

plus

ii) the amount of the Attendance Fees payable to the Director at the end of the Quarter, multiplied by the percentage elected by the Director in respect of Attendance Fees for the calendar year, divided by the Market Value of a Share on the Conversion Date.

d) Under the Plan, DSUs will be fully vested upon being credited to a Director.

e) In the event that any cash dividends are declared and paid by the Corporation on Shares, a Participant shall be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the total amount of the dividends that would have been paid to such Participant, if the DSUs in the Participant's account had been Shares, by the Market Value of a Share on the date on which the cash 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 the Corporation's assets to shareholders, or any other change affecting the number of Shares, such proportionate adjustments as the Committee may reasonably determine shall be made with respect to the number of DSUs then recorded in each Participant's account under the Plan provided that the value of the DSUs credited to a Participant's account immediately after such an adjustment shall not exceed the value of the DSUs credited to such Participant's account immediately prior thereto. No amount will be paid and no other benefit will be granted to, or in respect of' a Participant under the Plan or pursuant to any other arrangement, in order to compensate for a downward fluctuation in the price of Shares.

g) The Corporation shall maintain in its books an account for each Participant recording at all times the number of DSUs standing to the credit of the Participant. Upon payment in satisfaction of DSUs credited to a Participant in the manner described in (h) below, such DSUs shall be canceled.

h) On a Participant's Entitlement Date, the DSUs credited to the Participant's account shall be redeemed for the benefit of the Participant or his or her Beneficiary, as applicable. Specifically, on that date, an amount equal to the number of DSUs standing to the Participant's credit as at that date, multiplied by the Market Value on that date, shall become payable to the Participant or where the Participant has died, his or her Beneficiary, in cash as soon as practicable after the Participant's Entitlement Date and, in any event, by December 31 of the calendar year commencing immediately after the Participant's Termination Date.

i) Except as specifically set out in the Plan, no Director, Participant or other person shall have any claim or right to any Shares or other benefit in respect of DSUs granted pursuant to the Plan. Neither the Plan nor any award thereunder shall be construed as granting a Participant a right to be retained as a Director of the Corporation or of any of its Affiliates, including any Related Company, or a claim or right to any future grants of DSUs. Neither the Plan nor any action taken thereunder shall interfere with the right of the Corporation to terminate a Director's membership on the Board at any time. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of Shares by virtue of the Plan.

j) The Plan may be amended or terminated in whole or in part at any time by the Board, provided that such amendment does not adversely affect the rights accrued to any Participant under any Agreement at such time without the consent of the affected Participant. Notwithstanding the foregoing, any amendment, suspension or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the regulations under the Act ("Regulation 6801(d)") or any successor provision thereto.

k) The Corporation will bear the cost of administering the Plan.

l) No amount or benefit will be granted to a Director or a person with whom the Director does not deal at arm's length for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Shares of the Corporation.

Purpose of the Proposed Plan

7. The purpose of the Plan is to significantly strengthen the link between Director and shareholder interests by encouraging Directors to elect to have a portion of their compensation tied to the long-term performance of the Shares.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the related facts, proposed plan and purpose of the proposed plan, and provided that the proposed plan is established as described above, we rule as follows:

A. The Plan will satisfy the requirements of Regulation 6801(d) and thus will not constitute a "salary deferral arrangement" as defined in subsection 248(1) of the Act.

B. 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 any person in respect of a Director who participates or is eligible to participate in the Plan in respect of the Plan at any time prior to the receipt by the Director or his or her Beneficiary, as the case may be, of the value of such Participant's DSUs under the Plan.

C. When cash is received in satisfaction of a resident Participant's DSUs as described in 6(h) above, the resident Participant will include the amount paid by the Corporation, before any applicable withholding taxes, in his or her income under paragraph 6(1)(c) of the Act.

D. When cash is received in satisfaction of a non-resident Participant's DSUs as described in 6(h) above, the non-resident Participant will include the amount, to the extent attributable to services rendered in Canada, paid by the Corporation, before any applicable withholding taxes, in his or her income under paragraph 6(1)(c) and subparagraph 115(1)(a)(i)of the Act.

E. All amounts payable by the Corporation under the Plan to a Participant at the time of the Participant's death shall constitute a right or thing for purposes of subsection 70(2) of the Act.

F. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a cash payment from corporate revenues to a Director or, if the Director has died, to his or her Beneficiary, in satisfaction of the Director's interest under the Plan, the Corporation will be entitled to deduct the gross amount of that cash payment, including any amount withheld in respect of taxes and other source deductions, in calculating its income in respect of the year in which the cash payment was made in accordance with section 9 of the Act.

The above advance income tax 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 provided that the Plan is implemented on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate