2000 Ruling 2000-0043243 - PHANTOM STOCK PLANS

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 implementation of deferred share unit plan and the change of a SAR plan to such a deferred share unit plan result in an SDA?

Position: No.

Reasons: Plan to be implemented satisfies 6801(d) and conversion of rights under SAR is accommodated by rules in 6801(d).

XXXXXXXXXX 			2000-004324

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Parentco")/
XXXXXXXXXX ("Subco")

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling in respect of Parentco and Subco (collectively the "Companies").

In this letter, references to statutes are references to the Income Tax Act R.S.C. 1985 (5th Supp.), as amended (the "Act"), unless otherwise specifically stated.

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

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

(b) being considered by a tax services office or tax centre in connection with a previously-filed tax return of either of the Companies or a related person;

(c) under objection by either of the Companies or a related person;

(d) before the courts; or

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

Our understanding of the relevant facts, proposed plan, proposed amendments to two existing plans and purpose of the proposed plan and amendments is as follows.

Facts

1. For the purposes of this ruling, the relevant definitions are the following:

a) "Act" means the Income Tax Act (Canada), as amended from time to time.

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

c) "Beneficiary" means the person who at the time of an Eligible Executive's death is entitled under the terms of the DSU Plan and applicable law, to receive the value of any DSUs standing to the credit of the Eligible Executive at that time.

d) "Board" means those individuals who serve from time to time as the board of directors of Parentco and the board of directors of Subco acting in their capacity as directors of Parentco or Subco as the context requires.

e) "Committee" means the XXXXXXXXXX Committee of the Board or such persons as may be designated by the Board.

f) "Deferred Share Unit" or "DSU" means a unit credited by the Parentco or Subco to an Eligible Executive by way of bookkeeping entry in the books of Parentco or Subco, as the case may be, pursuant to the DSU Plan, the value of which, on a particular date, shall be equal to the Fair Market Value at that date.

g) "DSU Plan" shall have the meaning ascribed thereto below.

h) "Eligible Executive" means the persons from time to time holding the position of XXXXXXXXXX or XXXXXXXXXX of Parentco or Subco, as the case may be, and such other executive employee of Parentco or a Related Corporation as the Committee may designate from time to time as eligible to participate in the DSU Plan.

i) "Entitlement Date" with respect to an Eligible Executive who had a Termination Date, shall be the day specified by the Eligible Executive in an election filed with the Committee no later than 30 days following his or her Termination Date and shall not be prior to the later of XXXXXXXXXX and the date that is 60 days after the Eligible Executive's Termination Date and shall not be later than XXXXXXXXXX of the calendar year commencing immediately after the Eligible Executive's Termination Date. Where an Eligible Executive fails to make an election within the 30 days following his or her Termination Date, his or her Entitlement Date shall, subject to the subsequent paragraphs of this definition, be the day that is 60 days after the Eligible Executive's Termination Date.

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

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

Notwithstanding the foregoing, if, on an Eligible Executive's Entitlement Date, such Eligible Executive is, in the opinion of the Committee, in possession of material undisclosed information regarding Parentco and/or the Shares, the Eligible Executive's Entitlement Date shall be delayed until the earliest of the date on which (i) the Committee is satisfied the Eligible Executive is no longer in possession of any such material undisclosed information, (ii) the Committee elects to exercise its right to provide the value of the Eligible Executive's DSUs in cash, and (iii) XXXXXXXXXX of the year following the year of the Eligible Executive's Termination Date.

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

j) "Fair Market Value" means, with respect to any particular date the average closing price of a Share on XXXXXXXXXX or if the Shares are not listed on XXXXXXXXXX, on such other stock exchange in Canada 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 five trading days prior to that date on which at least one board lot of the Shares was traded.

k) "Related Corporation" shall mean a corporation related to Parentco for the purposes of the Act and, unless inconsistent with the context, includes Subco.

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

m) "SMIP" means the unfunded XXXXXXXXXX Incentive Plan applicable to an Eligible Executive for a year, pursuant to which incentive compensation awards are paid to the Eligible Executive based on attainment of corporate, national office, business unit and individual performance objectives over the course of an entire calendar year. Such incentive compensation awards for a particular calendar year are not payable and cannot be quantified until after the completion of the particular calendar year.

n) "Termination Date" means the earliest date on which both of the following conditions are met: (1) the Eligible Executive has ceased to be employed by Parentco, Subco or any Affiliate for any reason whatsoever, and (2) the Eligible Executive is not a member of the Board or of the board of directors of an Affiliate.

o) "XXXXXXXXXX Performance Period" means the three-year performance period XXXXXXXXXX.

p) "XXXXXXXXXX" means Subco's XXXXXXXXXX Appreciation Plan effective XXXXXXXXXX.

q) "XXXXXXXXXX" means Subco's XXXXXXXXXX Appreciation Plan effective XXXXXXXXXX.

2. Parentco and Subco are incorporated under the laws of Canada. Parentco is "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act, Subco is a wholly-owned XXXXXXXXXX subsidiary of Parentco and a "taxable Canadian corporation" as defined in subsection 89(1) of the Act. The Shares of Parentco are principally traded on the XXXXXXXXXX. The Companies both have a fiscal year-end of XXXXXXXXXX.

3. XXXXXXXXXX.

Proposed Plan

1. The Companies will establish a new incentive plan for Eligible Executives (the "DSU Plan") effective XXXXXXXXXX, subject to receipt of a ruling that the DSU Plan is a "prescribed plan or arrangement" as described in paragraph 680l(d) of the Income Tax Regulations ("Regulation 6801(d)") XXXXXXXXXX. The DSU Plan will comprise a plan text and written agreement between each Eligible Executive and his or her employer setting out the terms of the Eligible Executive's participation in the DSU Plan. You have attached copies of the proposed text of the DSU Plan and related election and beneficiary designation forms to your request for this ruling.

2. The relevant features of the DSU Plan are as follows:

a) The DSU Plan will be administered by the Committee.

b) Each Eligible Executive will be permitted to elect in respect of a calendar year whether to participate in the DSU Plan. If the Eligible Executive elects to participate in the DSU Plan, he/she may choose to receive 50%, 75% or 100% of his/her potential incentive compensation award calculated in accordance with the SMIP in DSUs under the DSU Plan, subject to the discretion of the Committee to decline to award DSUs to an Eligible Executive in respect of his/her participation in the DSU Plan in a particular year.

With respect to all years commencing after XXXXXXXXXX, the Eligible Executive will be required to make his/her election before the commencement of the year (i.e., performance period) in respect of which the election is made. Once made, an election would irrevocable. Elections under the DSU Plan for the XXXXXXXXXX calendar year will be dependent upon the Companies receiving a ruling that the DSU Plan is a "prescribed plan or arrangement" as described in Regulation 6801(d) XXXXXXXXXX Subject to the terms of such ruling, Eligible Executives will be given XXXXXXXXXX business days from the date on which the Companies receive such ruling to make the election with respect to the XXXXXXXXXX calendar year.

An Eligible Executive who transfers in a year from employment with Parentco or a Related Corporation to employment with another Related Corporation (or Parentco, where he/she was initially employed by a Related Corporation) will continue to be eligible to make elections and receive awards under the DSU Plan and such a transfer will not constitute a cessation of employment entitling the Eligible Executive to receive the value of his/her DSUs.

c) Each Eligible Executive who has elected to participate in the DSU Plan for a particular calendar year will be eligible to receive DSUs subject to meeting the applicable performance criteria for the year in question. Specifically, after the end of a calendar year the Committee will, subject to its discretion to decline to award DSUs to an Eligible Executive in respect of any calendar year irrespective of the Eligible Executive's election under the DSU Plan,

i) determine the amount that would have been awarded to the Eligible Executive under the SMIP if he/she had elected to have XXXXXXXXXX% of his/her incentive compensation for the relevant calendar year provided under that plan;

ii) multiply that amount by the percentage of the Eligible Executive's incentive compensation for such year that he/she had elected in the previous year to receive under the DSU Plan;

iii) divide the product thereof by the Fair Market Value immediately prior to the last business day of the year immediately preceding the relevant calendar year to obtain the number of DSUs to be awarded to the Eligible Executive; and

iv) credit such number of DSUs to the Eligible Executive's account under the DSU Plan.

d) DSUs will be fully vested upon being awarded to an Eligible Executive.

e) In the event that any cash dividend is declared and paid by Parentco on Shares, an Eligible Executive shall be credited with additional DSUs. The number of such additional DSUs will be calculated dividing the total amount of the dividends that would have been paid to such Eligible Executive if the DSUs in the Eligible Executive's account had been Shares by the Fair Market Value 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 Parentco's assets to shareholders, or any other change in the capital of Parentco affecting the Shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change shall be made with respect to the number of DSUs recorded in each Eligible Executive's account under the DSU Plan.

g) No amount will be paid and no other benefit will be granted to, or in respect of, an Eligible Executive under the DSU Plan or pursuant to any other arrangement, in order to compensate for a downward fluctuation in the price of a Share.

h) Parentco or Subco, as determined by the Board, shall maintain in its books an account for each Eligible Executive recording at all times the number of DSUs standing to the credit of the Eligible Executive. Upon payment in satisfaction of DSUs credited to an Eligible Executive in the manner described below, such DSUs shall be canceled.

i) The Eligible Executive or the Eligible Executive's Beneficiary shall be entitled, on the Entitlement Date, to redeem the DSUs credited to the Eligible Executive's account. On that date, an amount equal to the number of DSUs standing to the Eligible Executive's credit on that date, multiplied by the Fair Market Value on the Entitlement Date, shall become payable to the Eligible Executive or his/her Beneficiary, as the case may be.

j) The amount payable to an Eligible Executive (or the Eligible Executive's Beneficiary), as determined above, net of applicable withholdings, will be used to acquire Shares on the open market through an independent broker designated by the Eligible Executive (the "Designated Broker"). This is subject to Parentco's discretion to pay to the Eligible Executive or the Eligible Executive's Beneficiary, as the case may be, (or cause the Eligible Executive's employer to pay) the amount so payable, net of applicable withholdings, in cash. In the event that, as contemp1ated by the definition of "Entitlement Date" above, an Eligible Executive's Entitlement Date is delayed until December of the year following the year of the Eligible Executive's Termination Date because the Committee has determined that such Eligible Executive is in possession of material undisclosed information regarding Parentco or the Shares, all benefits payable to or in respect of the Eligible Executive under the DSU Plan shall be paid in cash, net of applicable withholdings.

k) Where payment is made in the form of Shares as described above, the Committee will calculate the number of whole Shares to be purchased by the Designated Broker on the open market on behalf and for the benefit of the Eligible Executive or the Eligible Executive's Beneficiary. The number of whole Shares will be determined by dividing the amount payable determined above, net of applicable withholdings, by the Fair Market Value as determined on Entitlement Date. On the Entitlement Date or, if the Entitlement Date is not a trading date for Shares on the XXXXXXXXXX, on the next such trading date, the Committee shall advise the Designated Broker of the specified number of whole Shares to be purchased on behalf of the Eligible Executive or the Eligible Executive's Beneficiary, as the case may be. The Designated Broker will purchase the specified number of whole Shares as soon as practicable after being notified by the Committee. On or before the date of settlement with respect to the purchase of the Shares by the Designated Broker, the employer, acting as agent for the Eligible Executive or the Eligible Executive's Beneficiary, as the case may be, will pay the purchase price of the specified number of Shares to the Designated Broker, together with any reasonable brokerage fees or commissions related thereto. The employer will also make a cash payment, net of applicable withholdings, to the Eligible Executive or the Eligible Executive's Beneficiary, as the case may be, with respect to fractional DSUs still standing to the Eligible Executive's credit after the maximum number of whole Shares have been purchased as described above.

l) Except as specifically set out in the DSU Plan, no Eligible Executive or other person shall have any claim or right to any Share or other benefit in respect of DSUs granted pursuant to the DSU Plan. Neither the DSU Plan nor any award thereunder shall be construed as granting an Eligible Executive a right to be retained as an employee of the Companies or of any of their Affiliates, or a claim or right to any future grants of DSUs. Neither the DSU Plan nor any action taken thereunder shall interfere with the right of the employer of an Eligible Executive to terminate employment of such Eligible Executive at any time. The payment of any sum of money in cash in lieu of notice of the termination of employment shall not be considered as extending the period of employment for the purposes of the DSU Plan. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Eligible Executive to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Eligible Executive be considered the owner of Shares by virtue of the DSU Plan until after the date of the purchase of such Shares on the open market as referred to above.

m) The DSU Plan may be amended or terminated in whole or in part at any time by the Board, provided that no such amendment or termination shall, unless required by law, adversely affect the rights of any Eligible Executive with respect to DSUs to which he or she is then entitled under the DSU Plan without the consent of the affected Eligible Executive and any amendment or termination shall be such that the DSU Plan continuously meets the requirements of Regulation 6801(d).

Proposed Amendments

1. In conjunction with the establishment of the DSU Plan, the Companies are also proposing to amend XXXXXXXXXX (collectively, the "XXXXXXXXXX Plans") to provide that, at the discretion of the Committee, an Eligible Executive's accrued benefits, if any, under the XXXXXXXXXX Plans may be paid in the form of DSUs issued in accordance with and subject to the terms of the DSU Plan. You have attached copies of the XXXXXXXXXX Plans and the proposed amendments thereto (the "XXXXXXXXXX Amendments") to your request for this ruling.

2. XXXXXXXXXX.

3. The XXXXXXXXXX Plans are appreciation rights plans. XXXXXXXXXX the XXXXXXXXXX Plans were designed to provide cash incentive awards, in addition to other earnings from employment, to eligible employees of the XXXXXXXXXX companies including the Eligible Executives, based on the increase over the applicable XXXXXXXXXX Performance Period in the XXXXXXXXXX value of the XXXXXXXXXX companies determined on the basis of XXXXXXXXXX and valuation principles applied by professional investment advisors.

4. Under the XXXXXXXXXX Plans, each participant was credited with a certain number of notional units at the commencement of each XXXXXXXXXX Performance Period. If the XXXXXXXXXX value of the XXXXXXXXXX companies determined in accordance with the terms of the XXXXXXXXXX Plans was the same or less at the end of a XXXXXXXXXX Performance Period as at the beginning of such period, a participant in the applicable XXXXXXXXXX Plan would receive nothing. If such value increased over a XXXXXXXXXX Performance Period, a participant in the applicable XXXXXXXXXX Plan would receive at the end of the XXXXXXXXXX Performance Period a payment equal to the per unit increase in value multiplied by the number of units credited to the participant in respect of the particular XXXXXXXXXX Performance Period.

5. The XXXXXXXXXX Plan XXXXXXXXXX contains the following express amending powers:

XXXXXXXXXX.

6. The XXXXXXXXXX contains the following express amending powers:

XXXXXXXXXX.

.

7. The Companies are proposing to amend the "XXXXXXXXXX" section of the XXXXXXXXXX Plans, both of which contemplate that award payments will normally be paid in cash, to provide that participants in the XXXXXXXXXX Plans who are also "Eligible Executives" as defined in the DSU Plan at the effective date of the DSU Plan shall, at the discretion of the Committee, receive awards under the XXXXXXXXXX Plan in the form of DSUs.

8. Pursuant to the XXXXXXXXXX Amendments, where the Committee elects to provide Eligible Executives with DSUs rather than cash payments, DSUs will be awarded as at the end of each XXXXXXXXXX Performance Period. The number of DSUs to be awarded to an Eligible Executive under the XXXXXXXXXX Amendments would be equal to the number (if any) obtained by dividing the increase in the value of the units credited to the Eligible Executive for the applicable XXXXXXXXXX Performance Period determined in accordance with the terms of the XXXXXXXXXX or the XXXXXXXXXX, as the case may be, by the Fair Market Value (as defined above and in the DSU Plan) on the last day of the applicable XXXXXXXXXX Performance Period.

9. The XXXXXXXXXX Amendments will be effective on the effective date of the DSU Plan XXXXXXXXXX . As noted above, the DSU Plan will be effective XXXXXXXXXX, subject to the Companies' receipt of a ruling that that the DSU Plan is a "prescribed plan or arrangement" as described in Regulation 6801(d). Accordingly, it is anticipated that the effective date of the DSU Plan and the XXXXXXXXXX Amendments will be XXXXXXXXXX and therefore before the expiry of the earliest and shortest XXXXXXXXXX Performance Period.

10. The XXXXXXXXXX Amendments also provide for Eligib1e Executives who are awarded DSUs under either or both the XXXXXXXXXX and the XXXXXXXXXX to enter into an agreement with their employer with respect to the award of the DSUs that complies with and is consistent with terms of the DSU Plan, and is effective on the last day of the Performance Period to which the award relates.

11. XXXXXXXXXX The XXXXXXXXXX Amendments provide that where such pro-rated awards are provided in the form of DSUs such DSUs shall, notwithstanding any other provisions of the relevant XXXXXXXXXX Plan, be redeemed in accordance with the DSU redemption provisions of the DSU Plan as described above on or before December 31 of the year following the year in which the participant terminated employment, irrespective of his or her date of disability, retirement or death.

Purpose of the Proposed Plan and XXXXXXXXXX Amendments

The DSU Plan

The purposes of the DSU Plan are:

1. to promote a greater alignment of interests between senior executives of the Companies and the shareholders of Parentco;

2. to provide a compensation system for senior executives that is reflective of the responsibility, commitment and risk accompanying their management role;

3. to assist the Companies to attract and retain individuals with experience and ability to act as senior management of the Companies; and

4. to allow the senior executives of the Companies to participate in the long-term success of Parentco.

The XXXXXXXXXX Amendments

The purpose of the XXXXXXXXXX Amendments is to enable the Committee to provide senior executives of the Companies with incentive compensation in a form that more closely aligns their interest with the interest of the shareholders of Parentco XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and amendments and purpose of the proposed plan and amendments, and provided that the proposed plan and amendments are implemented as described above, we rule as follows:

The DSU Plan

1. The DSU Plan will satisfy the requirements of paragraph 6801(d) of the Income Tax Regulations and thus will not constitute a salary deferral arrangement ("SDA") as defined in subsection 248(1) of the Act.

2. The DSU Plan will constitute neither an "employee benefit plan" nor a "retirement compensation arrangement" as defined in subsection 248(1) of the Act.

3. No amount will be included, pursuant to section 3, subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(a)(i) of the Act, in the income of any person in respect of an Eligible Executive who participates or is eligible to participate in the DSU Plan in respect of the DSU Plan at any time prior to the receipt by the Eligible Executive or his or her Beneficiary, as the case may be, of the value, in cash or in kind (i.e. Shares), of such Eligible Executive's DSUs under the DSU Plan.

4. All amounts received in cash or in kind under the DSU Plan by or on behalf of an Eligible Executive who is resident in Canada, including any related brokerage fees and commissions and any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Executive pursuant to subsection 5(1) of the Act and all such amounts received by or on behalf of an Eligible Executive who is not resident in Canada, including any related brokerage fees and commissions and any amounts withheld in respect of taxes and other source deductions, will be included in the income of such Eligible Executive under subsection 5(1) and subparagraph 115(1)(a)(i) of the Act to the extent that such amounts are attributable to employment services performed in Canada.

5. All amounts payable under the DSU Plan to an Eligible Executive at the time of his or her death shall constitute a right or thing for purposes of subsection 70(2) of the Act.

6. Subject to paragraph 18(1)(a) and section 67 of the Act, where the employer under the DSU Plan makes a cash payment from corporate revenues to an Eligible Executive or, if the Eligible Executive has died, to his or her Beneficiary, in satisfaction of the Eligible Executive's interest under the DSU Plan, the employer 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.

7. Subject to paragraph 18(1)(a) and section 67 of the Act, where an employer satisfies any portion of the entitlement of an Eligible Executive employed by it (or his/her Beneficiary) under the DSU Plan through the making of a cash payment, as agent for the Eligible Executive, to a Designated Broker to enable such broker to purchase Shares on the open market on behalf of the Eligible Executive or his/her Beneficiary, the gross amount of such payment, including any related brokerage fees and commissions and any amount withheld in respect of taxes and other source deductions, will be deductible to the employer in calculating its income in respect of the year in which the cash payment is made accordance with sections 9 of the Act.

The XXXXXXXXXX Amendments

1. No amount will be included in the income of any person under section 3, subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in connection with the amendment of the XXXXXXXXXX Plan in accordance with the XXXXXXXXXX Amendments in respect of a participant in the XXXXXXXXXX or the XXXXXXXXXX at any time prior to the receipt by the participant or his/her beneficiary or estate, as the case may be, of a cash payment under the XXXXXXXXXX or the XXXXXXXXXX or the receipt of the value, in cash or in kind (i.e. Shares), of the DSUs awarded to such participant pursuant to the XXXXXXXXXX Amendments.

2. Neither the XXXXXXXXXX nor the XXXXXXXXXX will become an SDA as a result of the XXXXXXXXXX Amendments.

3. Where the Committee elects to award DSUs to Eligible Executive under either or both the XXXXXXXXXX and the XXXXXXXXXX pursuant to the XXXXXXXXXX Amendments the income tax consequences to the Eligible Executives, their beneficiaries and employers, including Parentco and Subco, with respect to amounts received or paid in connection with such DSUs, will be as described in rulings C through G above, inclusive.

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 DSU Plan and XXXXXXXXXX Amendments are implemented on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate