2000 Ruling 2000-0043393 - SDA LONG TERM INCENTIVE PLAN

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 long-term incentive plan that awards employees for length of service and production over a seven year period constitute a salary deferral arrangement for purposes of the Act?

Position: No.

Reasons: The plan provides incentives for length of service and production during a cycle of seven fiscal years of the employer with amounts being paid out in twelve equal payments over the first calendar year which immediately follows the computation of the vested rights under the Plan.

XXXXXXXXXX 							2000-004339

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 in subsequent facsimiles and 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 to the Company.

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 Company is a "taxable Canadian corporation" XXXXXXXXXX The Company is XXXXXXXXXX. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

The Company's address is XXXXXXXXXX. The Company's taxation year ends on XXXXXXXXXX. 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. XXXXXXXXXX.

4. XXXXXXXXXX.

Proposed Plan

5. The Employer will introduce a new long-term incentive compensation plan referred to as the XXXXXXXXXX (the "Plan").

6. The principle features of the Plan are as follows:

(a) The Plan will have a cycle of 7 years (the "Cycle"). The Cycle will commence on XXXXXXXXXX using fiscal XXXXXXXXXX production for determining whether Eligible Employees are eligible to participate in the Plan. An Eligible Employee's production is the total revenue earned by the Employer on that Eligible Employee's account (the "Production").

(b) A new Cycle may commence at the beginning of each subsequent fiscal year to include Eligible Employees that satisfy the eligibility requirements in subsequent years.

(c) An Eligible Employee with a length of service of XXXXXXXXXX years or more with the Employer will be entitled to participate in the Plan if the Eligible Employee meets certain qualification criteria. An Eligible Employee with a length of service of 7 years or less with the Employer will only qualify if the Eligible Employee satisfies the XXXXXXXXXX Eligible Employees who qualify to participate in the Plan will hereinafter be referred to as "Participants".

(d) A Participant must meet all of the following requirements in order to be entitled to any payout under the Plan:

(i) the Participant must be a producing Eligible Employee at the time of vesting (see (g) and (h) below);

(ii) the Participant must have been in the Plan throughout the particular Cycle;

(iii) the Participant must continue to have a satisfactory XXXXXXXXXX throughout the Cycle prior to any payment of an award under the Plan. XXXXXXXXXX Once the Committee decides to disqualify a Participant, there is no appeal process;

(iv) the Participant must have an average 7-year growth rate in XXXXXXXXXX during the Cycle that exceeds the Employer's 7-year average growth rate in XXXXXXXXXX during the Cycle. XXXXXXXXXX; and

(v) the average per year XXXXXXXXXX growth of the Participant for the 7 years must exceed the Employer's average per year XXXXXXXXXX growth for the 7 years. XXXXXXXXXX.

(e) Participants will accumulate points in respect of the Cycle. Points will be earned as follows:

(i) XXXXXXXXXX for each year of service with the Employer prior to the Plan and XXXXXXXXXX for each year of service with the Employer during the Plan maxing out at XXXXXXXXXX;

(ii) the total growth in XXXXXXXXXX during the Cycle will be measured and the Participants will be ranked with the top quartile Participants receiving XXXXXXXXXX, the second quartile Participants receiving XXXXXXXXXX, the third quartile Participants receiving XXXXXXXXXX and the fourth quartile Participants receiving XXXXXXXXXX;

(iii) the total XXXXXXXXXX of all Participants will be combined and each Participant's XXXXXXXXXX, as a percentage of the total XXXXXXXXXX, will be multiplied by XXXXXXXXXX. The XXXXXXXXXX will be the average of the XXXXXXXXXX balances in the XXXXXXXXXX year; and

(iv) the total XXXXXXXXXX for all Participants will be combined and each Participant's XXXXXXXXXX, as a percentage of the total XXXXXXXXXX, will be multiplied by XXXXXXXXXX. The XXXXXXXXXX will be the average of the XXXXXXXXXX balances in the XXXXXXXXXX year.

(f) The Plan will consist of two awards:

(i) the first award will be equal to the amount computed by taking the Participant's points dividing by XXXXXXXXXX; and

(ii) the second award will be the Participant's share of a profit pool accumulated over the Cycle. The Employer will allocate an amount yet to be determined but estimated to be about XXXXXXXXXX% of pre-tax profits of the Employer for each year in the Cycle to the profit pool. The average of the Participant's XXXXXXXXXX years Production in the Cycle will be multiplied by his or her points under the Plan to get a production point multiple ("PPM"). The PPM of all Participants will be combined and each Participant's PPM, as a percentage of the total PPMs, will be multiplied by the profit pool to determine the Participant's share of the profit pool. The profit pool will be part of the initial Plan but subsequent plans may not include this feature.

(g) The awards will vest at the end of the Cycle, as soon as it is possible to complete the award calculations in accordance with the Plan. It is expected that these calculations will be completed within two months of the end of the Cycle (by XXXXXXXXXX). The awards will be paid out in XXXXXXXXXX payments commencing in XXXXXXXXXX of the calendar year immediately following the vesting of the awards.

(h) A Participant may qualify for accelerated vesting and a pro rata award before the Participant has completed seven full Plan years if either the Participant dies after XXXXXXXXXX years of participation in the Plan or where the Participant retires or ceases to be employed with the Employer and the Committee, acting in good faith, determines that all of the following conditions are satisfied:

(i) the Participant is at least XXXXXXXXXX years of age with XXXXXXXXXX years of service and XXXXXXXXXX years of participation in the Plan or is receiving long-term disability benefits from the Employer;

(ii) the Participant assists (to the extent possible) in the XXXXXXXXXX;

(iii) the Participant has not been dismissed for cause; and

(iv) the Participant executes a no-competition, XXXXXXXXXX and confidentiality agreement, in a form satisfactory to the Employer.

(i) Any award under the Plan will be available to the Employer to be offset against any other financial obligation a Participant may have with the Employer.

(j) The Plan is unfunded and Participants will have the same rights to amounts as any other unsecured creditor of the Employer.

7. The Plan is an incentive plan which will not replace any existing compensation plan.

Purpose of the Proposed Plan

8. The purpose of the Plan is to:

(a) XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX; and

(d) XXXXXXXXXX.

Rulings Given

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

A. The Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.

B. The Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.

C. The Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act.

D. When cash is paid by the Employer in satisfaction of a Participant's vested rights under the Plan as described in 6(g) above, or an amount is used to offset a Participant's financial obligation as described in 6(i) above, the Participant will include the amount paid by the Employer or used to offset the financial obligation with the Employer, before any applicable withholding taxes, in his or her income under subsection 5(1) of the Act.

D. E. Subject to paragraph 18(1)(a), section 67 and subsection 78(4) of the Act, any amounts paid by the Employer under the Plan 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 by XXXXXXXXXX.

Yours truly,

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