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 ISSUE:
The taxpayer proposes to make certain changes to the Employee Bonus Plan for the taxation year ended in XXXXXXXXXX and as a consequence is seeking a new ruling (see previous ruling document # 992523).
Position:
Favorable ruling given.
REASON:
The amendments to the Employee Bonus Plan, while significant, do not affect the fundamental character or quality of the transactions.
XXXXXXXXXX 2000-005785
XXXXXXXXXX , 2001
Dear Sir/Madam:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested ruling:
(i) is being considered by any Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed, or
(ii) is under objection by a taxpayer identified in this document or a related person.
Unless otherwise stated, every reference herein to a part, section, subsection paragraph, subparagraph or clause is a reference to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof, (the "Act").
Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("A Co") is a taxable Canadian corporation that is resident in and carries on business in Canada. A Co is served by the XXXXXXXXXX Tax Centre and the XXXXXXXXXX Taxation Services Office of the CCRA.
2. XXXXXXXXXX ("B Co") is a taxable Canadian corporation that is resident in and carries on business in Canada. B Co is a wholly owned subsidiary of A Co. The business number of B Co is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Centre and the XXXXXXXXXX Taxation Services Office of the CCRA.
3. A Co established an "Employee Bonus Plan" and subsequent "Investment Plan" for each taxation year of A Co ending on XXXXXXXXXX commencing with the year ended XXXXXXXXXX. The plans were established to provide employees who are eligible to be Participants ("Participants") with an opportunity to elect to have a portion of their annual bonus compensation reflect gains and losses on some of the investments made by A Co and B Co. The plans for the year ended XXXXXXXXXX, were the subject of an advance income tax ruling issued by the CCRA on XXXXXXXXXX, 1999 (file number 992523). The Employee Bonus Plan for a particular year (an "investment year") would last for XXXXXXXXXX years and, at the end of the XXXXXXXXXX year period, the Employee Bonus Plan for the investment year would be terminated. Following such termination, the Participant could elect to invest in an Investment Plan for that investment year which would then be established. The Investment Plan for the investment year could last for a minimum of XXXXXXXXXX years and a maximum of XXXXXXXXXX years after its commencement. The following is a summary of the key aspects of the original Employee Bonus Plan and the original Investment Plan:
Key Aspects of the Original Employee Bonus Plan
(a) An eligible Participant would be entitled to "defer" the receipt of a portion of the Participant's bonus for the year. A notional account would be set up for the Participant which would consist of the amount of the bonus so deferred.
(b) The amount in the notional account for the Participant is the main factor to be used in computing the Participant's return based on returns, gains and losses of certain qualifying investments made in the course of the XXXXXXXXXX activities of A Co and B Co during an investment year of A Co.
(c) As and when returns or proceeds of disposition are realized in respect of the qualifying investments, the Participant would receive an amount based on such returns or proceeds of disposition (less certain administrative costs and expenses and net of statutory withholdings) computed based upon the amount in the Participant's notional account.
(d) At the end of XXXXXXXXXX years, the Employee Bonus Plan for an investment year would be terminated. Qualifying investments which have not been disposed of by that time would be treated as having been disposed of for proceeds equal to the fair market value thereof, the Participant's return based on the notional proceeds would be computed based upon the amount in the Participant's notional account and the appropriate amount would be paid to the Participant, as employment income, on the termination of the Employee Bonus Plan (less certain administrative costs and expenses and net of statutory withholdings).
Key Aspects of the Original Investment Plan
(a) Following the termination of the Employee Bonus Plan relating to a particular investment year of A Co, a Participant may elect to invest in the Investment Plan an amount equal to the "pre-tax" amount paid out to the Participant upon termination of the Employee Bonus Plan. In general, the Participant would invest the "after-tax" portion of the amount paid to him from the Employee Bonus Plan and may be entitled to receive a loan on commercial terms from A Co for the balance of the investment amount. A notional account would be set up for the Participant which would consist of the amount so invested in the Plan by the Participant.
(b) As in the case of the Employee Bonus Plan, the amount in the notional account for the Participant is the main factor to be used in computing the Participant's "share" of returns, gains and losses based upon the performance of qualifying investments. The qualifying investments, for the purpose of the Investment Plan for an investment year of A Co, are those investments from the same pool of investments as related to the Employee Bonus Plan for that investment year that are still held by A Co or B Co at the time of the termination of the Employee Bonus Plan.
(c) Also, as in the case of the Employee Bonus Plan, as and when returns, gains or losses are made in respect of the qualifying investments, the Participant would receive his or her "share" of such returns, gains or losses (less certain administrative costs and expenses) computed based upon the amount in the Participant's notional account.
(d) A Co may elect to terminate the Investment Plan relating to an investment year at the end of XXXXXXXXXX years after the commencement of the Investment Plan (XXXXXXXXXX years after the investment year in question), and is required to terminate the Investment Plan at the end of XXXXXXXXXX years after its commencement (XXXXXXXXXX years after the investment year in question). At the termination of the Investment Plan, the Participant would be entitled to receive a payment determined by reference to the amount in the Participant's notional account, computed in the manner described above on the termination of the Employee Bonus Plan (less certain administrative costs and expenses).
4. Each of the Participants is an individual resident in Canada within the meaning of the Act. Each Participant is employed in and carries out the duties of his or her employment only in Canada. Some of the Participants perform services for B Co but none are remunerated by B Co, all Participants are employees of and are remunerated by A Co. A Co has entered into management services arrangements with B Co and other subsidiaries of A Co which provide for charges to B Co and such subsidiaries in favour of A Co in consideration for A Co making available the services of its employees. Some XXXXXXXXXX resident employees of certain XXXXXXXXXX subsidiaries of A Co will participate in a plan (the "XXXXXXXXXX Plan") similar to the plans described below, and some XXXXXXXXXX resident employees of certain XXXXXXXXXX subsidiaries of the A Co will participate in a plan (the "XXXXXXXXXX Plan") similar to the plans described below.
5. For the taxation year of A Co ended XXXXXXXXXX (the "XXXXXXXXXX Year"), A Co proposed to make certain changes to the Employee Bonus Plan for that year (the "XXXXXXXXXX Employee Bonus Plan") and to the subsequent Investment Plan (the "XXXXXXXXXX Investment Plan") that would be established when the XXXXXXXXXX Employee Bonus Plan is terminated. The proposed changes are conditional upon receipt of the rulings herein and such changes will not be effective unless and until the advance income tax rulings have been obtained. No payments have been made under the XXXXXXXXXX Employee Bonus Plan pending receipt of the advance income tax ruling.
Some of the issues relating to this advance income tax ruling were, as mentioned above, the subject of an advance income tax ruling issued by the CCRA in regards to The Plans and are reflected in an earlier return of A Co.
Proposed Transactions
6. It is proposed that the Employee Bonus Plan and the Investment Plan for the XXXXXXXXXX Year be amended to create the XXXXXXXXXX Employee Bonus Plan and the XXXXXXXXXX Investment Plan (the "XXXXXXXXXX Plans"). The XXXXXXXXXX Plans will provide employees who are eligible to be Participants (i.e. persons described in paragraph 4 above) with an opportunity to elect to have a portion of their bonus compensation for the XXXXXXXXXX Year reflect gains and losses on some of the investments made by A Co and B Co in that year. A Co and B Co refer to this investment activity as their XXXXXXXXXX activity. There will be approximately XXXXXXXXXX Participants across Canada. The XXXXXXXXXX Plans will be administered by a Plan Administrator consisting of a committee of several senior executives of A Co who also participate on the investment committee that makes decisions in connection with A Co's XXXXXXXXXX activities.
7. The investments that will be relevant to the XXXXXXXXXX Plans are referred to as Qualifying Investments. The terms of the XXXXXXXXXX Plans will describe in detail the types of investments that will be Qualifying Investments for the XXXXXXXXXX Year. The Plan Administrator will determine which investments made by A Co, B Co or their
subsidiaries will be included as Qualifying Investments for purposes of the XXXXXXXXXX Plans. Qualifying Investments will include investments made in the course of the XXXXXXXXXX activity either by A Co or B Co, or by a subsidiary of A Co where such investments are directed and administered by the XXXXXXXXXX group. For ease of reference, the term "A Co" when used below in reference to the making of, and the receipt of income on or sale proceeds of, Qualifying Investments includes any such subsidiaries of A Co that make such investments under the direction and administration of the XXXXXXXXXX group.
The XXXXXXXXXX Employee Bonus Plan
8. Under the XXXXXXXXXX Employee Bonus Plan, a portion of a Participant's bonus for the XXXXXXXXXX Year (the "Holdback Amount") will be held back rather than being paid to the Participant. Effective shortly after receipt of the rulings herein, a Participant will choose what percentage of his or her bonus for the XXXXXXXXXX Year will be held back, up to a maximum dollar amount to be specified by the Participant subject to certain limits described below. The Participant's choice regarding the amount of his or her Holdback Amount will be irrevocable.
9. Participation in the XXXXXXXXXX Employee Bonus Plan will be voluntary. The minimum Holdback Amount for certain Participants ("XXXXXXXXXX Participants") who are more directly involved in investment decisions made by B Co and A Co will be the greater of $XXXXXXXXXX and XXXXXXXXXX% of that Participant's bonus for the XXXXXXXXXX Year. The minimum Holdback Amount for any other Participant will be at least $XXXXXXXXXX. If a Participant's bonus for the XXXXXXXXXX Year is less than $XXXXXXXXXX, the Holdback Amount for that year will be XXXXXXXXXX. The minimum Holdback Amount will be subject to reduction as described in paragraph 12 below.
10. There will also be a maximum annual Holdback Amount for certain Participants. The maximum Holdback Amount for a Participant will be determined prior to the Participant choosing the maximum portion of his or her bonus to be held back.
11. Eligible employees of A Co who have referred qualifying equity and equity-related deals to B Co during the XXXXXXXXXX Year are eligible to have A Co contribute amounts ("Deal Referral Bonus") on their behalf to the XXXXXXXXXX Employee Bonus Plan over and above any incentive payment the employee may have elected to defer for participation in the XXXXXXXXXX Employee Bonus Plan as a Holdback Amount. In all instances A Co will direct that the amount that an eligible employee is eligible to have contributed as a Deal Referral Bonus be contributed to the XXXXXXXXXX Employee Bonus Plan for the Participant; the Participant otherwise has no right to receive such amount. The size of a Deal Referral Bonus will vary based on a number of factors, including the type of deal, type of referral and the deal size, subject to a minimum and maximum amount. This Deal Referral Bonus amount will be treated in the same manner as a Participant's Holdback Amount in the XXXXXXXXXX Employee Bonus Plan, including being eligible for the notional leverage feature described below. The Deal Referral Bonus concept is new for the version of the Employee Bonus Plan for the XXXXXXXXXX Year.
12. In addition to the maximum amounts referred to in paragraph 10, the aggregate amount of Holdback Amounts (together with additional incremental amounts for Participants who receive Deal Referral Bonuses) for all Participants in the XXXXXXXXXX Employee Bonus Plan and for XXXXXXXXXX employees who are participating in the corresponding XXXXXXXXXX Plan and the corresponding XXXXXXXXXX Plan will be limited to XXXXXXXXXX% of the total amount invested by A Co and B Co in Qualifying Investments. To the extent that the aggregate of all Holdback Amounts would exceed this XXXXXXXXXX% limit, the Holdback Amount of each Participant in the XXXXXXXXXX Employee Bonus Plan and the holdback amount of each Participant in the XXXXXXXXXX Plan and the XXXXXXXXXX Plan (other than XXXXXXXXXX Participants) will be reduced pro rata (without regard to the $XXXXXXXXXX minimum described in paragraph 9 above) so that the aggregate amount of the Holdback Amounts under the XXXXXXXXXX Employee Bonus Plan and the XXXXXXXXXX Plan and the XXXXXXXXXX Plan does not exceed this XXXXXXXXXX% limit. The XXXXXXXXXX% limit has been increased for the XXXXXXXXXX Employee Bonus Plan (the limit was XXXXXXXXXX% under the Employee Bonus Plan).
13. If the sum of the Holdback Amounts for all Participants under the XXXXXXXXXX Employee Bonus Plan, together with the amounts held back in respect of Participants in the XXXXXXXXXX Plan and the XXXXXXXXXX Plan, is less than XXXXXXXXXX% of the aggregate amount of the Qualifying Investments for the XXXXXXXXXX Year, then Participants who have so indicated in their elections will be permitted to increase their Holdback Amounts, and Participants under the XXXXXXXXXX Plan and the XXXXXXXXXX Plan will have a similar entitlement to increase their holdback amounts under the XXXXXXXXXX Plan and the XXXXXXXXXX Plan, pro rata to the amount of their Holdback Amounts before such increase; and if, after such pro rata increases to the Holdback Amounts, the sum of the Holdback Amounts and the holdback amounts of Participants under the XXXXXXXXXX Plan and the XXXXXXXXXX Plan is still less than XXXXXXXXXX% of the aggregate amount invested in Qualifying Investments, then Participants who have so indicated in their elections may, at the discretion of the Plan Administrator, be permitted to increase their Holdback Amounts further, and Participants under the XXXXXXXXXX Plan and the XXXXXXXXXX Plan may similarly be permitted to increase their holdback amounts further. However, taking into account such additional Holdback Amounts, the sum of the Holdback Amounts for all Participants under the XXXXXXXXXX Employee Bonus Plan and the XXXXXXXXXX Plan and the XXXXXXXXXX Plan will not be allowed to exceed XXXXXXXXXX% of the aggregate amount invested in Qualifying Investments for the XXXXXXXXXX Year.
14. The most significant difference between the XXXXXXXXXX Employee Bonus Plan and the prior version of the Plan is the introduction of the concept of "leverage" in the form of a "leverage amount" and matters consequential to this concept. The following is a summary of this "leverage" feature.
(a) Leverage Concept
The XXXXXXXXXX Employee Bonus Plan will include a notional leverage feature. In the context of the XXXXXXXXXX Plans, leverage means that an additional notional amount (the "leverage amount") will be offered to selected Participants which, if accepted by a Participant, will be added to the Participant's notional account for investment in the XXXXXXXXXX Employee Bonus Plan. A Participant's leverage amount will be added to the Participant's Holdback Amount, and to any Deal Referral Bonus awarded to the Participant, to form the total participation amount available to the Participant for notional investment under the XXXXXXXXXX Employee Bonus Plan. The participation amount will be used to determine the Participant's entitlement under the XXXXXXXXXX Employee Bonus Plan to receive an amount in respect of returns or proceeds of disposition realized on a Qualifying Investment. An increased participation amount (as compared to the prior version of the Plans) resulting from the addition of a leverage amount will therefore generally entitle a Participant to an increased return from his/her participation in the XXXXXXXXXX Employee Bonus Plan.
(b) Leverage Factor
Each Participant who is eligible to receive and who accepts a leverage amount will be assigned one of three maximum "leverage factors", expressed as a percentage up to XXXXXXXXXX%. Each Participant may select a leverage factor up to the assigned maximum leverage factor for the Participant. Each Participant's leverage factor will determine his or her leverage amount which is calculated by multiplying the leverage factor by the sum of the Participant's Holdback Amount and the amount of any Deal Referral Bonus awarded to the Participant.
(c) Leverage Fee
Each Participant's leverage amount will be subject to a charge (the "leverage fee") which will be calculated on the outstanding leverage amount balance, compounded quarterly, and will be charged to each Participant who elects to accept his or her leverage amount under the XXXXXXXXXX Employee Bonus Plan. The leverage fee will accrue for the duration of the XXXXXXXXXX Plans for as long as any portion of the leverage amount remains outstanding. Under the XXXXXXXXXX Plans, as returns or proceeds of disposition are realized by A Co in respect of Qualifying Investments, the Participants' returns based on the said returns or proceeds of disposition will first be applied to recover A Co's costs (XXXXXXXXXX% as described in paragraphs 17, 18 and 19 below), second to satisfy the Administration Charge (as described in paragraph 24 below), and third to reduce (to zero) a Participant's accrued leverage fees and outstanding leverage amount balance (as described in paragraph 20 below), before any cash payments are made to the Participant under the XXXXXXXXXX Plans. It is in this sense that the initial leverage amount will be "reduced" and a running account will be maintained as to the outstanding leverage amount.
(d) Leverage Account
A leverage account will be established in the records of A Co as an unfunded book entry account for each Participant in the XXXXXXXXXX Employee Bonus Plan who accepts a leverage amount. A Participant's leverage amount will be added to his or her leverage account at the time of commencement of the plan. Thereafter, at the end of each fiscal quarter of A Co, an amount equal to the leverage fees which have accrued during that quarter will be added to a Participant's leverage account. The balance in a Participant's leverage account will be reduced from time to time as described in paragraph 20 below.
(e) Leverage Amount is not at Risk
A Participant will not be at risk with respect to the Participant's outstanding accrued leverage fees and the Participant's outstanding leverage amount balance, in the sense that if the returns from the XXXXXXXXXX Plans are insufficient to reduce these amounts to zero, the Participant will not be required to fund the shortfall from his or her other assets. Each Participant will be at risk for his or her entire Holdback Amount and his or her Deal Referral Bonus (if any) under the XXXXXXXXXX Employee Bonus Plan, and his or her Investment Amount in the case of the XXXXXXXXXX Investment Plan (as defined in paragraph 30 below), and his or her undistributed returns based on the returns or proceeds of disposition that are realized on Qualifying Investments under such XXXXXXXXXX Plans (which will be reduced by the Participant's share of losses) but never more than those amounts.
(f) Vesting
A Participant's right to an amount in respect of the returns or proceeds of disposition that are realized on Qualifying Investments, to the extent that they relate to the Participant's leverage amount only, vests XXXXXXXXXX % on each of XXXXXXXXXX . Provided a Participant remains in the employ of A Co or a subsidiary of A Co until at least XXXXXXXXXX , he or she will be entitled to XXXXXXXXXX % of the returns or proceeds of disposition that are realized on Qualifying Investments that relate to the Participant's leverage amount. Furthermore, a Participant will be treated as being XXXXXXXXXX % vested (1) at all times when the Participant has an outstanding leverage amount balance or outstanding leverage fees, (2) at all times while in the employ of A Co or a subsidiary of A Co, and (3) when his or her employment is terminated because of death, disability or retirement (subject to the exceptions described below). Under these circumstances, a Participant will continue to be entitled to receive XXXXXXXXXX % of the returns based on returns or proceeds of disposition that are realized on Qualifying Investments that relate to the Participant's leverage amount regardless of the vesting schedule.
The vesting schedule becomes relevant in the event that a Participant ceases to be employed by A Co or a subsidiary of A Co under various circumstances. A Participant who takes an approved leave of absence or ceases to be employed by A Co by reason of termination for cause, termination without cause, resignation or retirement (in the case of retirement, only if the Participant engages in an activity competitive with the operations of A Co) during the four-year vesting period of the XXXXXXXXXX Plans, will have his or her returns based on the profits, losses, income and fees on the Qualifying Investments relating to his or her leverage amount reduced in accordance with the vesting schedule.
A further consequence will arise to a Participant who ceases to be employed by reason of termination for cause, resignation or retirement (in the case of resignation and retirement, only if the Participant engages in an activity competitive with the operations of A Co) during the four-year vesting period of the XXXXXXXXXX Plans. A Participant whose vesting percentage is reduced by reason of such circumstances and who has previously received cash distributions of profits, losses, income or fees under the Plans will be required to repay to A Co the difference between the amount the Participant actually received and the amount the Participant would have received if his or her vesting percentage had been reduced at the time of such payment (the "clawback"). It is expected that the repayment of the "clawback" amount would be effected primarily by means of appropriate reductions in subsequent amounts that would otherwise be paid to the Participant under the XXXXXXXXXX Plans until the full amount of the "clawback" has been repaid. If this is not sufficient to recover the full amount of the "clawback" then the Participant will be required to repay the balance of the "clawback" amount to A Co.
15. A Co will maintain a separate unfunded book entry account (the "Employee Account") for each Participant in the XXXXXXXXXX Employee Bonus Plan. The percentage of the aggregate amount invested by A Co and B Co in Qualifying Investments for the XXXXXXXXXX Year that is represented by the aggregate of the Participant's Holdback Amount (together with the amount of any Deal Referral Bonus) and the Participant's initial leverage amount will be the Participant's "Specified Percentage" for the XXXXXXXXXX Year for the purposes of the XXXXXXXXXX Employee Bonus Plan. The term "Specified Percentage" just defined is not a term that is used in the draft document which sets out the terms of the XXXXXXXXXX Plans, rather that term is used in this description of the XXXXXXXXXX Employee Bonus Plan in order to simplify the description of the operation of that plan.
16. XXXXXXXXXX.
17. When A Co or B Co receives amounts such as dividends or interest payments on a Qualifying Investment, each Participant's Employee Account will be credited (subject to paragraph 20 below) with an amount equal to the Participant's Specified Percentage of the amounts such as dividends or interest payments on a Qualifying Investment that are realized by A Co or B Co, minus XXXXXXXXXX% of such net amounts.
When A Co or B Co disposes of all or a portion of a Qualifying Investment for cash proceeds, each Participant's Employee Account will be adjusted (subject to paragraph 20 below) with an amount equal to the Participant's Specified Percentage of the aggregate of the net amount of returns or proceeds of disposition that are realized on Qualifying Investments by A Co or B Co, minus XXXXXXXXXX% of the profit or plus XXXXXXXXXX % of the loss realized by A Co or B Co on the disposition of that Qualifying Investment.
Such disposition could occur through a sale of all or part of the Qualifying Investment. It could also occur through A Co or B Co receiving a repayment of invested capital in a Qualifying Investment or through the repayment of all or part of the principal amount of a debt that is a Qualifying Investment.
18. When A Co or B Co receives cash fees in connection with a Qualifying Investment, or when non-cash fees have been realized in cash, the Participant's Employee Account will be credited (subject to paragraph 20 below) with the Participant's Specified Percentage of XXXXXXXXXX% of the amount of such fees. Non-cash fees mentioned above refers to fees paid to A Co "in kind" rather than in cash and would include, for example, securities of A Co's client (in which a Qualifying Investment might be made) or options or warrants to buy securities of the client.
19. In the event of a Writedown described in paragraph 40 below, the Employee Account of each Participant for the XXXXXXXXXX Year will be adjusted (debited) (subject to paragraph 20 below) by the Participant's Specified Percentage of XXXXXXXXXX% of the amount of the Writedown.
20. For as long as a Participant's leverage account (as described in paragraph 14(d) above) has a positive balance, any amount that would otherwise be applied to increase his or her Employee Account as described in paragraphs 17, 18 and 19 shall first be deducted from that Participant's leverage account until the balance in the leverage account has been reduced to zero.
21. Participants will be entitled to receive cash payments ("Cash Compensation Payments") referable to their Employee Accounts under the XXXXXXXXXX Employee Bonus Plan. Payments may be made on an annual, semi-annual, quarterly or other basis as determined by the Plan Administrator from time to time. It is anticipated that, generally, Cash Compensation Payments to Participants will be made at least annually if and to the extent that amounts have accrued in the Participants' Employee Accounts as described above (subject to the reduction in the amount of the payments on account of the Administration Charge described in paragraph 24 below and the limitation described in paragraph 20 above). The amount of a Participant's Employee Account will be reduced by the amount of any payment made to the Participant out of that Employee Account. The terms of the XXXXXXXXXX Employee Bonus Plan will provide that Cash Compensation Payments will be treated by A Co and the Participant as income received by the Participant from A Co.
22. At no time will the Participant have or be entitled to a legal or beneficial ownership interest in any Qualifying Investment. The Participants' only rights will be to receive Cash Compensation Payments from A Co computed by reference to and in accordance with the terms of the XXXXXXXXXX Employee Bonus Plan.
23. The Specified Percentage is to be determined at the outset, as described in paragraph 15 above, and will not change. Thus, if an event that would trigger a credit or debit to a Participant's Employee Account or a decrease in a Participant's leverage account in respect of a Qualifying Investment occurs during the XXXXXXXXXX Year, the Participant's Specified Percentage for the XXXXXXXXXX Year will be determined as if the event had not occurred; however, appropriate credits or debits will be then made to the Participant's Employee Account and leverage account taking into account the event that has occurred.
24. An "Administration Charge" will be charged to Participants from time to time as determined by the Plan Administrator. The Administration Charge will be applied to reduce amounts that would otherwise be deducted from a Participant's leverage account, or would otherwise be added (credited) to a Participant's Employee Account. The Administration Charge will be calculated for each calendar year as the lesser of $XXXXXXXXXX and XXXXXXXXXX% of the aggregate participation amounts under the XXXXXXXXXX Employee Bonus Plan, the XXXXXXXXXX Plan and the XXXXXXXXXX Plan (less a pro rata amount allocated to XXXXXXXXXX Participants under the XXXXXXXXXX Plan and to XXXXXXXXXX Participants under the XXXXXXXXXX Plan) allocated to Qualifying Investments made in the XXXXXXXXXX Year plus non-cash proceeds, if any, of Qualifying Investments at the beginning of the particular calendar year. The Administration Charge will continue to accrue until all Qualifying Investments for the XXXXXXXXXX Year have been disposed of and all Cash Compensation Payments with respect to that year have been made to Participants.
A Participant's share of the Administration Charge for the XXXXXXXXXX Year will be determined pro rata based on the aggregate of the Participant's Holdback Amount, leverage amount and Deal Referral Bonus, if any, relative to the aggregate of such amounts for all Participants under the XXXXXXXXXX Employee Bonus Plan, the XXXXXXXXXX Plan and the XXXXXXXXXX Plan for the XXXXXXXXXX Year. The Administration Charge for each calendar year, and for any prior calendar years for which the Administration Charge has not been deducted from payments to Participants, will be deducted (debited) from the Participants' Employee Accounts thereby reducing the Cash Compensation Payment to be made under the XXXXXXXXXX Employee Bonus Plan for the investment year in question. In determining the amount of the final Cash Compensation Payment to be made on the termination of the XXXXXXXXXX Employee Bonus Plan as described below, amounts added to a Participant's Employee Account in respect of notional dispositions of Qualifying Investments shall not be reduced by any amount in respect of the Administration Charge so that such Administration Charge will be allocated to a Participant only to the extent of amounts in the Participant's Employee Account, or amounts that would otherwise be deducted from the Participant's leverage account, if applicable, arising in connection with actual receipts of cash by A Co or B Co.
25. At least annually, the Plan Administrator will conduct or arrange for a valuation of Qualifying Investments acquired for the XXXXXXXXXX Employee Bonus Plan (together with a valuation of Qualifying Investments acquired in the prior investment year for purposes of the prior Plans).
26. The XXXXXXXXXX Employee Bonus Plan will be terminated and wound up on XXXXXXXXXX (the "Termination Date"). The XXXXXXXXXX Plan and the XXXXXXXXXX Plan will not be terminated on the Termination Date, but will continue to operate for another six years. Also, if, at any time, the aggregate fair market value of all Qualifying Investments held by A Co and B Co in respect of the XXXXXXXXXX Employee Bonus Plan (as determined with reference to the annual valuation of all Qualifying Investments) is less than XXXXXXXXXX% of the aggregate initial investment in Qualifying Investments made for that year, the Plan Administrator may in its discretion terminate and wind up the XXXXXXXXXX Employee Bonus Plan.
27. In either such case, at the time of termination, the fair market value of the Qualifying Investments acquired in the XXXXXXXXXX Employee Bonus Plan will be determined with reference to the annual valuation of all Qualifying Investments and a Participant will be entitled to receive a final Cash Compensation Payment of the amount in the Participant's Employee Account, computed as if all Qualifying Investments for the XXXXXXXXXX Employee Bonus Plan had been disposed of for proceeds equal to their fair market value as so determined and the balance in the leverage account, if any, were deducted.
28. On the death or permanent disability of a Participant, the Participant or his or her estate will have the option of requesting that the Participant's participation in the XXXXXXXXXX Employee Bonus Plan be terminated. If such option is exercised, the fair market value of the Qualifying Investments acquired for the XXXXXXXXXX Employee Bonus Plan will be determined with reference to the annual valuation of all Qualifying Investments, and the Participant or estate will be entitled to receive a final Cash Compensation Payment of the amount in the Participant's Employee Account, computed as if all Qualifying Investments for the XXXXXXXXXX Employee Bonus Plan had been disposed of for proceeds equal to their fair market value as so determined and the balance in the leverage account, if any, were deducted. At its discretion, exercisable on a case by case basis, the Plan Administrator may permit a similar termination of participation in the XXXXXXXXXX Employee Bonus Plan for other Participants.
The terms of the XXXXXXXXXX Employee Bonus Plan will provide that final Cash Compensation Payments will be treated by A Co and the Participant or estate, as the case may be, as income received by the Participant from A Co.
29. Other than in the case of the option exercisable on death or disability, but subject to the vesting requirements described in paragraph 14(f) above, a Participant's rights to receive Cash Compensation Payments under the XXXXXXXXXX Employee Bonus Plan will continue after termination of employment with A Co until the termination and winding up of the XXXXXXXXXX Employee Bonus Plan.
The XXXXXXXXXX Investment Plan
30. A Participant in the XXXXXXXXXX Employee Bonus Plan is eligible to, but is not required to, use the Participant's funds received out of and on termination of the XXXXXXXXXX Employee Bonus Plan to purchase an investment contract (an "Investment Contract") under the XXXXXXXXXX Investment Plan. At any time on or before the fourteenth day (or such later date as the Plan Administrator may allow) following the receipt by a Participant of a final Cash Compensation Payment under the XXXXXXXXXX Employee Bonus Plan, the Participant may elect to purchase an Investment Contract characterized by reference to the XXXXXXXXXX Year if Qualifying Investments acquired in that year are still held by A Co or B Co on XXXXXXXXXX (the "Investment Date"). The Participant may invest in his or her Investment Contract for the XXXXXXXXXX Year an amount (the "Investment Amount") that is no more and no less than the final Cash Compensation Payment received by the Participant under the XXXXXXXXXX Employee Bonus Plan.
31. A Participant may borrow money and use such borrowed money to pay all or part of the Investment Amount for an Investment Contract. The Participant may borrow from a lender that is not A Co and is not affiliated with A Co.
In addition, A Co may agree to make a loan (an "Investment Loan") to a Participant who is purchasing an Investment Contract under the XXXXXXXXXX Investment Plan. An Investment Loan will bear interest at normal commercial arm's length rates and at a rate that is not less than the prescribed rate under section 80.4 which interest will be required to be paid annually by the Participant. The principal amount outstanding under an Investment Loan used by a Participant to purchase an Investment Contract for the XXXXXXXXXX Year will be required to be repaid by the Participant as and when the Participant receives amounts in respect of that Investment Contract.
32. An Investment Contract will relate to investments held on the Investment Date that were Qualifying Investments for the XXXXXXXXXX Year under the XXXXXXXXXX Employee Bonus Plan. References below to Qualifying Investments refer to such remaining Qualifying Investments. The fair market value of each such Qualifying Investment will be determined as of the Investment Date having reference to the annual valuation of all Qualifying Investments.
33. For the XXXXXXXXXX Investment Plan which will be created on the termination of the XXXXXXXXXX Employee Bonus Plan, the leverage feature will operate in much the same way that it will operate in the XXXXXXXXXX Employee Bonus Plan. Each Participant in the XXXXXXXXXX Investment Plan will be given an initial leverage amount in the XXXXXXXXXX Investment Plan which will be equal to the amount, if any, in that Participant's leverage account immediately before the termination of the XXXXXXXXXX Employee Bonus Plan. In other words, to the extent that the leverage amount granted to the Participant under the XXXXXXXXXX Employee Bonus Plan and accrued leverage fees have not been reduced to nil at the time the XXXXXXXXXX Employee Bonus Plan is terminated, the outstanding leverage amount (together with outstanding leverage fees) will be reduced to zero as described in paragraph 20 above but will be considered to continue on as a leverage amount within the XXXXXXXXXX Investment Plan. The "leverage amount" concept for the Investment Plan (includes the leverage amount and the leverage fee) is designed so that the notional account for the Participant would be the full amount of the final Cash Compensation Payment that the Participant would have received as a final payment under the XXXXXXXXXX Employee Bonus Plan but for the reduction for the leverage amount and the leverage fee, if any, from the final Cash Compensation Payment. Thus, as is the case under the XXXXXXXXXX Employee Bonus Plan, the addition of the leverage amount to the XXXXXXXXXX Investment Plan will increase the participation amount of the Participant under that Plan (as compared to the prior version of the Investment Plan) in the following sense: the increase resulting from the addition of the leverage amount will entitle the Participant to an increased return based on the profits or losses and income and fees realized by A Co and B Co on Qualifying Investments under the XXXXXXXXXX Investment Plan. As is the case under the XXXXXXXXXX Employee Bonus Plan, each Participant's leverage amount in the XXXXXXXXXX Investment Plan will be subject to a leverage fee charge which will be calculated and applicable in the same manner as the leverage fee under the XXXXXXXXXX Employee Bonus Plan. As is the case under the XXXXXXXXXX Employee Bonus Plan, a leverage account will be established in the records of A Co as an unfunded book entry account for each Participant in the XXXXXXXXXX Investment Plan, and the Participant's leverage amount and accrued leverage fees will be added to the account in a similar manner as is described in paragraph 14(d) above and amounts will be deducted from the account from time to time as described in paragraph 41 below. As is the case under the XXXXXXXXXX Employee Bonus Plan, as returns are generated under the XXXXXXXXXX Investment Plan, they will first be applied to recover A Co's costs (15%) (as described in paragraphs 37, 38, 39 and 40 below), second to satisfy the Administration Charge (as described in paragraphs 44 and 45 below), and third to reduce (to zero) a Participant's accrued leverage fees and outstanding leverage amount balance (as described in paragraph 41 below), before any cash payments are made to the Participant. The vesting features associated with the leverage amount, including the "clawback" feature, apply to the XXXXXXXXXX Investment Plan in the manner described in paragraph 14(f) above. However, the vesting features are only relevant for the first year of the XXXXXXXXXX Investment Plan since all Participants who remain in the employ of A Co on XXXXXXXXXX would become fully vested on XXXXXXXXXX (as described in paragraph 14(f) above).
34. The quotient obtained by dividing (1) the aggregate of the Investment Amount paid by a Participant for an Investment Contract and the Participant's leverage amount for the XXXXXXXXXX Investment Plan, by (2) the aggregate fair market value of the Qualifying Investments for the XXXXXXXXXX Year that are held A Co or B Co on the Investment Date, will be the "Specified Percentage" of the Participant under the Participant's Investment Contract for the XXXXXXXXXX Year. In connection with an Investment Contract, A Co will maintain two separate unfunded book entry accounts (an "Income Account" and a "Principal Account") for each Participant in respect of the Participant's Specified Percentage of each Qualifying Investment for the XXXXXXXXXX Year. As is the case with the XXXXXXXXXX Employee Bonus Plan as described in paragraph 15 above, the term "Specified Percentage" just defined is not a term that is used in the draft document which sets out the terms of the XXXXXXXXXX Plan, rather that term is used in this description of the XXXXXXXXXX Investment Plan in order to simplify the description of the operation of that Plan.
35. In respect of each Qualifying Investment, the product obtained by multiplying the fair market value as of the Investment Date of a Qualifying Investment by the quotient obtained by dividing (1) the Investment Amount paid by a Participant for an Investment Contract, by (2) the aggregate fair market value of the Qualifying Investments for the XXXXXXXXXX Year that are held by A Co or B Co on the Investment Date, will be recorded as the Participant's "Initial Principal Investment Amount" for that Qualifying Investment but such amount will not be added to any of the Participant's accounts. The Participant's Initial Principal Investment Amount for that Qualifying Investment will be relevant for income tax purposes in determining the Participant's income or loss in respect of a disposition of all or a portion of the Qualifying Investment.
36. XXXXXXXXXX.
37. When A Co or B Co receives cash amounts such as dividends or interest payments on a Qualifying Investment, each Participant's Income Account for that Qualifying Investment will be credited (subject to paragraph 41 below) with an amount equal to the Participant's Specified Percentage of XXXXXXXXXX % of the net amounts received by A Co or B Co. Where such amounts are received by A Co or B Co in kind rather than in cash, the amounts will not be credited to the Participants' Income Accounts until such amounts have been realized in cash by A Co or B Co.
38. When A Co or B Co disposes of all or a portion of a Qualifying Investment for cash proceeds, each Participant's Principal Account for that Qualifying Investment will be adjusted (subject to paragraph 41 below) with an amount equal to the Participant's Specified Percentage of the aggregate of the amount of the profit or loss realized by A Co or B Co minus XXXXXXXXXX% of the profit or plus XXXXXXXXXX% of the loss realized by A Co or B Co on the disposition of that Qualifying Investment. When A Co or B Co receives a payment in kind rather than in cash upon the disposition of all or a portion of a Qualifying Investment, no amount will be added to the Participants' Principal Accounts until such consideration has been realized in cash, at which time amounts will be credited to the Participants' Principal Accounts in the same manner as on the disposition of a Qualifying Investment for cash proceeds.
39. When A Co or B Co receives cash fees in connection with a Qualifying Investment, and when non-cash fees have been realized in cash, the Participant's Income Account for that Qualifying Investment will be credited (subject to paragraph 41 below) with the Participant's Specified Percentage of XXXXXXXXXX% of the amount of such fees. Non-cash fees mentioned above refers to fees paid and distributions made in respect of Qualifying Investments including dividends or interest which are paid to A Co not in the form of cash but in the form of other property.
40. If there is a writedown in the value of a Qualifying Investment that represents a situation in which, if section 50 were applicable to A Co or B Co and A Co or B Co were to make the election referred to in that section, A Co or B Co would be deemed to have disposed of the Qualifying Investment for proceeds equal to nil (a "Writedown"), then the Principal Account of each Participant for that Qualifying Investment will be adjusted (debited) by the Participant's Specified Percentage of XXXXXXXXXX% of the amount of the Writedown, and the amount of such Writedown will be taken into account in calculating ACO's profit or loss for purposes of this Plan on any subsequent disposition of that Qualifying Investment.
Upon such Writedown, a Participant's Initial Principal Investment Amount in respect of that Qualifying Investment (or the remaining portion of the Initial Principal Investment Amount if a partial disposition has occurred before that time with respect to such Qualifying Investment) will be reduced to zero.
41. For as long as a Participant's leverage account (as described in paragraph 33 above) has a positive balance, any amount that would otherwise be applied to increase his or her Income Accounts or Principal Accounts as described in paragraphs 37, 38 and 39 shall first be deducted from that Participant's leverage account until the balance in the leverage account has been reduced to zero.
42. Participants will be entitled to receive cash payments referable to the aggregate of the amounts in their Income Accounts and Principal Accounts under the XXXXXXXXXX Investment Plan after the recording of the additions and reductions described above. Payments to Participants will be made at least annually if and to the extent that amounts have accrued in the Participants' Income Accounts and Principal Accounts as described above (subject to the reduction in the amount of the payments on account of the Administration Charge described in paragraphs 44 and 45 below and the limitation described in paragraph 41 above). Payments to Participants may however be made on a semi-annual, quarterly or other basis as determined by the Plan Administrator from time to time.
43. Payments to Participants that reflect amounts in their Income Accounts will be designated as "Income Payments". The amount of any Income Payment from an Income Account for a Qualifying Investment will reduce the balance in the Income Account for that Qualifying Investment. Payments to Participants that reflect amounts in their Principal Accounts will be designated as "Principal Payments". The amount of any Principal Payment from a Principal Account for a Qualifying Investment will reduce the balance in the Principal Account for that Qualifying Investment.
44. An "Administration Charge" will be charged to Participants from time to time as determined by the Plan Administrator. The Administration Charge will be applied to reduce amounts that would otherwise be deducted from a Participant's leverage account, or would otherwise be added to a Participant's Income Accounts or Principal Accounts. The Administration Charge will be calculated for each calendar year as the lesser of $XXXXXXXXXX and XXXXXXXXXX% of the aggregate participation amounts under the XXXXXXXXXX Investment Plan, the XXXXXXXXXX Plan and the XXXXXXXXXX Plan (less a pro rata amount allocated to XXXXXXXXXX participants under the XXXXXXXXXX Plan and to XXXXXXXXXX participants under the XXXXXXXXXX Plan) plus non-cash proceeds, if any, of Qualifying Investments at the beginning of the particular calendar year. The Administration Charge will continue to accrue until the earlier of (a) the date that the XXXXXXXXXX Investment Plan has been terminated as described below, and (b) the date on which all Qualifying Investments for the XXXXXXXXXX Year have been disposed of and all payments with respect to that year have been made to Participants.
45. A Participant's share of the Administration Charge will be determined pro rata based on the aggregate of the Participant's Investment Amount and leverage amount relative to the aggregate participation amounts under the XXXXXXXXXX Investment Plan, the XXXXXXXXXX Plan and the XXXXXXXXXX Plan. The Administration Charge for each calendar year, and for any prior calendar years for which the Administration Charge has not been deducted from payments to Participants, will reduce Participants' Income Accounts or one or more Principal Accounts, as determined by the Plan Administrator, for that investment year so that it will be deducted from the payments that Participants would otherwise receive relating to the investment year.
46. At no time will the Participant have or be entitled to a legal or beneficial ownership interest in any Qualifying Investment. The Participants' only rights will be to receive Income Payments and Principal Payments from A Co computed by reference to and in accordance with the terms of the XXXXXXXXXX Investment Plan.
47. It is anticipated that the aggregate amount of Income Payments and Principal Payments received by a Participant in excess of the aggregate of the Initial Principal Investment Amounts of that Participant for Qualifying Investments under an Investment Contract for the XXXXXXXXXX Year will exceed the amount of any interest payable by the Participant on borrowed money used by the Participant to acquire that Investment Contract.
48. The terms of the XXXXXXXXXX Investment Plan will provide that Income Payments in respect of a Qualifying Investment will be treated by A Co and the Participant as income received by the Participant from A Co. The terms of the XXXXXXXXXX Investment Plan will also provide that Principal Payments in respect of a Qualifying Investment will be treated, in part, as a return of the Participant's Initial Principal Investment Amount in respect of that Qualifying Investment and in part as income received by the Participant from A Co, in the appropriate proportions reflecting the portion of the particular Qualifying Investment that has been disposed of by A Co or B Co.
For example, if one-third of a particular Qualifying Investment has been disposed of, the related Principal Payment to a Participant will be treated firstly as a return of one-third of the Participant's Initial Principal Investment Amount in respect of that Qualifying Investment and the remainder as income received by the Participant from A Co.
Any amount paid to a Participant out of a Participant's Principal Account for a Qualifying Investment that is referable to a writedown will be treated as a return of a portion of the Participant's Initial Principal Amount for that Qualifying Investment.
49. In the event that the aggregate amount of Principal Payments to which a Participant is entitled with respect to a particular Qualifying Investment is less than the Initial Principal Investment Amount for that Qualifying Investment, the Participant will, to that extent, not receive a return of the Initial Principal Investment Amount for that Qualifying Investment and will therefore realize a loss of part or all of his or her Initial Principal Investment Amount for that Qualifying Investment.
50. On XXXXXXXXXX, any remaining amount in a Participant's Income Accounts and Principal Accounts (after increases or decreases as described below), will, subject to paragraph 41 above, be paid by A Co to the Participant and the XXXXXXXXXX Investment Plan will be terminated and wound up. Also, at any time on or after XXXXXXXXXX, A Co may, at its discretion, pay out the Investment Contracts for all but not less than all Participants for the XXXXXXXXXX Year and the XXXXXXXXXX Investment Plan will be terminated and wound up.
In addition, if at any time during the term of the XXXXXXXXXX Investment Plan, the aggregate fair market value of Qualifying Investments held by A Co and B Co in respect of the XXXXXXXXXX Year (as determined with reference to the annual valuation of all Qualifying Investments) is less than XXXXXXXXXX% of the aggregate initial investment in Qualifying Investments made for that year, the Plan Administrator may, in its discretion, terminate and wind up the XXXXXXXXXX Investment Plan.
51. In any case described in paragraph 50 above, immediately preceding such termination, the fair market value of any Qualifying Investments still owned by A Co or B Co that were made or deemed to be made in the XXXXXXXXXX Year will be determined with reference to the annual valuation of all Qualifying Investments, and a Participant will be entitled to receive from A Co a final Income Payment and a final Principal Payment of the amounts in each of the Participant's Income Accounts and Principal Accounts for the XXXXXXXXXX Year computed as if all Qualifying Investments for that year had been disposed of for proceeds equal to their fair market value as so determined and the remaining balance, if any, in the leverage account were deducted.
52. On the death or permanent disability of a Participant, the Participant or his or her estate will have the option of requesting that the Participant's Investment Contract in respect of the XXXXXXXXXX Year be paid out. If such option is exercised, the fair market value of the Qualifying Investments still held by A Co or B Co that were acquired in the XXXXXXXXXX Year will be determined with reference to the annual valuation of all Qualifying Investments, and the Participant or estate will be entitled to receive from A Co a final Income Payment and a final Principal Payment of the amounts in each of the Participant's Income Accounts and Principal Accounts for the XXXXXXXXXX Year computed as if all such Qualifying Investments had been disposed of for proceeds equal to the fair market value thereof as so determined and the remaining balance, if any, in the leverage account were deducted. At its discretion, exercisable on a case by case basis, the Plan Administrator may permit a similar termination of participation in the XXXXXXXXXX Investment Plan for other Participants.
The terms of the XXXXXXXXXX Investment Plan will provide that final Income Payments in respect of a Qualifying Investment will be treated by A Co and the Participant as income received by the Participant or estate, as the case may be, from A Co.
53. Other than in the case of the option exercisable on death or disability, but subject to the vesting requirements described in paragraphs 14(f) and 33 above, a Participant's rights to receive amounts under the XXXXXXXXXX Investment Plan will continue after termination of employment with A Co until the termination and winding up of the XXXXXXXXXX Investment Plan.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the XXXXXXXXXX Employee Bonus Plan is similar to that of the prior version of the Employee Bonus Plan, namely, to provide an incentive to Participants in connection with the investing activities of A Co and B Co by arranging for a portion of each Participant's bonus to reflect the risks and benefits of such investment activities.
The XXXXXXXXXX Employee Bonus Plan and the XXXXXXXXXX Investment Plan are intended to encourage Participants to seek out and refer investment opportunities to A Co and B Co, and to encourage improvements in the management of Qualifying Investments by Participants who are engaged in the investment activity of A Co and B Co. The introduction of the leverage feature to the XXXXXXXXXX Plans is the most significant difference between the XXXXXXXXXX Plans and the prior version of the Plans. The purpose of the leverage feature is to increase the participation of the Participants in the risks and benefits of the investing activities of A Co and B Co as compared to the level of such participation in the prior version of the Plans.
Rulings
Provided that the above description of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. The XXXXXXXXXX Employee Bonus Plan will not be considered to be a "salary deferral arrangement".
B. The amount, with respect to the XXXXXXXXXX Employee Bonus Plan, to be included in the income of a Participant for a taxation year as income from an office or employment will consist of the aggregate of the following amounts:
(i) pursuant to subsection 5(1), the amount of the bonus net of the Holdback Amount paid by A Co to a Participant in that taxation year as described in paragraph 8 of the Proposed Transactions;
(ii) pursuant to subsection 5(1), the amount of any Cash Compensation Payment paid to a Participant in that taxation year as described in paragraph 21 of the Proposed Transactions; and
(iii) pursuant to subsection 5(1), the amount of a final Cash Compensation Payment paid to a Participant in that taxation year as described in paragraphs 27 and 28 of the Proposed Transactions.
C. Subject to paragraph 18(1)(a) and section 67, an amount referred to in ruling "B", above, that is paid to a Participant in respect of a particular taxation year of A Co will be deductible by A Co pursuant to section 9 in computing its income for that taxation year to the extent that such payment is made in the year or within 180 days following the end of the taxation year of A Co to which the payment relates.
D. The amount, with respect to the XXXXXXXXXX Investment Plan, to be included in the income of a Participant for a taxation year as income from a business or property as contemplated by subsection 9(1) will consist of the aggregate of the following amounts:
(i) the amount of any Income Payment, as that term is described in paragraphs 42 and 43 of the Proposed Transactions, paid to the Participant in that taxation year;
(ii) the amount of any final Income Payment, as described in paragraphs 51 and 52 of the Proposed Transactions, paid to the Participant in that taxation year;
(iii) the amount of any Principal Payment from a Principal Account for a particular Qualifying Investment, as described in paragraphs 42 and 43 of the Proposed Transactions, paid to a Participant, in that taxation year to the extent that such Principal Payment exceeds
1) in the case of a disposition of all of the Qualifying Investment, the Initial Principal Investment Amount of the Participant in respect of that Qualifying Investment;
(2) in the case of a partial disposition of the Qualifying Investment, the proportionate portion of the Initial Principal Investment Amount of the Participant applicable to that partial disposition of the Qualifying Investment; and
(iv) the amount of any final Principal Payment from the Principal Account for a particular Qualifying Investment, as described in paragraphs 51 and 52 of the Proposed Transactions, to the extent that such final Principal Payment exceeds the Initial Principal Investment Amount of the Participant in respect of a Qualifying Investment for which there has been no previous partial disposition or, in the case of the disposition of the remaining portion of a Qualifying Investment, the appropriate portion of the Initial Principal Investment Amount of the Participant applicable to that remaining portion.
E. Subject to paragraph 18(1)(a) and section 67, an amount referred to in ruling D above that is paid to a Participant in a particular taxation year of A Co will be deductible by A Co pursuant to section 9 in computing its income for that taxation year.
F. Following a Writedown of a Qualifying Investment by A Co or B Co, as described in paragraph 40 of the Proposed Transactions, at the time that A Co makes a payment to a Participant of any remaining amount in the Participant's Principal Account in respect of that Qualifying Investment, a Participant will be considered to have disposed of the Initial Principal Investment Amount for that Qualifying Investment (or the remaining amount in the Participant's Principal Account if there has been a prior partial disposition of that Qualifying Investment before that time) and the Participant will, for the purpose of computing the income of the Participant for the taxation year that includes the year of the payment, be considered to have incurred a loss from carrying on a business or from property as contemplated by subsection 9(2) equal to the amount by which the Initial Principal Investment Amount (or the remaining portion thereof if a partial disposition of that Qualifying Investment has occurred before that time) exceeds the amount received by the Participant from the Principal Account of that Participant for that Qualifying Investment in connection with such Writedown.
G. Upon either
(i) the disposition by A Co or B Co of all or a portion of a Qualifying Investment (or the last portion of a Qualifying Investment if there has been a prior partial disposition) and the payment to a Participant of all amounts in the Principal Account of that Participant to which the Participant is entitled in respect of that Qualifying Investment or portion thereof, or
(ii) the termination of the XXXXXXXXXX Investment Plan and the payment by A Co to a Participant of all amounts in the Principal Account of that Participant to which the Participant is entitled in respect of a Qualifying Investment for that investment year,
to the extent that the Initial Principal Investment Amount for that Qualifying Investment other than a Qualifying Investment which was subject to a Writedown described in paragraph 40 of the Proposed Transactions, or in the case of a partial disposition of the Qualifying Investment, the appropriate portion of the Initial Principal Investment Account applicable to that partial disposition, exceeds the total of the Principal Payments received by the Participant in respect of that Qualifying Investment, or such portion thereof in the case of a partial disposition, from the time that the Participant acquired the Investment Contract in respect of the XXXXXXXXXX Year up to and including the particular time, will, for the purposes of computing the income of the Participant for the taxation which includes the particular time, be considered to be a loss of the Participant from a business or property as contemplated by subsection 9(2).
H. For the purposes of section 7000 of the Income Tax Regulations, no amount will be considered to accrue as interest on an Investment Contract, as described in paragraph 30 of the Proposed Transactions, and accordingly, no amount will be required to be included in the income of a Participant pursuant to subsection 12(9) in respect of that Investment Contract
I. No amount received from a Participant in the XXXXXXXXXX Investment Plan with respect to the purchase of an Investment Contract, as that term is defined in paragraph 30 of the Proposed Transactions, will be required to be included in the income of A Co or B Co.
J. Provided that a Participant has a legal obligation to pay interest on borrowed money used to acquire an Investment Contract, within the meaning of that term in paragraph 30 of the Proposed Transactions, and provided that the Investment Contract continues to be held for the purpose of gaining or producing income (other than income which would be exempt), the Participant will be entitled to deduct, in computing the income of the Participant for a taxation year, the lesser of the interest paid or payable in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CCRA has agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above. For greater certainty, nothing in this letter should be construed as implying that these rulings apply to the XXXXXXXXXX Plan, the XXXXXXXXXX Plan or their participants.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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