2000 Ruling 2000-0057893 - DEFERRED BONUS PLAN SDA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Will the proposed deferred bonus plan be excluded from the salary deferral arrangement provisions of the Act?

Position: Yes

Reasons: Plan satisfies 6801(d) of the Regulations so the plan will be exempted from the salary deferral arrangement provisions of the Act.

XXXXXXXXXX 								2000-005789

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your facsimile of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Facts

1. XXXXXXXXXX (the "Corporation") is incorporated under the laws of Canada and it head office is located in XXXXXXXXXX. The Corporation is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Income Tax Act (the "Act").

The Corporation files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office. The Corporation's fiscal year ends on XXXXXXXXXX.

2. XXXXXXXXXX.

3. The Corporation's common shares are listed and traded on the XXXXXXXXXX.

4. The Corporation has a Stock Option Plan and a Stock Ownership Incentive Plan in place for its key employees. Where an employee attains his or her stock ownership target which is based on the employee's job level and annual base salary, the employee will become entitled to certain incentives under the Stock Ownership Incentive Plan. In determining whether an employee has attained his or her stock ownership target, the Corporation will include any deferred share units that may be credited to the employee's notional account under the plan described below.

Proposed Plan

5. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its resident and non-resident key employees. The Plan will be unfunded and will be administered by the Human Resources and Compensation Committee of the Corporation's Board of Directors. The Corporation will be responsible for all costs relating to the administration of the Plan. A copy of the Plan was submitted with your request for the advance income tax ruling.

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

(a) "Affiliate" includes any related or associated corporation, or any corporation that is a member of a group of corporations that do not deal at arm's length, notwithstanding that they may not be related or associated for purposes of the Act. With respect to corporations that are not related or associated for purposes of the Act, the Committee will determine whether they are Affiliates;

(b) "Award Date" means each date on which Deferred Share Units (as defined below) are awarded to a Participant (as defined below) which shall be, unless otherwise determined by the Committee (as defined below), as follows:

(i) in respect of a Participant's Bonus (as defined below) for a year, the Award Date shall be XXXXXXXXXX of the next calendar year; and

(ii) in respect of a Participant's Discretionary Bonus (as defined below), the Award Date shall be the day on which such bonus becomes payable;

(c) "Award Market Value" means the average closing price of a Corporation Share (as defined below) on the XXXXXXXXXX Stock Exchange for the XXXXXXXXXX trading days ending on the Award Date;

(d) "Board" means the board of directors of the Corporation;

(e) "Committee" means the Human Resources and Compensation Committee of the Board;

(f) "Corporation Share" means a subordinate voting share of the Corporation listed on the XXXXXXXXXX Stock Exchange;

(g) "Deferred Share Unit" means a unit equivalent in value to one Corporation Share, awarded by means of a bookkeeping entry to a notional account maintained for each Participant in the books of the Corporation in accordance with an election made by a Participant under the terms of the Plan;

(h) "Distribution Date" means the last business day of the calendar year following the calendar year in which the Participant retires or terminates employment (including death) with the Corporation and its Affiliates (the "Termination Date"), unless the Corporation chooses an earlier date that is subsequent to the Termination Date but before the last business day of the calendar year following the Termination Date.

(i) "Distribution Market Value" means the average closing price of a Corporation Share on the XXXXXXXXXX Stock Exchange for the XXXXXXXXXX trading days ending on the Distribution Date;

(j) "Dividend Equivalents" means a bookkeeping entry whereby a Participant's notional account will be credited with the equivalent amount of any dividend paid on a Corporation Share that would have been paid on a Deferred Share Unit if it were a Corporation Share;

(k) "Dividend Market Value" means the average closing price of a Corporation Share on the XXXXXXXXXX Stock Exchange for the XXXXXXXXXX trading days ending on the dividend payment date;

(l) "Election Form" means an election substantially in the form of Schedule A to the Plan;

(m) "Participant" means a person who is, at the relevant time, an executive or an employee of the Corporation that is designated as an eligible participant in the Plan by the Committee;

(n) "Participant's Bonus" means the performance bonus payable to a Participant under the Corporation's bonus policies for services provided during a fiscal year; and

(o) "Participant's Discretionary Bonus" means a sign-on bonus negotiated with certain key executives upon their accepting a position with the Corporation.

7. The terms of the Plan are as follows:

(a) The effective date of the Plan will be XXXXXXXXXX.

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

(c) Each Participant has the right to elect once each calendar year to receive not more than XXXXXXXXXX of his or her Participant's Bonus in Deferred Share Units by completing, signing and returning an Election Form to the Compensation and Benefits Department of the Corporation by XXXXXXXXXX of the fiscal year. The election will only be valid for that particular fiscal year. If an election is not made by a Participant for a fiscal year, the Participant's Bonus for that year shall be paid in cash. The total or part of a Participant's Discretionary Bonus may, at the sole discretion of the Committee, be received in Deferred Share Units, subject to the vesting conditions, if any, determined by the Committee at its sole discretion.

(d) The Participant will be allocated the elected proportion of his or her Participant's Bonus and the proportion of the Participant's Discretionary Bonus designated by the Committee in the form of Deferred Share Units which will be credited to the Participant's notional account. The number of Deferred Share Units (rounded to the nearest integer) to be credited to the Participant's notional account on the Award Date will be determined by dividing (a) the amount of the applicable portion of the Participant's Bonus or Participant's Discretionary Bonus to be deferred by (b) the Award Market Value.

(e) A Participant's notional account will be credited with Dividend Equivalents on each dividend payment date in respect of which ordinary course cash dividends are paid by the Corporation on a Corporation Share. The number of additional Deferred Share Units (rounded to the nearest integer) will be computed by dividing (a) the amount obtained by multiplying the amount of the dividend declared and paid per Corporation Share by the number of Deferred Share Units credited to the Participant's notional account on the record date for the payment of the dividend by (b) the Dividend Market Value.

(f) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than ordinary course cash dividends) of Corporation assets to shareholders, or any other changes affecting the Corporation Shares, such proportionate adjustments, to reflect such change or changes, shall be made with respect to the number of Deferred Share Units outstanding under the Plan and the Participant's notional account will be adjusted accordingly.

(g) On the Distribution Date, a Participant shall receive a lump sum payment in cash, net of the applicable withholding taxes, equal to the number of Deferred Share Units credited to the Participant's notional account on the Distribution Date multiplied by the Distribution Market Value. Upon payment in full of the value of the Deferred Share Units, they will be cancelled.

In lieu of the cash payment, the Participant may elect to receive the value of the Deferred Share Units, net of the applicable withholding taxes, in the form of Corporation Shares acquired on the open market. The Corporation Shares will be purchased through the XXXXXXXXXX Stock Exchange on the Participant's behalf by a broker designated by the Corporation. The Corporation will pay the transaction costs associated with the designated broker's acquisition of Corporation Shares on behalf of the Participant. The purchase shall be made on or before the Distribution Date. Any cash remaining after the maximum number of whole Corporation Shares are purchased for the Participant shall be paid to the Participant, less any applicable withholding taxes.

(h) Upon the death of a Participant prior to the distribution of the Deferred Share Units credited to his or her notional account under the Plan, a cash payment, net of the applicable withholding taxes, shall be made to the beneficiary named by the Participant for purposes of the Plan (or, in the absence of a valid designation of a beneficiary, to the Participant's estate). Such cash payment shall be equivalent to the lump sum cash amount computed in 7(g) above, calculated as if the Participant had previously ceased to be a Participant on the day prior to his or her death.

A Participant may designate in writing a person to receive the benefits payable under the Plan on the Participant's death, and may also by written notice to the Compensation and Benefits Department of the corporation alter or revoke such designation from time to time, subject always to the provisions of any applicable law. Such written notice shall be in such form and shall be executed in such manner as the Committee in its discretion may from time to time determine.

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

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

Purpose of the Proposed Plan

9. The purpose of the proposed plan is to enhance the Corporation's ability to attract and retain talented individuals to serve as officers and executives of the Corporation and to promote a greater alignment of interests between Participants and the shareholders of the Corporation.

Additional Information

10. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:

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

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

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

(d) is before the courts; or

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

Rulings Given

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

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

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

C. Except for those amounts identified in Rulings D and E below, no amount will be included pursuant to section 3, subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of a Participant in respect of the Deferred Share Units credited to his or her notional account under the Plan.

D. The amount to be included in the income of a resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(a) of the Act, the lump sum cash payment made by the Corporation to the Participant for his or her rights to the Deferred Share Units credited to the Participant's notional account as described in 7(g) above;

(b) under paragraph 6(1)(a) of the Act, the amount paid by the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in 7(g) above;

(c) under paragraph 6(1)(a) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in 7(g) above;

(d) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by the Corporation for the acquisition of the Corporation Shares distributed to the Participant by the broker as described in 7(g) above; and

(e) under paragraph 6(1)(a) of the Act, the cash payment made by the Corporation to the Participant for the remaining value of the Deferred Share Units credited to his or her notional account after the acquisition of the shares and the payment of the applicable withholding taxes as described in 7(g) above.

E. The amount to be included in the income of a non-resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the lump sum cash payment, to the extent it is attributable to services rendered in Canada, paid by the Corporation to the Participant for his or her rights to the Deferred Share Units credited to the Participant's notional account as described in 7(g) above;

(b) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in 7(g) above;

(c) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of applicable withholding taxes withheld by the Corporation as described in 7(g) above;

(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of brokerage fees paid by the Corporation for the acquisition of the Corporation Shares distributed to the Participant by the broker as described in 7(g) above; and

(e) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the cash payment paid by the Corporation to the Participant for the remaining value of the Deferred Share Units credited to his or her notional account after the acquisition of the shares and the payment of the applicable withholding taxes as described in 7(g) above.

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

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D and E above that are paid by the Corporation in a particular year in respect of Participant will be deductible by the Corporation 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.

The above rulings are based on the draft of the Plan that was submitted with the request and which is described in paragraph 7 above. Any substantive difference between this version and the final version of the Plan would invalidate the rulings provided.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate