2000 Ruling 2000-0058793 - PHANTOM STOCK PLAN, DIRECTORS

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

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

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

Principal Issues: Will the payment of Director fees in the form of deferred share units result in an SDA?

Position: No.

Reasons: 6801(d) is satisfied.

XXXXXXXXXX 							2000-005879

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter 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 a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning 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.

2. XXXXXXXXXX.

3. The Corporation's common shares are listed and traded on XXXXXXXXXX. The Corporation had XXXXXXXXXX common shares outstanding as at XXXXXXXXXX.

4. The Corporation currently pays members of its board of directors an annual board retainer, fees for chairing a committee of the board of directors, fees for attending meetings of the board of directors or committees of the board of directors and additional fees for non-resident directors. These fees are paid quarterly in arrears for the period ending on January 31, April 30, July 31 and October 31.

Proposed Plan

5. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its resident and non-resident directors. Unless otherwise determined by the Board of Directors of the Corporation, the Plan will be unfunded and will be administered by the Corporate Governance 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 terms of the Plan was provided with your submission for an advance income tax ruling.

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

(a) "Affiliate" means 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 Income Tax Act (the "Act");

(b) "Annual Amount" means the portion of the annual board retainer payable by the Corporation to an Eligible Director in a financial year for service on the Board which has been designated by the Board to be payable under the Plan;

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

(d) "Committee" means the Corporate Governance Committee of the Board or such other person(s) designated by the Board;

(e) "Deferred Share Unit" means a bookkeeping entry credited to a notional account maintained for each Eligible Director on a deferred basis, the value of which at any particular time shall be equal to the average of the high and low price of a Share on XXXXXXXXXX Stock Exchange on the day immediately before the date in issue;

(f) "Eligible Director" means a person who, as of any applicable date, is a member of the Board and is not otherwise an officer or employee of the Corporation or any of its direct or indirect subsidiaries;

(g) "Share" means a common share of the Corporation and such other share as is added thereto or substituted therefore as a result of amendments to articles of the Corporation, a reorganization or otherwise; and

(h) "Trading Day" means any date on which XXXXXXXXXX Stock Exchange is open for the trading of shares.

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 Eligible Director who participates in the Plan and elects to receive Deferred Share Units in order to carry out the objectives of the Plan, more particularly described below.

(c) Each Eligible Director has the right to elect to participate in the Plan. Except as provided below, the Eligible Director must file a notice of election in the form of Schedule A attached to the Plan documents (the "Election Notice") with the Corporate Secretary at least thirty days before the commencement of a fiscal year. With respect to an Eligible Director appointed during a fiscal year, the Eligible Director will have to elect as soon as practicable after such appointment effective as of his or her date of appointment. The Election Notice will permit the Eligible Director to choose to receive his or her Annual Amount as follows:

(i) in Deferred Share Units; or

(ii) in Shares purchased on the open market.

An Eligible Election will apply until it is changed by the Eligible Director in accordance with the terms of the Plan.

For the fiscal year commencing XXXXXXXXXX, the Election Notice shall be filed with the Corporate Secretary of the Corporation no later than XXXXXXXXXX with respect to the fiscal quarter commencing XXXXXXXXXX and thereafter.

(d) Where an Eligible Director has elected to receive his or her Annual Amount in Shares, the Corporation will pay the elected proportion of the Annual Amount, net of withholding taxes, to the Eligible Director's investment account to be used to purchase Shares on the open market. Shares so purchased will be dealt with in accordance with the instructions of the Eligible Director.

(e) Where an Eligible Director has elected to receive his or her Annual Amount in Deferred Share Units, the Eligible Director will be allocated the elected proportion of his or her Annual Amount payable for a quarter in the form of Deferred Share Units which will be credited to the Eligible Director's notional account. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited will be determined by dividing (a) the amount of the applicable portion of the Annual Amount to be credited in Deferred Share Units at that time by (b) the average of the high and low price of a Share on the last Trading Day immediately preceding the date of such payment.

(f) An Eligible Director's notional account will be credited with additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Corporation on its Shares. The number of additional Deferred Share Units will be computed by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Share by the number of Deferred Share Units recorded in the Eligible Director's notional account on the record date for the payment of such dividend, by (b) the average of the high and low price of a Share on the Trading Day immediately preceding the date of such payment.

(g) 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 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.

(h) The Deferred Share Units credited to an Eligible Director's account will not be payable until after the Eligible Director's retirement, termination or death. Retirement and termination mean an event causing the Eligible Director to no longer be a director or employee of the Corporation, or a person related to the Corporation or an Affiliate.

The Eligible Director or his or her estate will be permitted to elect a redemption date within the period following the Eligible Director's retirement, termination or death and ending on XXXXXXXXXX of the first calendar year after the Eligible Director's retirement, termination or death.

(i) The value of a Deferred Share Unit that will be paid on the redemption date will be the average of the high and low price of a Share on XXXXXXXXXX Stock Exchange on the last Trading Day immediately before that date. The Corporation will make a lump-sum cash payment, net of any applicable withholding taxes, to the Eligible Director or his or her estate, as soon as practicable after the redemption date, provided that in any event such payment date shall be no later than XXXXXXXXXX of the first calendar year commencing after the Eligible Director's retirement, termination or death.

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

(k) Deferred Share Units are not Shares and will not entitle an Eligible Director to any shareholder rights, including without limitation, voting rights, dividend entitlement or rights on liquidation

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 an Eligible Director 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 Plan will be established to promote a greater alignment of interests between Eligible Directors and the shareholders of the Corporation and to assist the Corporation in attracting and retaining persons with experience and ability to act as directors 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. Provided that the Plan remains unfunded, 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 an Eligible Director 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 Eligible Director for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to an Eligible Director's investment account to purchase Shares on the open market as described in 7(d) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid to an Eligible Director in respect of the Deferred Share Units credited to his or her notional account as described in 7(i) above; and

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in 7(d) and 7(i) above.

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

(a) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, paid by the Corporation to an Eligible Director's investment account to purchase Shares on the open market as described in 7(d) above;

(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, paid to an Eligible Director in respect of the Deferred Share Units credited to his or her notional account as described in 7(i) above; and

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

F. The amount payable by the Corporation to the named beneficiary or estate of an Eligible Director as a result of the Eligible Director's death will constitute a right or thing held by the deceased Eligible Director at the time of death for purposes of subsection 70(2) of the Act.

G. 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.

H. 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 an Eligible Director 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, the terms of which are described in 7 above, that was submitted with the request. 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