2001 Ruling 2001-0075543 - DIRECTORS PHANTOM STOCK PLAN

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

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

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

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

Position: No.

Reasons: 6801(d) is satisfied.

XXXXXXXXXX 						2001-007554

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
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 common shares of the Corporation are principally traded on XXXXXXXXXX Stock Exchange. 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's address is XXXXXXXXXX. 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 ("Subco") is a taxable Canadian corporation and a public corporation. Subco is a wholly-owned subsidiary corporation of the Corporation.

Subco's address is XXXXXXXXXX. Subco files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3. The Corporation and Subco (hereinafter collectively referred to as the "Companies") have a fiscal year-end of XXXXXXXXXX. The Companies current fiscal quarters end on XXXXXXXXXX of each year.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. The Corporation has a Board of Directors and Subco has a Board of Directors. The individuals who serve on the Board of Directors of the Corporation serve concurrently as members of the Board of Directors of Subco. The Companies currently provide their directors that are not otherwise employees of the Corporation, Subco or any affiliate (as that term is defined in 3 of the Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3, entitled 'Retiring Allowances') with Directors' fees. The Directors' fees generally consist of an annual retainer fee for serving as a director, additional annual retainer fees for service as a member or chair of a committee of the board of directors and meeting fees for attending committee and general board meetings. Amounts paid for the reimbursement of expenses are not included in the Directors' fees. The Corporation is responsible for the portion of the fees that relates to Directors' services rendered as members of the Corporation's Board of Directors and Subco is responsible for the portion of the fees that relates to Directors' services rendered as members of Subco's Board of Directors. In respect of the proposed plan described below, the Corporation will continue to be responsible for the costs associated with the services provided by the members of its Board of Directors and Subco will continue to be responsible for the costs associated with the services provided by the members of its Board of Directors.

7. The Companies determine the amount of Directors' fees that they will pay to their non-employee directors prior to the commencement of the year. The portion of each director's fees that are referable to services performed in a fiscal quarter of the Corporation or of Subco becomes payable to the director at the end of that fiscal quarter. In general, at the end of each quarter, a director is paid XXXXXXXXXX% of his or her annual retainer fees and committee fees for the year and the amount owing for attendance of meetings held within that quarter.

Proposed Plan

8. The Companies will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its resident and non-resident non-employee directors. Unless otherwise determined by the XXXXXXXXXX, the Plan will be unfunded and will be administered by the XXXXXXXXXX. Each of the Corporation and Subco will be responsible for its share of the costs relating to the administration of the Plan, as determined by the XXXXXXXXXX A copy of the terms of the Plan was provided with your submission for an advance income tax ruling.

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

(a) "Affiliate" means an affiliate of the Corporation or Subco, as applicable, as the term "affiliate" is defined in 3 of the Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3, entitled 'Retiring Allowances';

(b) "Beneficiary" means an individual who, on the date of an Eligible Director's death, is the person who has been designated in accordance with section XXXXXXXXXX of the Plan and the laws applying to the Plan, or where no such individual has been validly designated by the Eligible Director, or where the individual does not survive the Eligible Director, the Eligible Director's legal representative;

(c) "Board" means the individuals who serve from time to time as the board of directors of the Corporation;

(d) "Broker" means a broker independent from the Corporation and any Related Corporation who has been designated by an Eligible Director and who is a member of XXXXXXXXXX Stock Exchange or, where the Common Shares are not listed on XXXXXXXXXX Stock Exchange, the stock exchange that is relevant for determining the value of the Deferred Share Units;

(e) "Committee" means the XXXXXXXXXX or such other persons designated by the Board;

(f) "Common Share" means a common share of the Corporation;

(g) "Conversion Date" means, with respect to any Quarter, the date used to determine the Fair Market Value for purposes of determining the number of Deferred Share Units to be awarded in respect of that Quarter to an Eligible Director, which date shall be the Date recommended by the Committee and confirmed by the Board and which, for the Quarter including the effective date of the Plan, shall be the last day of that Quarter and thereafter shall generally be the last day of each Quarter and, in any event, shall not be earlier than the first business day, or later than December 31, of the year in respect of which the Deferred Share Units are being provided;

(h) "Deferred Share Unit" means a unit credited by the Corporation or Subco to an Eligible Director by way of a bookkeeping entry in the books of the Corporation or Subco, as determined by the Board, pursuant to the Plan, the value of which at any particular date shall be the Fair Market Value at that date;

(i) "Directors' Annual Remuneration" means all amounts payable to an Eligible Director by the Corporation and/or Subco in respect of the services provided to the Corporation and/or Subco by the Eligible Director in a calendar year, including without limitation: (i) the annual base retainer fee for serving as a director; (ii) the annual retainer fee for serving as a member of a Board committee; (iii) the annual retainer fee for chairing a Board committee; and (iv) the fees for attending meetings of the Board of directors or Board committees, but, for greater certainty, excluding amounts received by an Eligible Director as a reimbursement for expenses incurred in attending meetings;

(j) "Eligible Director" means all directors of the Corporation and Subco who are not otherwise employees of the Corporation, Subco or any Affiliate;

(k) "Entitlement Date" means the date on which an Eligible Director has elected to have the Deferred Share Units credited to his or her account with the Corporation or Subco redeemed by the Corporation or Subco, respectively. The Eligible Director will file an irrevocable written election with the Committee within 30 days following his or her Termination Date. The date elected shall not be prior to the date that is 60 days after the Eligible Director's Termination Date and shall not be later than XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date. Where no election is filed by the Eligible Director within the required time, the Entitlement Date will be 60 days after the Eligible Director's Termination Date. An Eligible Director's Entitlement Date may be extended (i) where his or her Entitlement Date would have fallen between the record date and payment date for dividends on Common Shares, to the date immediately following the dividend payment date; (ii) where the Committee does not have the data necessary to calculate the Eligible Director's entitlement under the Plan, to the date on which the Committee obtains such data; or (iii) where the Eligible Director is in possession of material undisclosed information about the Corporation and/or the Common Shares, to the earliest of the date on which the Eligible Director ceases to be in possession of such information, the date on which the Committee elects to pay the Eligible Director's entitlement under the Plan in cash or XXXXXXXXXX of the calendar year commencing immediately after his or her Termination Date;

(l) "Fair Market Value" means, with respect to any particular date, the average closing price of a Common Share on XXXXXXXXXX Stock Exchange, or if the Common Shares are not listed on XXXXXXXXXX Stock Exchange, on such other stock exchange in Canada on which the Common Shares are listed, or if the Common Shares are not listed on any stock exchange, then on the over-the-counter market, on the five trading days prior to that date on which at least one board lot of Common Shares was traded;

(m) "Minimum Amount" means the minimum amount of Directors' Annual Remuneration required to be elected by Eligible Directors to be satisfied by Common Shares and/or Deferred Share Units, being an amount equal to XXXXXXXXXX of the aggregate annual base retainer paid by the Corporation and Subco to Eligible Directors;

(n) "Quarter" means a fiscal Quarter of the Corporation or Subco as the context requires, which, until changed by the Corporation or Subco, as the case may be, shall be the three month period ending XXXXXXXXXX in any calendar year;

(o) "Related Corporation" means a corporation related to the Corporation for purposes of the Act and, unless inconsistent with the context, includes Subco; and

(p) "Termination Date" means the earliest date on which all of the following conditions are met: (i) the Eligible Director has ceased to be a member of the Board; (ii) the Eligible Director has ceased to be a member of the board of directors of Subco; and (iii) the Eligible Director is neither an employee of the Corporation, Subco or an Affiliate, nor a member of the board of directors of an Affiliate.

10. The terms of the Plan are as follows:

(a) Subject to the receipt by the Corporation of such approval, if any, by the shareholders of the Corporation as the Corporation or its advisors deem necessary or desirable to implement the Plan in accordance with applicable law, the effective date of the Plan will be the later of XXXXXXXXXX and the date on which the Corporation receives an advance income tax ruling confirming that the Plan meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations").

(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 shall complete and deliver to the Secretary of the Corporation an initial written election by no later than XXXXXXXXXX business days before the end of the Quarter that includes the effective date of the Plan, which shall apply to the Eligible Director's Directors' Annual Remuneration payable on or after the end of such Quarter. The Eligible Director's written election shall designate the percentage (in whole percentages only), if any, of the Directors' Annual Remuneration that is:

(i) to be provided in the form of Deferred Share Units;

(ii) to be provided in the form of Common Shares; and

(ii) to be paid in cash.

An Eligible Director may change the form or forms of payment of his or her Directors' Annual Remuneration for subsequent years by completing and delivering to the Secretary of the Corporation a new written election by no later than the last business day of the year preceding the first year in which the Directors' Annual Remuneration that is subject to the new election becomes payable.

The amount so designated to be satisfied by Common Shares, Deferred Share Units or a combination thereof for any year shall not be less than the Minimum Amount for the year, provided that this requirement to designate the Minimum Amount shall not apply in respect of a particular year if the Eligible Director has:

(iv) XXXXXXXXXX; or

(v) XXXXXXXXXX.

An Eligible Director may, however, designate less than the Minimum Amount in respect of a particular year in order to attain during that year the minimum aggregate level of Common Shares and Deferred Share Units set out in (iv) above.

Where an Eligible Director has not provided an election that complies with the above requirements, the Eligible Director will be deemed to have elected to have the Minimum Amount for that year satisfied by Common Shares and the balance paid in cash unless, in accordance with the foregoing requirements, the Eligible Director is not required to designate the Minimum Amount, in which case he or she will be deemed to have elected to be paid all of his or her Directors' Annual Remuneration for the applicable year in cash.

(d) Where an Eligible Director has elected to receive a portion of his or her Directors' Annual Remuneration in Common Shares, the Corporation and/or Subco, as the case may be, will pay the elected proportion of the Directors' Annual Remuneration, net of the applicable withholding taxes, to the Eligible Director's Broker to be used to purchase Common Shares on the open market on behalf of the Eligible Director. An amount that would give rise to a fractional share shall be paid in cash, as described in (f) below. The Common Shares so purchased by the Broker will be dealt with in accordance with the instructions of the Eligible Director.

(e) Where an Eligible Director has elected to receive a portion of his or her Directors' Annual Remuneration in Deferred Share Units, the Eligible Director will be allocated the elected proportion of his or her Directors' Annual Remuneration 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 Directors' Annual Remuneration to be credited in Deferred Share Units at that time, by (b) the Fair Market Value of Common Shares on the particular Conversion Date.

(f) Where an Eligible Director has elected to receive a portion of the Directors' Annual Remuneration payable to him or her in respect of a Quarter in cash, the Eligible Director will be paid cash, net of the applicable withholding taxes, as soon as practicable after the last day of the Quarter.

(g) 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 Common 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 Common 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 Fair Market Value of a Common Share on the date credited.

(h) 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 change in the capital of the Corporation affecting Common Shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change or changes, shall be made with respect to the number of Deferred Share Units outstanding under the Plan.

(i) The Deferred Share Units credited to an Eligible Director's notional account will not be payable until after the Eligible Director's Termination Date.

The redemption of the Deferred Share Units credited to an Eligible Director's notional account will only take place on, or as soon as practicable after, the Eligible Director's Entitlement Date. In any event, the redemption of Deferred Share Units credited to an Eligible Director will occur no later than December 31 of the year commencing immediately after the Eligible Director's Termination Date.

(j) The value of a Deferred Share Unit that will be redeemed by or in respect of an Eligible Director shall, after the deduction of any applicable withholding taxes, be used to purchase, on behalf of the Eligible Director or the Eligible Director's Beneficiary, as applicable, Common Shares on the open market. Prior to XXXXXXXXXX on the Entitlement Date or, where the Entitlement Date is not a trading day for Common Shares on the stock exchange which is relevant for determining the value of Deferred Share Units, on the next such trading day, the Committee shall notify the Broker as to the number of Common Shares to be purchased by the Broker on behalf of the Eligible Director on the open market. The number of Common Shares will be computed by taking the cash value of the redeemed Deferred Share Units on the Entitlement Date, net of the applicable withholding taxes, and dividing by the Fair Market Value of a Common Share on the Entitlement Date. The Broker will purchase on the open market the number of Common Shares which the Committee has requested the Broker to purchase. The Broker will notify the Eligible Director, or the Eligible Director's Beneficiary, and the Committee of: (i) the aggregate purchase price of the Common Shares; (ii) the purchase price per share or, if the Common Shares were purchased at different prices, the average purchase price (computed on a weighted average basis) per share; (iii) the amount of any related brokerage commissions; and (iv) the settlement date for the purchase of the Common Shares. On the settlement date, the Corporation and/or Subco, as the case may be, will pay the aggregate purchase price and the related commissions related to the Eligible Director to the Broker. The Corporation and/or Subco, as the case may be, will make a cash payment, net of any applicable withholding taxes, to the Eligible Director or the Eligible Director's beneficiary in respect of any fractional Deferred Share Units still credited to the Eligible Director's notional account once the Common Shares have been acquired by the Broker on behalf of the Eligible Director.

The Corporation shall have the right to pay, or cause Subco to pay, the value of an Eligible Director's Deferred Share Units in a lump sum cash payment, net of any applicable withholding taxes, on the Entitlement Date and shall be fully discharged of its obligations under the Plan in so doing.

(k) 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 Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

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

11. 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 Regulations, or any successor provision thereto.

12. The Committee may prescribe election forms for use by Eligible Directors who are residents of a jurisdiction other than Canada that differ from the election form filed with the request for an advance income tax ruling on the Plan, which applies to Canadian residents, where necessary or desirable to obtain comparable treatment for the Plan, the Eligible Directors or the Companies under the laws and regulatory policies of such other jurisdiction as is provided under the Act and other applicable Canadian federal and provincial laws and regulatory policies. In any event, the terms of an election form prescribed for use by a non-resident Eligible Director will be such that they will not cause the Plan to cease to meet the requirements of paragraph 6801(d) of the Regulations.

Purposes of the Proposed Plan

13. The Plan will be established:

(a) to promote a greater alignment of interests between Eligible Directors and the shareholders of the Corporation;

(b) to provide a compensation system for Eligible Directors that is reflective of the responsibility, commitment and risk accompanying membership on the Board or board of directors of Subco;

(c) to assist the Companies to attract and retain individuals with experience and ability to act as directors of the Companies; and

(d) to allow Eligible Directors to participate in the long-term success of the Corporation.

Additional Information

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

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

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

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

(d) before the courts; nor

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

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 cash payments paid by the Companies to the Eligible Director as described in 10(d), 10(f) and 10(j) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Companies to an Eligible Director's Broker to purchase Common Shares on the open market as described in 10(d) and 10(j) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Companies as described in 10(d), 10(f) and 10(j) above; and

(d) under paragraph 6(1)(a) of the Act, the amount of commissions paid to the Broker by the Companies as described in 10(d) and 10(j) 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 cash payments, to the extent attributable to services rendered in Canada, paid by the Companies to the Eligible Director as described in 10(d), 10(f) and 10(j) 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 by the Companies to an Eligible Director's Broker to purchase Common Shares on the open market as described in 10(d) and 10(j) above;

(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 Companies as described in 10(d), 10(f) and 10(j) above; and

(d) under paragraph 6(1)(a) of the Act, the amount of commissions paid, to the extent attributable to services rendered in Canada, to the Broker by the Companies as described in 10(d) and 10(j) above.

F. The amount payable by the Companies to the Eligible Director's Beneficiary or the 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 excluded 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 respect of its Eligible Directors, and by Subco in respect of its Eligible Directors, in a particular year will be deductible by the Corporation in respect of its amounts paid, and by Subco in respect of its amounts paid, 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 70-6R4 dated January 29, 2001, 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 10 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