2001 Ruling 2001-0077933 - EBP, foreign s.d.a.

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

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

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

Principal Issues: Will a plan established by an foreign subsidiary of a Canadian public company qualify as an employee benefit plan for purposes of the Act?

Position: Yes.

Reasons: The conditions in each provision are satisfied.

XXXXXXXXXX 						2001-007793

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (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 transactions and purpose of the proposed transactions is as follows:

Facts

1. The Company is a XXXXXXXXXX, with its principal place of business in XXXXXXXXXX. The Company 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 Company's head office is located at XXXXXXXXXX. The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. On XXXXXXXXXX, the Company acquired XXXXXXXXXX ("Subco"), a XXXXXXXXXX corporation. Subco does not carry on business in Canada and it is an indirect, wholly-owned subsidiary of the Company.

3. Prior to the acquisition of Subco by the Company, Subco had established a deferred compensation plan (the "Subco Plan") for its senior management and certain other employees of itself and its subsidiaries (the "Subco Group"). Pursuant to the Subco Plan, an employee of the Subco Group was entitled to defer the receipt of a portion of their employment compensation related to the following year to a later date. Subco maintained notional accounts to which the deferred compensation was credited in respect of each participant in the Subco Plan. The return on the amounts credited to a participant's notional account was based on notional investments in various securities, including shares of Subco. Upon a pre-elected payout date (generally, the date of separation from the Subco Group), a participant would have been entitled to receive a cash payment equal to the balance credited to his or her notional account. However, where a portion of a participant's notional account was invested in notional shares of Subco, the participant was entitled to receive an equal number of shares of Subco.

4. As part of the Company's agreement to acquire Subco, the Company undertook to ensure that employees of the Subco Group would be provided with a deferred compensation plan similar to the Subco Plan.

5. Effective XXXXXXXXXX, Subco adopted a new deferred compensation plan (the "New Plan"). The New Plan is, for U.S. tax purposes, a non-qualified deferred compensation plan, pursuant to which employees of the Subco Group will be offered the opportunity to elect, on an annual basis, to defer receipt of a portion of their compensation in excess of $XXXXXXXXXX U.S. to be earned with respect to the upcoming year (the "Deferrable Compensation"). Employees of the Subco Group that are resident in Canada for purposes of the Income Tax Act (the "Act") are not eligible to participate in the New Plan. The terms of the New Plan include the following:

(a) The New Plan will be administered by a committee of the Board of Directors of Subco (the "Committee").

(b) With respect to the first year of the New Plan, a participant (a "Participant") must make their deferral elections within XXXXXXXXXX days of the New Plan's adoption. In each year thereafter, Participants must elect no later than XXXXXXXXXX of the year immediately preceding the year in which the Deferrable Compensation will be earned. With respect to Participants who are hired in a year and are eligible to participate in the New Plan, the Participants must elect to participate in the New Plan within XXXXXXXXXX days of his or her initial employment with the Subco Group.

(c) A Participant's election will provide the percentage of his or her Deferrable Compensation that is to be withheld from the following year's salary (the "Voluntary Deferred Compensation"). The Committee may designate a percentage of a Participant's Deferrable Compensation that must be deferred under the New Plan (the "Mandatory Deferred Compensation").

(d) Through his or her election, a Participant will select the investments that his or her Voluntary Deferred Compensation will be notionally invested in for purposes of the New Plan. Consequently, the Voluntary Deferred Compensation may, depending upon the investments chosen, be credited to one or more notional accounts maintained for the Participant. A Participant may choose to invest in notional common shares of the Company and the portion of the Voluntary Deferred Compensation earmarked by the Participant to be invested in such shares will be notionally credited to an account for such shares (the "Stock Account"). All of a Participant's Mandatory Deferred Compensation will be invested in notional common shares of the Company and such amounts will also be credited to the Participant's Stock Account. A Participant is not allowed to transfer amounts credited to his or her Stock Account to any other notional account maintained for him or her under the New Plan. A Participant that elects to invest part or all of his Voluntary Deferred Compensation in notional common shares of the Company and a Participant with Mandatory Deferred Compensation may become entitled to an employer matching of notional shares credited to his or her Stock Account at such time or times as the Committee, in its sole and absolute discretion, shall determine. When the Company pays a dividend on its common shares, a Participant's Stock Account will be credited with additional shares computed by taking the amount of dividends that would have been received in respect of the notional shares credited to the Participant's Stock Account and dividing by the fair market value of a common share of the Company on the date the dividend is paid. The amount credited will be in whole shares rounded down and the amount related to fractional shares will be credited to another of the Participant's notional accounts.

(e) Upon electing to participate in the New Plan, a Participant will also make an irrevocable election with respect to the timing of the distribution of the amounts credited to his or her notional accounts, including his or her Stock Account (the "Distribution Date"). Generally, a Participant may elect to have such distribution made either (i) on the earlier of any specified date (XXXXXXXXXX) and the date of his or her cessation of employment with the Subco Group (the "Separation Date") (other than a cessation of employment due to death, disability or termination for cause) or (ii) on the Separation Date.

(f) At the request of Subco, the Company will be the obligor for all accounts except for the amount of Mandatory Deferred Compensation credited to a Participant's Stock Account and any employer matching related to the Mandatory Deferred Compensation. Subco will be the obligor for these amounts. However, for Participants who are residents of the States of XXXXXXXXXX for U.S. tax purposes, the Company will be the obligor for all of the Participant's notional accounts under the New Plan.

(g) On the Distribution Date, a Participant will receive common shares of the Company in respect of the amounts credited to his or her Stock Account. The number of common shares of the Company will be reduced by the number of common shares of the Company that equals the amount of tax that must be withheld on the value of the common shares of the Company to be distributed to the Participant in respect of the shares credited to the Participant's Stock Account. All distributions from the Participant's other notional accounts will be in cash and subjected to normal U.S. withholding taxes.

(h) All amounts credited to notional accounts for Participants under the New Plan are subject to the claims of creditors of the Company and Subco in the event of their insolvency or bankruptcy. The rights of Participants in the New Plan to the amounts credited to their notional accounts will be no greater than the rights of any other general, unsecured creditor of the Company or Subco.

6. Under U.S. securities laws, the voluntary deferral of an amount by a Participant under the New Plan may constitute the purchase of a security by the Participant. If Subco were the issuer of the security, it would have to comply with burdensome U.S. federal and state regulatory requirements. The regulatory requirements are less onerous if the Company became the issuer of the deferred compensation obligations under the New Plan because its common shares trade on the XXXXXXXXXX k Stock Exchange and it is already subject to public reporting requirements under U.S. securities laws. To accommodate Subco, the Company agreed to be an obligor under the New Plan in respect of amounts payable to Participants under the New Plan from each of the notional accounts, other than the notional Stock Accounts. Consequently, the Company and Subco have entered into an agreement pursuant to which Subco will indemnify the Company for any costs it incurs pursuant to its obligations under the New Plan (the "Chargeback Agreement").

Proposed Transactions

7. A trust (the "Trust") will be established to purchase common shares of the Company on the open market as amounts are allocated to a Participant's Stock Account under the New Plan. The Company and Subco will be the settlors of the Trust and the Trust will be a "rabbi trust" for U.S. tax purposes. It is proposed that Subco will provide the Trust with the funds that it will need to acquire common shares of the Company.

8. The principal terms of the Trust will be as follows:

(a) the Trust will be formed pursuant to the laws of XXXXXXXXXX;

(b) the only trustee of the Trust will be a resident of the United States;

(c) the Company and Subco will be settlors of the Trust (the "Settlors"). The Company will contribute a nominal amount of money ($XXXXXXXXXX) or a gold coin to the Trust. In addition, in accordance with the Chargeback Agreement, Subco will provide the Trust with such funds as are necessary to purchase common shares of the Company to satisfy the New Plan's future obligations to its Participants;

(d) the assets of the Trust and any earnings thereon will be used exclusively for the purposes of the New Plan and, in the event of the insolvency of the Settlors, the general creditors of the Settlors;

(e) the Trust will make distributions to the Participants in accordance with a schedule provided to the trustee by the Committee. The Committee may determine that the Company, as obligor under the New Plan (or Subco on behalf of the Company, in accordance with the Chargeback Agreement) shall directly satisfy a Participant's scheduled distribution under the New Plan, in which case the Committee shall notify the trustee of the Trust and the trustee will not make the scheduled distribution to the Participant;

(f) if the Trust assets are insufficient to make scheduled payments of benefits in accordance with the terms of the New Plan, the Company (or Subco on behalf of the Company, in accordance with the Chargeback Agreement) shall pay the amount of such shortfall directly to the Participant;

(g) in the event of the insolvency of a Settlor of the Trust, payments from the Trust to Participants shall cease, and in accordance with the terms of the Trust, the assets of the Trust will be used for the benefit of the general creditors of the Settlors;

(h) except as provided in (g) above, the Trust is irrevocable, and the Settlors have no power to direct the trustee to return to either Settlor or to divert to any other person the assets of the Trust before all payments of benefits have been made to the Participants pursuant to the New Plan;

(i) the Company shall have the right, at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This power of substitution will be included in the trust agreement solely because it is a requirement of the U.S. tax authorities in order to maintain the status of the Trust as a rabbi trust. It is not contemplated that the Company will ever utilize this power of substitution; and

(j) on termination of the Trust, any assets remaining in the Trust will be distributed to the Company.

Purpose of the Proposed Transactions

9. The purposes of the proposed transactions are to:

(i) pre-fund the liability to deliver common shares of the Company to Participants in the New Plan;

(ii) minimize the cost of providing the common shares should there be an increase in the fair market value of the common shares of the Company; and

(iii) eliminate the need to issue common shares from the Company's treasury, including the dilutive effects associated therewith.

Additional Information

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

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

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

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

(d) is before the courts; or

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

Rulings Given

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

A. The Trust will constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.

B. By virtue of the exception provided under paragraph (l) of the definition of retirement compensation arrangement in subsection 248(1) of the Act, the Trust will not constitute a retirement compensation arrangement for purposes of the Act.

C. By virtue of the exception provided in paragraph 75(3)(a) of the Act for property held in a taxation year by a trust governed by an employee benefit plan, subsection 75(2) of the Act will not apply to the Trust.

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 proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate