2001 Ruling 2001-0080393 - 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's fees in the form of deferred share units result in an SDA?

Position: No.

Reasons: 6801(d) is satisfied.

XXXXXXXXXX 			2001-008039

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX ("ACo").

Definitions

Certain terms are defined as follows for the remainder of this ruling:

a) "Act" means the Income Tax Act (Canada), as amended from time to time.

b) "Average Share Price" means the average of the closing sale prices for board lots for the Shares on XXXXXXXXXX Stock Exchange and for record lots for the Shares as reported on XXXXXXXXXX Stock Exchange - Consolidated Trading, on each day during the last five trading days prior to the date on which DSUs are awarded with respect to a Quarter pursuant to the Plan, the dividend declaration date or the Redemption Date, any currency conversion being made at the Bank of Canada noon rate of exchange on the relevant day.

c) "Board" means those individuals who serve from time to time as the Board of Directors of ACo.

d) "Committee" means the Personnel Committee of the Board and any successor committee, or such other persons as may be designated by the Board.

e) "Deferred Share Unit", or "DSU" means a unit credited by ACo to a Member by way of a bookkeeping entry in the books of ACo, pursuant to Plan, the value of which, as of a particular date, shall be equal to the Average Share Price.

f) "Director" means a director of ACo.

g) "Director's Annual Remuneration" means all amounts payable to a Non-Executive Director by ACo in respect of the services provided to ACo by the Non-Executive Director in a calendar year.

h) "Employee" means an employee (otherwise than in the capacity of a director) of ACo or of any company in which ACo can hold more than XXXXXXXXXX percent of the outstanding voting shares.

i) "Member" means an individual who joins the Plan in accordance with the terms of the Plan.

j) "Non-Executive Director" means a Director of ACo who is not an Employee.

k) "Plan" shall have the meaning ascribed thereto in 5 and 6 below.

l) "Quarter" means a fiscal quarter of ACo, which until changed by the Board, shall be the three month period commencing 1 January, 1 April, 1 July or 1 October in any calendar year.

m) "Redemption Date" with respect to a Member who has a Retirement Date, shall be the day specified by or in respect of the Member in an election filed with the secretary of ACo and shall not be prior to the date that is at least XXXXXXXXXX business days from the date of delivery of such notice to ACo and shall not be later than 15 December of the first calendar year commencing after the Director's Retirement Date. Where a Member fails to make an election within the above-mentioned period, his or her Redemption Date shall be 15 December of the first calendar year commencing after the Director's Retirement Date.

In any event, the payment of the Member's benefits under the Plan will take place no later than 31 December of the first calendar year commencing after the Director's Retirement Date.

n) "Retirement Date" means the date on which a Member ceases to be a Director.

If a Member becomes an Employee but continues to be a Director, his or her membership in the Plan shall be suspended effective the date of the commencement of his employment and shall resume upon termination of such employment. If prior to the termination of his or her employment such Member ceases to be a Director, the Member's Retirement Date shall be deemed to be the date he or she ceases to be an Employee.

o) "Share" means a common share of the capital stock of ACo.

p) "Spouse" means the person, who, on the day preceding the death of a Member, is the person who has been designated in accordance with the Plan and who is legally married to the Member or, in the event the Member is not married, the person who qualifies as a spouse under the laws applying to the Plan.

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

Facts

A. ACo is incorporated under the laws of Canada and has its head office in XXXXXXXXXX. ACo is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. Effective XXXXXXXXXX, the legal name of ACo was changed from XXXXXXXXXX. The Shares of ACo are traded principally on XXXXXXXXXX ACo has a fiscal year-end of XXXXXXXXXX. ACo is the parent company of an international group involved in XXXXXXXXXX. ACo has approximately XXXXXXXXXX registered holders of its Shares.

B. ACo currently provides Non-Executive Directors with Director's Annual Remuneration which includes all amounts paid by ACo to the Directors in respect of the services they perform as directors of ACo, other than amounts paid as a reimbursement of expenses. Director's Annual Remuneration currently comprises annual retainer fees for serving as a director, additional annual retainer fees for service as a member or chair of a committee of the Board and meeting fees for attending committee and general board meetings. Existing Directors, and individuals who became Directors in XXXXXXXXXX and thereafter, have been granted deferred share units pursuant to the terms of a plan governed by paragraph 6801(d) of the Income Tax Regulations (the "Current DSU Plan"), which plan is the subject of an advance tax ruling from Canada Customs and Revenue Agency ("CCRA") dated XXXXXXXXXX, 1997 (XXXXXXXXXX) (the "XXXXXXXXXX 1997 Ruling"). Pursuant to the XXXXXXXXXX 1997 Ruling, Directors received deferred share units based on a portion of fees payable to the Director for services as a Director, Chairman of the Board, a member of a Board committee or chairman of a Board committee during the year.

C. The amount of Director's Annual Remuneration for a year is determined by the Board prior to the commencement of the year. The portion of Director's Annual Remuneration referable to services performed in a Quarter by a Non-Executive Director becomes payable to the Non-Executive Director at the end of the Quarter.

Proposed Transactions and Plan

D. Effective XXXXXXXXXX, further deferred share units in respect of Director's Annual Remuneration for the Quarter commencing XXXXXXXXXX and subsequent Quarters will not be provided under the Current DSU Plan. In all other respects, the Current DSU Plan will continue to operate in accordance with its terms and the XXXXXXXXXX 1997 Ruling (specifically, the second paragraph in part XXXXXXXXXX of the XXXXXXXXXX 1997 Ruling).

E. ACo will establish a new incentive plan for Non-Executive Directors (the "Plan") effective XXXXXXXXXX, subject to receipt of an advance income tax ruling from CCRA that the Plan is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations ("Regulation 6801(d)"). The Plan will comprise a plan text and written elections by each Non-Executive Director setting out the terms of the Non-Executive Director's participation in the Plan. You have provided a copy of the proposed text of the Plan.

F. The Plan includes the following terms:

a) The Plan will be administered by the Committee.

b) With respect to Director's Annual Remuneration relating to the Quarter commencing XXXXXXXXXX and subsequent Quarters, each Member will be required to receive XXXXXXXXXX% of his or her Director's Annual Remuneration in the form of DSUs and will be permitted to elect to receive the remaining XXXXXXXXXX% of his or her Director's Annual Remuneration in the form of cash or DSUs or a combination thereof by filing a written election with the secretary of ACo within the time periods described below for such elections, specifying, in whole percentages, the percentage of his or her Director's Annual Remuneration to be provided in cash and DSUs. Notwithstanding the above, the Committee has the right, in its sole discretion, to require payment of a Member's Director's Annual Remuneration solely in cash or DSUs or a combination of cash and DSUs as determined by the Committee.

c) For the first year in which the Plan is effective, Members will be given until the day that is XXXXXXXXXX business days before the end of the Quarter that includes the effective date of the Plan to make an election with respect to the electable portion of his or her Director's Annual Remuneration payable on and after the end of such Quarter.

d) Where there is no election that complies with the foregoing requirements in effect under the Plan for a Member in respect of a particular year, he or she will be deemed to have elected to receive all of his or her electable Director's Annual Remuneration for that year in cash.

e) A Member may change his or her election with respect to the form of payment of his or her Director's Annual Remuneration for a particular year by filing a new written election with the secretary of ACo on or before the last business day of the calendar year immediately prior to the particular year, specifying, in whole percentages, the percentage of his or her electable Director's Annual Remuneration for the particular year to be provided in cash and DSUs. Such an election shall continue in force with respect to Director's Annual Remuneration for subsequent years, subject to the Member's right to change his or her election, as described in this paragraph.

f) The number of DSUs credited to a Member for a Quarter shall be determined by dividing the amount of his or her Director's Annual Remuneration to be satisfied by DSUs on such date by the Average Share Price on such date. DSUs granted to a Member as described above shall be credited to the Member's account under the Plan on the first day following the end of every applicable Quarter. The portion of Director's Annual Remuneration payable in cash in respect of a Quarter shall be paid as soon as practicable after the last day of the applicable Quarter.

g) DSUs will be fully vested upon being awarded to a Member.

h) In the event that any cash dividend is declared and paid by ACo on Shares, a Member shall be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the total amount of the dividends that would have been paid to the Member if the DSUs in the Member's account were Shares, determined as at the declaration date of such dividends, by the Average Share Price on the date on which the cash dividends are declared on the Shares.

i) In the event of a reorganization, recapitalization, reclassification, stock split, stock dividend, combination of shares, merger, amalgamation or consolidation, or the sale, conveyance, lease or other transfer by ACo of all or substantially all of the assets of ACo, pursuant to any of which such events the then outstanding Shares are split or combined or changed into, become exchangeable at the holder's election for, or entitle the holder thereof to, other shares of stock, or any similar change in the Shares or other similar event, each Member's account shall be adjusted in an equitable manner to reflect such change or other event. Such adjustment shall be made by the Committee and shall be conclusive and binding for all purposes of the Plan. Except as described in this section, Members shall have no other rights as a result of any change in the Shares or of any other event.

j) No amount will be paid and no other benefit will be granted to, or in respect of a Member under the Plan or pursuant to any other arrangement, in order to compensate for a downward fluctuation in the price of Shares.

k) ACo shall maintain in its books an account for each Member recording at all times the number of DSUs standing to the credit of the Member. Upon payment in satisfaction of DSUs credited to a Member in the manner described below, such DSUs shall be cancelled.

l) On his or her Redemption Date, a Member, the Member's Spouse or the Member's legal representative, as applicable, shall be entitled to redeem the DSUs credited to the Member's account on that date and receive an amount equal to the number of DSUs standing to the Member's credit on the Redemption Date, multiplied by the Average Share Price on that date.

m) The amount payable to a Member (or the Member's Spouse or legal representative, as applicable), as determined above, net of applicable withholdings, will be used, as elected by the Member, to acquire Shares on the open market through an independent broker designated by the Member or will be paid in cash, or in a combination of cash and purchase of Shares as described in this section. ACo will also make a cash payment, net of applicable withholdings, to the Member or the Member's Spouse or legal representative, as the case may be, with respect to fractional DSUs still standing to the Member's credit after the maximum number of whole Shares has been purchased as described above.

n) Except as specifically set out in the Plan, no Member or other person shall have any claim or right to any Shares or other benefit in respect of DSUs granted pursuant to the Plan. Neither the Plan nor any award thereunder shall be construed as granting a Member a right to be retained as a member of the Board or a claim or right to any future grants of DSUs or other benefits under the Plan. Neither the Plan nor any action taken thereunder shall interfere with the right of ACo to terminate the membership of such Director on the Board. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Member to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Member be considered the owner of Shares by virtue of the Plan until after the date of the purchase of such Shares on the open market as referred to above.

o) The Plan may be amended or terminated in whole or in part at any time by the Board, provided that no such amendment or termination shall, unless required by law, adversely affect the rights of any Member with respect to benefits to which he or she is then entitled under the Plan and any amendment or termination shall be such that the Plan continuously meets the requirements of Regulation 6801(d) or any successor to such provision.

Purpose of the Proposed Plan

G. The purpose of the proposed plan is:

a) to promote a greater alignment of interests between Members and the shareholders of ACo; and

b) to assist ACo to attract and retain talented individuals to act as directors of ACo.

Additional Information

The tax account number of ACo is XXXXXXXXXX. ACo files its income tax returns at XXXXXXXXXX Taxation Centre.

The mailing address of ACo is:

XXXXXXXXXX.

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

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

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

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

(d) before the courts; or

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

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and 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 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" ("SDA"), as contained in subsection 248(1) of the Act.

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

C. 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.

D. Except as provided in Rulings E and F 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 computing the income of any Member in respect of the DSUs that are credited under the Plan to a Member.

E. The amount to be included in the income of a resident Member 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 Aco to the Member as described in 6(m) above;

b) under paragraph 6(1)(c) of the Act, the amount paid by Aco to the Member's designated broker, including any commissions, to purchase Shares on the open market as described in 6(m) above;

c) under paragraph 6(1)(c) of the Act, the amount paid by Aco to the Member's Spouse or legal representative, as a result of the Member's death, as described in 6(m) above; and

d) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by Aco as described in 6(m) above.

F. The amount to be included in the income of a non-resident Member 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 Aco to the Member as described in 6(m) 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 Aco to the Member's designated broker to purchase Shares on the open market, including any commissions, as described in 6(m) 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, paid by Aco to the Member's Spouse or legal representative, as a result of the Member's death, as described in 6(m) above; and

d) 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 ACo as described in 6(m) above.

G. An amount payable under the Plan to a Member's Spouse or legal representative as a result of the Member's death will constitute a right or thing for purposes of subsection 70(2) of the Act.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, the amounts referred to in E and F above will be deductible by ACo in calculating its income in respect of the year in which the payment is made, 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 6 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