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:
1. Will an employee/director of a public company that retires from office but retains his seat on the public company's board of directors be considered to have terminated his employment?
2. Can we accept that the value of phantom stock units under a 6801(d) plan will be based on the value of the post reorganization entities?
3. Can 6801(d) plan participants choose when amounts in respect of a terminated 6801(d) plan will be taxed?
4. Can we rule regarding SARs issued in XXXXXXXXXX under a new SAR Plan?
Position:
1. No.
2. No.
3. No.
4. No.
Reasons:
1. The position in ATR-12 and in paragraph 3 of IT-337R3 does not apply to a director of a public company.
2. The provisions of 6801(d) are clear, the value must be based on the value of the company or any related company. Since the post reorganization entities will not be related, the value can't be based on the value of the post reorganization entities.
3. The amounts become taxable at the time that the plan ceases to meet the conditions set out in 6801(d) of the Regulations. This would be when the Board of Directors accepts the termination of the 6801(d) plan.
4. We do not rule on completed transactions.
XXXXXXXXXX 2001-008561
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX )
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. 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:
Definitions
1. (a) "Act" means the Income Tax Act.
(b) "Board" means the Board of Directors of the Company.
(c) "CBCA" means the Canada Business Corporations Act.
(d) "Common Share" means the class of common shares of the Company listed for trading on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.
(e) "Compensation Committee" means the Management and Compensation Committee of the Board.
(f) "Market Value" means the average of the closing prices for a board lot of Common Shares on the XXXXXXXXXX Stock Exchange on the five trading days immediately preceding the particular event on which at least a board lot of Common Shares was traded.
(g) "Plan" means the Senior Executive Long-Term Incentive Plan of the Company as most recently revised on XXXXXXXXXX.
(h) XXXXXXXXXX.
Facts
2. The Company was incorporated under the CBCA on 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 Act.
The Company's head office is located at XXXXXXXXXX. The Company has a XXXXXXXXXX fiscal and taxation year end. The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
3. XXXXXXXXXX.
4. Subject to the XXXXXXXXXX the Company intends to undertake XXXXXXXXXX.
5. XXXXXXXXXX.
6. XXXXXXXXXX.
7. The Company and certain of its subsidiaries (XXXXXXXXXX) established the Plan effective XXXXXXXXXX. Participation in the Plan is only available to senior employees of the Company and its participating subsidiaries. The Plan was established for the stated purposes of increasing shareholder value by improving ongoing profitability and growth, increasing the proprietary interest of key executives of the Company, retaining and attracting key executives, relating financial rewards to the achievement of specific long-term goals, permitting an appropriate relativity between short-term and long-term compensation, and promoting entrepreneurial spirit. Historically, none of the Company or any of its subsidiaries has set aside funds in respect of any actual or potential obligations under the Plan. The participants in the Plan are not entitled to any amount under the Plan for the purpose of reducing the impact of a reduction in the fair market value of the Common Shares.
8. The Plan is administered by the Compensation Committee of the Board. Members of the Compensation Committee are not entitled to participate in the Plan. The Compensation Committee has full and complete authority to interpret the Plan and to make rules and regulations to administer the Plan.
9. At the beginning of XXXXXXXXXX (performance period), or at such other time or times as it may determine appropriate based on such criteria as the position, responsibilities, and potential for the particular participant, the Compensation Committee contingently allocates, at its sole discretion, some phantom stock units (the "Units") to each participant in the Plan. The Units are generally credited to the participant's notional account (the "Account") maintained by the Compensation Committee and they only vest after the attainment of certain performance goals.
10. The Plan provides for the following in respect of the allocation and crediting of Units, and the payment of the value of the Units credited to the participant's Account:
(a) Clauses XXXXXXXXXX
(i) Units are credited to the Accounts based on the achievement of certain performance criteria generally based on the financial results of the Company for participants who are employed by the Company, and the Company and the relevant subsidiary for participants that are employed by a subsidiary of the Company.
(ii) No Units are credited to a participant's Account for a performance period in which that person is terminated for any reason other than death or retirement. In the year of death or retirement, the number of Units to be credited will be determined by the Compensation Committee at its discretion.
(b) Clause XXXXXXXXXX - Additional Units are credited to the Accounts for dividends declared on the Common Shares. The number of Units credited for a particular participant is equal to the amount of the dividend per Common Share multiplied by the number of Units in the participant's Account divided by the Market Value of a Common Share on the dividend payment date.
(c) Clause XXXXXXXXXX - Upon ceasing to be employed by the Company or the relevant subsidiary of the Company, the Company or the appropriate subsidiary of the Company will pay the participant an amount equal to the number of Units credited to his or her Account multiplied by the Market Value of a Common Share on the date of the participant's termination of employment, less statutory withholding taxes.
(d) Clause XXXXXXXXXX - A participant can elect to defer calculation and receipt of the amount referred to in 10(c) until the end of the year following the year that he or she ceased his or her employment, in which case the amount paid will be calculated based on the Market Value of a Common Share on the deferred payment date.
11. The Plan also provides for the following:
(a) Clause XXXXXXXXXX - Upon the occurrence of certain "change in control" events (as defined in the Plan) and where the Plan participant's employment is subsequently terminated within XXXXXXXXXX years of the "change in control" date (without cause or because of retirement or death), the Company shall pay, within thirty days of the termination date, a lump sum in cash equal to the number of Units credited to his or her Account multiplied by the Market Value on the date of the "change in control" or the Market Value on the termination date if that day is more than one year after the date of the "change in control" event.
(b) Clause XXXXXXXXXX - In the event of certain corporate changes that affect the outstanding Common Shares (XXXXXXXXXX), the Compensation Committee shall make an equitable adjustment to the Units credited to the Account for each participant (and such other matters as may be required).
(c) Clause XXXXXXXXXX - the Board may amend, suspend or terminate the Plan at any time but such amendment shall not adversely affect the rights of the participants in the Plan to the Units credited to their Accounts without the consent of the particular participants.
12. There are currently XXXXXXXXXX participants in the Plan (the "Participants"). All of the Participants are senior employees of the Company or its subsidiary corporations and all of whom are individuals resident in Canada for purposes of the Act. As of XXXXXXXXXX, a total of approximately XXXXXXXXXX Units will have been credited to the Accounts maintained for the Participants. These Units relate to performance periods prior to XXXXXXXXXX.
13. The Participants will comprise the following groups:
(a) XXXXXXXXXX Hereinafter, these employees will be referred to as the "Terminated Participants".
XXXXXXXXXX
(b) XXXXXXXXXX will remain a director of the Company and he will only receive director's fees estimated to be less than 10% of his current annual remuneration from the Company. XXXXXXXXXX Hereinafter, these Participants will be referred to as the "Employed Participants".
(c) XXXXXXXXXX.
The Plan obligations relating to the Terminated Participants and the Employed Participants will be satisfied by the Company. The Plan obligations relating to the XXXXXXXXXX will be obligations of XXXXXXXXXX and the Plan obligations relating to the XXXXXXXXXX will be obligations of XXXXXXXXXX.
Proposed Transactions
14. The Board will terminate the Plan on the XXXXXXXXXX with the consent of the Participants and in consideration of such termination each Participant will be granted the right to be paid a cash settlement amount (the "Settlement Amount") on any business day between XXXXXXXXXX and XXXXXXXXXX (the "Settlement Date"). All of the Settlement Amounts will be paid by XXXXXXXXXX. The Company will pay the Settlement Amounts owing to the Terminated Participants and the Employed Participants. XXXXXXXXXX will make the required payment to the XXXXXXXXXX and XXXXXXXXXX will make the required payment to the XXXXXXXXXX.
15. Where the Participant chooses the effective date of the Reorganization as the Settlement Date, the Settlement Amount will be computed by taking the number of Units credited to the Account of the particular Participant multiplied by the Market Value of a Common Share as of XXXXXXXXXX.
16. Where the Participant chooses a Settlement Date that is subsequent to XXXXXXXXXX and on or before XXXXXXXXXX , the Settlement Amount will be computed by:
(a) converting each Unit into the number of shares of the Company and the XXXXXXXXXX; and
(b) computing the fair market value on the Settlement Date of the particular shares of the Company XXXXXXXXXX that the Participant's Units would have been converted into had the Units been Common Shares on XXXXXXXXXX. The fair market value of the shares will be computed by taking the average of the closing prices for a board lot of the particular shares on the XXXXXXXXXX Stock Exchange on the five trading days immediately preceding the Settlement Date.
Purpose of the Proposed Transactions
17. Since the majority of the Plan Participants will be terminated from their employment with the Company XXXXXXXXXX, the Company wants to wind-up the Plan and to payout the value of the Units in a manner that is consistent with the terms of the Plan.
18. 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. When cash is paid by the Company to a Terminated Participant or an Employed Participant in respect of his or her Settlement Amount, as described in 14 above, the Terminated Participant or Employed Participant, as the case may be, will include the amount paid by the Company, before any applicable withholding taxes, in his or her income under subsection 5(1) of the Act.
B. When cash is paid by XXXXXXXXXX to the XXXXXXXXXX for the XXXXXXXXXX Settlement Amount and by XXXXXXXXXX to the XXXXXXXXXX for the XXXXXXXXXX Settlement Amount, as described in 14 above, the cash paid, before any applicable withholding taxes, will be included in the recipient's income under subsection 5(1) of the Act.
C. Subject to paragraph 18(1)(a) and section 67 of the Act, any cash amounts referred to in Rulings A and B that are paid by the Company, XXXXXXXXXX, will be deductible by the particular payor 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 proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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