2001 Ruling 2001-0092683 - PHANTOM STOCK PLAN EMPLOYEE BONUSES

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 employee cash awards in the form of deferred share units result in a salary deferral arrangement?

Position: No.

Reasons: The conditions of 6801(d) continue to be satisfied.

XXXXXXXXXX 							2001-009268

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in the ruling request is:

(i) in an earlier return of the Corporation or a related person,

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation or a related person,

(iii) under objection by the Corporation or a related person,

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor

(v) the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

Facts

1. The Corporation is a company incorporated under the laws of Canada, a resident of Canada and a public corporation. The Corporation's common shares are listed on XXXXXXXXXX. The expression "public corporation" has the meaning assigned by subsection 89(1) of the Act.

2. XXXXXXXXXX.

3. The Corporation and certain of its Subsidiaries, including XXXXXXXXXX ("Canco") and its subsidiaries, currently have short-term incentive programs for its officers and employees (a "STIP"). Under the STIP, incentive payments are approved by senior management and/or a committee generally responsible for compensation related matters (the "Committee") based on various factors throughout a particular period as determined by the Committee from time to time (an "Award Period"). In the absence of any such determination by the Committee, the Award Period for the Corporation and its Subsidiaries shall be the period commencing on XXXXXXXXXX and ending on XXXXXXXXXX. With respect to Canco and its subsidiaries, the Board of Directors of the Corporation has confirmed that the period commencing on XXXXXXXXXX and ending XXXXXXXXXX shall constitute an Award Period. Cash awards that may be payable to officers and key employees under the STIP are determined and paid in the calendar quarter following the Award Period to which the award relates (as to the Award Period commencing on XXXXXXXXXX and terminating on XXXXXXXXXX, the "Mid-Year STIP Payout"; as to any other Award Period, the "Final STIP Payout").
4. The Corporation has also established a deferred share unit plan entitled "XXXXXXXXXX" (the "DSU Plan") for the benefit of its officers and key employees and officers and key employees of related corporations (collectively, the "Eligible Key Employees"). The Canada Customs and Revenue Agency issued advance income tax rulings (#964182 dated XXXXXXXXXX, 1997) and supplemental advance income tax rulings (#970163 dated XXXXXXXXXX, 1997, #970485 dated XXXXXXXXXX, 1997, #970984 dated XXXXXXXXXX, 1997 and #2000-000416 dated XXXXXXXXXX, 2000) in respect of the DSU Plan (hereinafter collectively referred to as the "Ruling Letters").

In the Ruling Letters and the DSU Plan documentation, the DSU Plan is referred to as the "Plan".

Unless otherwise indicated, all capitalized terms herein shall have the meanings assigned thereto in the amended and restated version of the DSU Plan dated XXXXXXXXXX.

5. As presently drafted, the DSU Plan precludes participation in any other annual short-term incentive plan with respect to a calendar year. The closing paragraph of Section 5 of the DSU Plan reads as follows:

"An Eligible Key Employee who elects or is required, under this Section 5, to participate in the Plan with respect to any particular calendar year shall not be eligible to participate, with respect to the same calendar year, in the Annual Short-Term Incentive Program or, in the case of Key Employees of the Corporation, in the Restricted Share Program."

This means that in order to participate in the DSU Plan, the Eligible Key Employees must opt out of the STIP altogether for the relevant calendar year.

6. The Corporation has since determined that it is appropriate to allow Eligible Key Employees, with respect to any particular Award Period, to elect to participate in both the STIP and the DSU Plan. Accordingly, the Corporation wishes to amend the DSU Plan (i) to allow an Eligible Key Employee to participate, in whole or in part, in the DSU Plan for any particular Award Period by electing to have a percentage of the cash award that would otherwise be payable to such Eligible Key Employee under the STIP allocated, in lieu of a cash payment, in the form of Deferred Share Units under the DSU Plan, and (ii) to make certain other modifications regarding the operation and administration of the DSU Plan.

Proposed Amendments

7. The Corporation will amend the DSU Plan in order to allow Eligible Key Employees to participate, in respect of a particular Award Period, in whole or in part, in the DSU Plan by electing, prior to having any legal entitlement to receive an award under the STIP for the particular Award Period, to have a percentage of the cash awards, if any, that would otherwise be payable to such Eligible Key Employees under either the Mid-Year STIP Payout or the Final STIP Payout allocated, in lieu of a cash payment, in the form of Deferred Share Units under the DSU Plan. The principal features of the proposed amendments are as follows:

(a) Each Eligible Key Employee who is eligible for participation in the DSU Plan for a particular Award Period will be given the right to elect in respect of that Award Period whether to participate in whole or in part in the DSU Plan. Each Eligible Key Employee who elects to participate wholly or partly in the DSU Plan for a particular Award Period will be eligible to receive an award under the DSU Plan based on the same criteria as the STIP for that Award Period, but the award will be expressed in Deferred Share Units rather than a cash payment.

(b) If the Eligible Key Employee elects (i) to participate partly in the DSU Plan for a particular Award Period (by electing to have a portion of the cash awards, if any, that would otherwise be payable to such Eligible Key Employee under either the Mid-Year STIP Payout or the Final STIP Payout allocated in the form of Deferred Share Units) or (ii) to participate wholly in the DSU Plan for a particular Award Period (by electing to have the entire cash award, if any, payable under the Mid-Year STIP Payout or the Final STIP Payout, as the case may be, allocated in the form of Deferred Share Units), that Eligible Key Employee will be required to so elect in writing on or before the date (the "Election Expiry Date") that is the second to last business day of the particular Award Period, which election shall specify the extent, expressed as a percentage, to which such Eligible Key Employee elects to participate in the DSU Plan. Such election may be revoked or modified if written notification of such revocation or modification is received by the Corporation on or before the Election Expiry Date for that particular award.

(c) An Eligible Key Employee who elects or is required as described in 8(e) below, to participate in the DSU Plan for a particular Award Period shall only be eligible to participate, with respect to the same Award Period, in the STIP, to the extent that the amount actually payable under the STIP to such Eligible Key Employee does not exceed the product obtained by multiplying X and Y, where X is the result obtained by subtracting from one (1) the percentage elected by the Eligible Key Employee to be paid in the form of Deferred Share Units, and Y is equal to the cash payment that would otherwise have been awarded under the STIP to an Eligible Key Employee for a particular Award Period, if not for his/her participation in the DSU Plan.

(d) The number of Deferred Share Units to be credited to an Eligible Key Employee for a particular Award Period shall be based on the dollar amount of the Mid-Year STIP Payout and/or the Final STIP Payout (as the case may be) which the Eligible Key Employee has elected to be allocated in the form of Deferred Share Units for a particular Award Period, divided by the Market Value of a Corporation common share on the last trading day prior to the Effective Date for that particular Award Period.

8. The DSU Plan will be amended as follows:

(a) By inserting immediately after the words "Key Employees" at the end of the definition of "Annual Short-Term Incentive Program" in item (c) of Section 2 thereof the following words:

"including any advances or mid-year payouts which may be paid under such program;"

(b) By adding the following definitions in the appropriate alphabetical locations in Section 2 thereof and by rearranging the alphabetical listing of the current items accordingly:

"(d) "Award Period" has the meaning assigned thereto in Section 5 hereof;

(f) "Bonus Amount" has the meaning assigned thereto in Section 7 hereof;"

(o) "Election Expiry Date" has the meaning assigned thereto in Section 5 thereof;

(u) "Participation Level" has the meaning assigned thereto in Section 5 hereof;"

(c) By deleting the reference to "the XXXXXXXXXX" in the definition of "Market Value" in Section 2(s) of the DSU Plan.

(d) By replacing the words "the Participants and their" in the fourth sentence of Section 3 of the DSU Plan by the words "a Participant and such Participant's."

(e) By deleting Section 5 thereof in its entirety and replacing it with the following:

"The Committee, in its absolute discretion, shall determine in respect of a calendar year the particular period or periods for the Corporation and any of its Subsidiaries in respect of which Share Units may be awarded to Eligible Key Employees under Section 6 hereof (an "Award Period"). Unless otherwise determined by the Committee, the Award Period of the Corporation and any of its Subsidiaries shall be the period commencing on XXXXXXXXXX and ending on XXXXXXXXXX. An Eligible Key Employee may, with respect to any particular Award Period, elect to participate in the Plan. In order to elect to participate in the Plan in respect of any particular Award Period, an Eligible Key Employee shall complete and deliver to the Corporation a written election on or before the date (the "Election Expiry Date") that is the second to last business day of the particular Award Period, which election shall specify, in percentage form (the "Participation Level"), the extent to which such Eligible Key Employees elects to participate in the Plan for that Award Period. Such election may be revoked or modified if written notification of such revocation or modification is received before the Election Expiry Date.

Notwithstanding the foregoing, but subject to confirmation by the Board, the Committee may, in its sole discretion, with respect to any particular Award Period, require one or more Eligible Key Employees, or one or more classes of Eligible Key Employees, to participate in the Plan even if such Eligible Key Employee(s) has not or have not elected to participate in the Plan. The Committee shall then establish the Participation Level of such Eligible Key Employee(s).

An Eligible Key Employee who elects or is required, under this Section 5, to participate in the Plan with respect to any particular Award Period shall only be eligible to participate, with respect to that particular Award Period, in the Annual Short-Term Incentive Program, to the extent that the amount actually payable to such Eligible Key Employee under the Annual Short-Term Incentive Program for the particular Award Period does not exceed the product obtained by multiplying X and Y, where X is the result obtained by subtracting from one (1) the Participation Level and Y is equal to the Bonus Amount, as defined in Section 7 hereof."

(f) The DSU Plan is hereby further amended by deleting Section 7 thereof in its entirety and replacing it with the following:

"In order to compute the number of Share Units to be awarded to an Eligible Key Employee under Section 6 hereof, the Committee shall determine an amount expressed in dollars (the "Dollar Amount") to be assigned to such Eligible Key Employee for the Award Period, which amount shall only be determined after the Election Expiry Date. The Dollar Amount shall be equal to the product obtained by multiplying the Participation Level and the Bonus Amount. The Bonus Amount shall be equal to the cash bonus which would, if not for an Eligible Key Employee's participation in the Plan, be awarded to such Eligible Key Employee under the Annual Short-Term Incentive Program for the Award Period. The number of Share Units (including fractional Share Units) to be awarded to an Eligible Key Employee under the Plan and credited to his or her account with respect to any particular Award Period shall be equal to the quotient obtained by dividing: (a) the Dollar Amount, by (b) the Market Value of a Common Share on the last trading day prior to the Effective Date."

9. Implementation of the amendments proposed herein shall be dependant upon the approval of the Board of Directors of the Corporation, that was received at a meeting held in XXXXXXXXXX and the receipt of a favourable advance income tax ruling from the Canada Customs and Revenue Agency.

Additional Information

10. For the Award Period of XXXXXXXXXX (coinciding with the XXXXXXXXXX Mid-Year STIP Payout), Eligible Key Employees were informed on XXXXXXXXXX that they would have until XXXXXXXXXX to make an irrevocable election to receive the XXXXXXXXXX Mid-Year STIP Payout in the form of Deferred Share Units. The determination of the number of Deferred Share Units to be credited to an Eligible Key Employee who has made an election in respect of the said Award Period was made on, and the Effective Date for purposes of determining the Market Value of a Common Share (for purposes of Section 7 of the DSU Plan) was, XXXXXXXXXX (being the date of the Board Meeting). The award of such Deferred Share Units and the Effective Date of the DSU Plan amendments shall be on the later of the date on which confirmation of the Board is obtained and the receipt of a favourable advance income tax ruling in respect of the proposed amendments. If a favourable advance income tax ruling is not obtained, the aforementioned elections made by the Eligible Key Employees shall be nul and void.

11. For subsequent Award Periods, Eligible Key Employees will be required to elect on or before the Election Expiry Date for such subsequent Award Periods.

Purpose of the Proposed Amendments

12. The purpose of the proposed amendments is to allow Eligible Key Employees to participate, in whole or in part, in the DSU Plan for a particular Award Period by electing to have all or a portion of either the Mid-Year STIP Payout or the Final STIP Payout (as the case may be) allocated, in lieu of a cash payment, in the form of Deferred Share Units under the DSU Plan. The proposed amendments will, therefore, provide Eligible Key Employees with improved flexibility and choice with respect to the receipt of short-term incentive awards.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendments, and purpose of the proposed amendments and provided the proposed amendments are completed as described in 7 and 8 above, we rule as follows:

A. The amendments described in 7 and 8 above will not disqualify the DSU Plan from being a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations").

B. Provided the DSU Plan and subsequent amendments to the DSU Plan were implemented prior to the deadlines set out in the Ruling Letters, the rulings issued in our Ruling Letters will continue to be binding on the Agency in accordance with the practice outlined in Information Circular 70-6R4, dated January 29, 2001. However, these rulings will be binding only in respect of the DSU Plan described in the Ruling Letters and may not be binding in the event the DSU Plan is amended, other than as described in 7 and 8 above.

C. No gain or loss shall be realized by an Eligible Key Employee as a consequence of the implementation of the amendments described in 7 and 8 above and no amount shall be included in the income of an Eligible Key Employee pursuant to section 3, subsection 5(1), paragraph 6(1)(a), subsection 6(3), paragraph 56(1)(a) or section 115 of the Act, solely as a result of the amendments proposed herein.

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 amendments are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch