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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Will the payment of a percentage of annual commissions and bonuses in the form of deferred share units result in an SDA?
Reasons: The conditions of paragraph 6801(d) of the Regulations are satisfied.
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)
This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation.
We understand that to the best of your knowledge, and that of the Corporation, none of the items involved in this ruling request is:
a) in an earlier return of our client or a related party;
b) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of our client or a related person;
c) under objection by our client or a related person;
d) before the courts; nor
e) the subject of a ruling previously issued to our client by the Directorate.
Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:
1. The Corporation is a taxable Canadian corporation that is controlled indirectly by XXXXXXXXXX ("ParentCo"). The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
2. The Business Number of the Corporation is XXXXXXXXXX. The Corporation deals with XXXXXXXXXX Tax Services Office located at XXXXXXXXXX and files its tax returns at the XXXXXXXXXX Tax Centre. The head office of the Corporation is XXXXXXXXXX.
3. The Corporation has established a comprehensive benefit program for its employees that includes a registered pension plan, a short-term bonus plan, insurance and medical programs.
4. Employees are remunerated on a cash basis, depending on their job classification, as follows:
a. salary plus discretionary performance bonus;
b. salary plus commissions based on sales contracts plus discretionary performance bonus;
c. salary plus commissions based on sales contracts; and
d. commissions based on sales contracts plus discretionary performance bonuses.
5. The Corporation proposes to establish a deferred compensation plan for eligible employees of XXXXXXXXXX, a division of the Corporation (the "Plan"). The Plan will be effective from the date this advance tax ruling is issued.
6. An employee will be eligible to participate in the Plan, depending on his or her job classification, as follows:
a. Comissioned Sales
Employees who achieve $XXXXXXXXXX gross commission income in the immediate preceding calendar year or such other amount as the Corporation determines from time to time.
Executives who are entitled in the immediate preceding calendar year to participate in the Corporation's short-term bonus plan.
c. Sales Managers
Sales managers who have attained or maintained XXXXXXXXXX manager status or Regional Manager status in the immediate preceding calendar year.
An employee must re-qualify each year (e.g., have annual commission income greater than $XXXXXXXXXX) to participate in the Plan for the following year.
7. Notwithstanding paragraph 6, the Corporation in its sole discretion, may invite other employees to join the Plan at any time or waive, change, or increase existing criteria or introduce such further conditions that employees must meet in order to participate in the Plan.
8. Each year a qualifying employee will be given the option to participate in the Plan. An employee who elects to participate in the Plan (the "Participant") will elect to defer a percentage of his or her annual cash compensation that is derived from annual commissions ("Commissions") and/or annual discretionary performance bonuses ("Bonus"). This election will be made in advance of the time that the Participant would otherwise be entitled to receive the Bonus or Commissions in cash. Elections must be made within the time limit established by the Corporation and filed with the Corporation annually. An election, once made, may not be revoked for the year to which it relates.
9. A minimum amount of XXXXXXXXXX% of Commissions must be deferred. A minimum of $XXXXXXXXXX of Bonus must be deferred. The maximum amount that may be deferred in any one year is limited to XXXXXXXXXX% of the Employee's annual cash remuneration including Bonus and Commission. The Corporation may unilaterally adjust the amount deferred so that the maximum is not exceeded.
10. Under the Plan, a phantom stock unit will be created. One phantom stock unit will represent one common share of the ParentCo ("Common Share"). The value of the phantom stock unit will be equal to the value of one Common Share.
11. Each Participant will be allocated phantom stock units under the Plan. The number of phantom stock units allocated to a Participant will be equal to the amount of compensation deferred by the Participant divided by the value of the phantom stock unit.
12. A Participant will have no legal ownership or beneficial interest in the Common Share by virtue of the phantom stock unit. For greater certainty, a phantom stock unit will not entitle a Participant to any shareholder rights, including without limitation, voting rights, dividend entitlements or rights on liquidation.
13. A notional account will be established for each Participant ("Notional Account"). The number of phantom stock units allocated to the Participant and the value of those units will be recorded in the Notional Account. The amounts credited to the Notional Account shall be recorded as a book reserve of the Corporation. The Notional Account will not be funded in any way.
14. In the event of any stock dividend, cash dividend, stock split, combination or exchange of shares, consolidation, spin off or other distribution affecting the fair market value of the Common Shares, the number of phantom stock units credited to a Participant's Notional Account will be adjusted accordingly.
15. A Participant may appoint a beneficiary to receive amounts under the Plan in the event of the Participant's death, as follows:
a. the beneficiary will be the Participant's spouse;
b. if the Participant does not have a spouse, the Participant may designate a person related by blood, marriage or adoption; and
c. if there is no person described in paragraph a) or b), above, "beneficiary" will mean the Participant's estate.
16. Subject to paragraph 17, a Participant will be immediately vested in the phantom stock units allocated to him or her under the Plan. However, a Participant will have no right to receive any benefits under the Plan until termination of employment, retirement or death.
17. If a Participant's employment is terminated for breaching the Corporation's written code of conduct, the Participant will forfeit an amount equal to the lesser of:
a. the amount deferred in respect of the year of termination and the XXXXXXXXXX years immediately preceding the year of termination; and
b. the fair market value of the phantom stock units at the time of termination allocated in respect of the time period described above.
However, all other phantom stock units will be paid to the Participant as described in paragraph 16.
18. Benefits will be distributed to a Participant, or to the Participant's beneficiary in the event of his death, no later than the end of the calendar year immediately following the year in which the Participant retires, terminates employment or dies. The amount of benefits payable to a Participant will depend on the value of the phantom stock units in his or her Notional Account, in the period commencing one year before the Participant's retirement, termination of employment or death and ending with the date of payment. Benefits will be paid in cash.
19. The Plan will be administered by a committee or persons appointed by the Corporation. The Corporation will pay all costs and expenses associated in establishing the Plan. The Corporation may charge an annual administration fee, based on the value of the units allocated to a Participant's Notional Account, to each Participant's Notional Account. However, no annual administration fee will be charged for the first Plan year. This fee, if any, may be altered from time to time.
20. The Plan may be amended or terminated by the Corporation at any time. However, no such amendment will adversely affect the phantom stock units allocated to the Participant's Notional Account. On termination of the Plan, the phantom stock units will remain to the credit of the Participant's Notional Account until the Participants subsequent termination of employment, retirement, or death, whichever occurs first. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously satisfies the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.
Purpose of the Proposed Plan
21. The purpose of establishing the Plan is to encourage the retention of employees of the Corporation who are believed to contribute significantly to the financial success of the Corporation.
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 constitute a prescribed plan or arrangement as defined in paragraph 6801(d) of the Regulations and will therefore be excluded from the definition of salary deferral arrangement as contained in subsection 248(1) of the Act.
B. Provided that the Plan remains unfunded, the Plan will not constitute a retirement compensation arrangement as defined in subsection 248(1) of the Act.
C. No amount will be included in the income of a Participant as a result of allocating phantom stock units to the Participant's Notional Account under subsection 5(1), paragraph 6(1)(a), subsection 56(2) or paragraph 56(1)(a)(i) of the Act.
D. All payments under the Plan to the Participants will be included in the income of the recipient in the year the payment is received as employment income under section 5 of the Act.
E. An amount payable under the Plan to a beneficiary, as described under 15 above, as a result of the Participant's death, will constitute a right or thing held by the deceased Participant at the time of death for purposes of subsection 70(2) of the Act.
F. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments in the year under the Plan referred to in Ruling D, and any costs incurred by the Corporation in the year in establishing the Plan, will be deductible in computing the Corporation's income 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.
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch
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