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 certain amendments to a 6801(d) plan cause the plans to no longer qualify under 6801(d) of the Regulations? In particular, the calculation of DSUs to be granted will use a 30 day average rather than a 5 day average of the closing price of the shares of the corporation on the stock exchange.
Position:
No.
Reasons:
The plans have been amended to include a method of determining fmv which better suits the purposes of the plans. The amendments do not offend the provisions of paragraph 6801(d). In particular, the requirement relating to the fair market value of the shares of the corporation in respect of amounts received under the plan under paragraph 6801(d)(ii) is only that amounts received under the arrangement must "depend" on the fair market value of shares of the corporation.
XXXXXXXXXX 2001-010130
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Parentco")
XXXXXXXXXX ("Subco")
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of Parentco and Subco (collectively, the "Companies").
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.
References to the "Ruling" herein are to the ruling dated XXXXXXXXXX, 2000 (2000-004324), which was the subject of supplemental ruling 2001-006969, dated XXXXXXXXXX, 2001 (the "Supplemental Ruling"), both issued by the Canada Customs and Revenue Agency. Unless stated otherwise, defined terms in this letter are as defined in the Ruling, as amended by the Supplemental Ruling.
We understand that, to the best of your knowledge and that of the Companies, none of the issues involved in the ruling request is:
in an earlier return of the Companies or a related person,
being considered by a tax services office or tax centre in connection with a previously-filed tax return of the Companies or a related person,
under objection by the Companies or a related person,
before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, nor
the subject of a ruling previously issued by the Directorate other than the Ruling and Supplemental Ruling.
Our understanding of the facts, proposed amendments and purpose of the proposed amendments is as follows:
Facts
Parentco established the DSU Plan effective XXXXXXXXXX in accordance with the Ruling. Pursuant to 5b of the Ruling, Eligible Executives have made their elections to participate in the DSU Plan for the XXXXXXXXXX calendar years. Earlier this year, Management Incentive Compensation (as defined in the DSU Plan ) under the SMIP was determined for the XXXXXXXXXX calendar year and DSUs were credited to the Eligible Executives' Accounts who elected to participate in the DSU Plan for XXXXXXXXXX.
As of the date of this letter, Eligible Executives have not yet made their elections to participate in the DSU Plan for the XXXXXXXXXX (or any subsequent) calendar year. In addition, awards of DSUs under the XXXXXXXXXX in respect of the period ended XXXXXXXXXX and awards of DSUs under the XXXXXXXXXX in respect of the period ended XXXXXXXXXX are not yet payable or even determinable under the terms of those plans.
The initial public offering of Shares closed on XXXXXXXXXX. Under the DSU Plan, DSUs to be awarded to Eligible Executives for a Performance Period are to be based on the Fair Market Value of a Share determined as at December 31 of the immediately preceding calendar year (i.e., the average closing price over the last five trading days prior to December 31 of the applicable year), except for the XXXXXXXXXX Performance Period (when the Fair Market Value was calculated as of XXXXXXXXXX). Therefore, the first Performance Period for which Fair Market Value was calculated as at December 31 of the immediately preceding calendar year was XXXXXXXXXX.
In the last 5 trading days of XXXXXXXXXX, when the Fair Market Value was being established for the purposes of the grant of DSUs for the XXXXXXXXXX Performance Period, the Companies noted a significant increase in trading activity in Shares and significantly greater volatility (both upwards and downwards) in the price of Shares than during other periods of the year. As a result, the price of the Shares averaged over the last 5 trading days prior to XXXXXXXXXX did not, for the purposes of the DSU Plan, appear to be truly reflective of the value of an equity interest in Parentco at the commencement of the XXXXXXXXXX Performance Period.
The DSU Plan currently provides for DSUs to be granted only where an Eligible Executive has elected to receive Management Incentive Compensation in the form of DSUs or is entitled to benefits under one or both of the XXXXXXXXXX Plans. The DSU Plan does not currently authorize Parentco or Subco to grant DSUs as an incentive that is based on criteria in addition to or other than those taken into account under the SMIP and/or the XXXXXXXXXX Plans, or to require that an Eligible Executive remain employed for a certain period of time (or meet some other employment-related condition) in order to vest with respect to DSUs granted to him or her.
Proposed Amendments
Pursuant to its amending power under the DSU Plan, Parentco proposes to amend the DSU Plan, with effect from the date on which a ruling is received that the DSU Plan as amended meets the requirements of a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations ("Regulation 6801(d)"), in order to: (i) provide that, for purposes of granting DSUs to Eligible Executives who have elected to receive their potential Management Incentive Compensation relating to years after XXXXXXXXXX in the form of DSUs and for purposes of granting DSUs in respect of the XXXXXXXXXX year period ended XXXXXXXXXX under the XXXXXXXXXX and in respect of the XXXXXXXXXX year period ended XXXXXXXXXX under the XXXXXXXXXX, "Fair Market Value" as of a the relevant Conversion Date will be calculated on the basis of the average closing price of a Share on the thirty trading days prior to the particular date; (ii) provide that, for all other purposes, "Fair Market Value" as of a particular date will be calculated on the basis of the average closing price of a Share on the ten trading days prior to the particular date; (iii) give the Committee discretion to grant DSUs to Eligible Executives in addition to or in lieu of DSUs granted pursuant to an Eligible Executive's election under the DSU Plan or pursuant to the XXXXXXXXXX Plans and the DSU Plan, which discretionary DSUs may vest over time or upon satisfaction of conditions, as determined by the Committee; and (iv) to more accurately reflect the roles of the Committee and the Board (based on the Companies' current internal corporate governance structure) with respect to the DSU Plan and the XXXXXXXXXX Plans.
Purpose of the Proposed Amendments
Change in "Fair Market Value" for Incentive and XXXXXXXXXX Plan Grants
The main objectives in calculating the Fair Market Value applicable to DSUs awarded in respect of Management Incentive Compensation on the basis of Share prices at the end of a year immediately preceding a particular Performance Period is to provide Eligible Executives who elect, under the DSU Plan, to receive a portion of their potential incentive compensation award under the SMIP in DSUs with an award that reflects the increase in real value of Parentco over the relevant Performance Period and to put such Eligible Executives in a similar position to an average Shareholder who holds Shares at the beginning of such Performance Period and enjoys an increase or suffers a decrease in such value over that Performance Period.
In the case of DSUs awarded pursuant to the XXXXXXXXXX Plans, the Conversion Date is the last day of the applicable XXXXXXXXXX Performance Period. The purpose of the XXXXXXXXXX Plans is, inter alia, to reward the "leaders" of the Companies for contributing to the long-term success of the Companies' business, which is expected to be reflected in an increase in the value of Parentco.
As noted above, XXXXXXXXXX was the first year in which Shares were traded publicly. Therefore, XXXXXXXXXX was the first year in which the Companies had an opportunity to assess whether or not the Fair Market Value calculation appropriately reflected the value of an equity interest in Parentco at the start of a Performance Period under the SMIP and the last day of a XXXXXXXXXX Performance Period, which, as indicated in the immediately preceding paragraphs, was the primary rationale for requiring the calculation of the Fair Market Value as of December 31 of the year immediately prior to a Performance Period for DSUs awarded in respect of Management Incentive Compensation and as of December 31 of the last year of a XXXXXXXXXX Performance Period for DSUs awarded under the XXXXXXXXXX Plans. The Companies have no reason to believe that similar volatility in the price of the Shares will not occur over the last few days of each calendar year.
The main purposes of the proposed amendment to the definition of Fair Market Value in the DSU Plan to provide for the averaging of Share prices over a thirty day period in the circumstances outlined above is to ensure that Eligible Executives who elect under the DSU Plan to receive all or some portion of their potential incentive compensation under the SMIP for a Performance Period in the form of DSUs and Eligible Executives who are awarded DSUs pursuant to the XXXXXXXXXX Plans, receive DSU awards at the end of the applicable Performance Period or XXXXXXXXXX Performance Period (as applicable) that are not based on temporary upwards or downwards fluctuations in the price of Shares at the end of a year due to factors over which the Eligible Executives have no direct control and which are not primarily related to their performance as executives of Parentco or Subco. The use of a thirty day average is intended to "smooth out" the more volatile upwards and downwards fluctuations that would distort an average calculation over five days at the end of a calendar year.
Change in the Definition of "Fair Market Value" for Other Grants and Redemptions
Due to the changes in the trading volume of Shares that occur from time to time, there can be significant short-term increases and decreases in Share values. As a result, the Companies have concluded that it would be more equitable and result in the value attributed to DSUs more closely representing the true value of an equity interest in Parentco if the Fair Market Value (for purposes other than the granting of DSUs on account of Management Incentive Compensation as elected by Eligible Executives or pursuant to the XXXXXXXXXX Plans) was based on a average closing price of Shares over a slightly longer period than the five days provided for in the DSU Plan originally.
The Companies considered basing Fair Market Value on a thirty day average for all purposes under the DSU Plan and have concluded that it is not necessary at this time to base Fair Market Value on a thirty day average for purposes other than granting DSUs on account of Management Incentive Compensation or pursuant to the XXXXXXXXXX Plans because the highest level of trading activity in the Shares (and thus the greatest opportunity for short-term fluctuations to have a disproportionately large effect on Fair Market Value) appears to occur at the end of a calendar year. The calculation of DSU values for purposes of grants on account of Management Incentive Compensation and pursuant to the XXXXXXXXXX Plans must, under the terms of the DSU Plan and the XXXXXXXXXX Plans, occur at December 31 but no Eligible Executive is forced to redeem his or her DSUs at December 31, discretionary grants of DSUs are not required to be made at December 31 and, while some DSUs awarded as dividend equivalents may be granted as at December 31, most of these "dividend equivalent DSUs" will be granted as at other dates during a year (based on the current practice of paying quarterly dividends).
In addition, it is administratively more time consuming and complex to calculate Fair Market Value based on a thirty day average Share price than a ten day average Share price. In view of the fact that DSU redemption dates and the award dates for "discretionary DSUs" and "dividend equivalent DSUs" are generally not required to be December 31, the potential inequity to Eligible Executives of using a ten day average Share price for purpose of determining Fair Market Value for redemptions of DSUs generally and grants of "discretionary DSUs" and "dividend equivalent DSUs" rather than a thirty day average Share price has not, in the view of the Companies, been demonstrated to be so great as to justify the additional administrative time (and cost) required if the longer averaging period were used for all purposes under the DSU Plan.
Granting Discretionary DSUs
The proposed provision permitting the Committee to grant DSUs on a discretionary basis to Eligible Executives is intended to enable the Companies to provide a new form of compensation to Eligible Executives that is not based solely on the specific factors used to determine incentive compensation under the SMIP but may relate to performance of special projects for Parentco or a Related Corporation, a desire to retain a particular Eligible Executive, or other matters related to an Eligible Executive's employment with Parentco or a Related Corporation. This provision would also permit the Committee to require an Eligible Executive to remain with Parentco and/or Subco for a certain period of time or satisfy certain other conditions in order to vest with respect to these "discretionary DSUs".
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of the relevant facts, proposed amendments and purpose of the proposed amendments, and provided that the proposed amendments are made as described above, we rule as follows:
Provided the DSU Plan, as amended by the Supplementary Ruling, and the amended XXXXXXXXXX Plans, were implemented prior to the deadline set out in the Ruling, the rulings issued in the Ruling will continue to be binding on the Canada Customs and Revenue Agency in accordance with the practice outlined in Information Circular 70-6R4 dated January 29, 2001.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the Canada Customs and Revenue Agency provided that the proposed amendments are made by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch
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