2001 Ruling 2001-0104223 - DIRECTORS FEES

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 Director's fees in the form of deferred share units (DSUs) constitute an SDA for purposes of the Act? At the option of the employer, the DSUs may be redeemed on termination of employment in the form of shares purchased on the open market or in cash.

Position: No.

Reasons: The provisions of Regulation 6801(d) are satisfied.

XXXXXXXXXX 							2001-010422

XXXXXXXXXX, 2001

Dear XXXXXXXXXX

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

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your letter dated XXXXXXXXXX, which included amendments to your letter of XXXXXXXXXX and the draft plan originally submitted.

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 plan and transactions is as follows:

Facts

1. The Corporation is incorporated under the laws of XXXXXXXXXX, is a resident of Canada, a "taxable Canadian corporation" and a "public corporation". The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Act.

2. XXXXXXXXXX.

3. The shares of the Corporation are publicly traded on the XXXXXXXXXX Stock Exchanges. The Corporation has a fiscal year-end of XXXXXXXXXX.

The Corporation files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

4. The Corporation currently has a Board of Directors composed of XXXXXXXXXX directors.

5. For the present term of office, the Corporation is paying its non-employee directors an annual retainer of XXXXXXXXXX $XXXXXXXXXX (the "Annual Retainer Fee").

6. A recent trend among leading public corporations is to pay a portion of each director's compensation based on the value of the Common Shares of the corporation, thereby rewarding the directors for the creation of shareholder value and instilling a proprietary interest in the corporation. In response to that trend, the Corporation is contemplating the establishment of a long-term stock based compensation program, more particularly described below.

Proposed Transactions

7. The Corporation will establish "XXXXXXXXXX" (the "Plan") for the benefit of non-employee directors of the Corporation both resident and non-resident in Canada (the "Eligible Directors"). Directors of the Corporation who are employees of the Corporation or of one of its subsidiaries will not be eligible to participate in the Plan.

8. Certain terms are defined in the Plan as follows:

a) "Annual Retainer Fee" means the amount, expressed in dollars, of the annual retainer fee which would, but for the Plan, be payable in cash by the Corporation to an Eligible Director for one year of service as a member of the Board, beginning on the date of the annual general meeting of the Corporation at which an Eligible Director is elected and ending on the date immediately preceding the date of the following annual general meeting of the Corporation, and for greater certainty, Annual Retainer Fee shall exclude any other fee which may be payable by the Corporation to the Eligible Director.

b) "Board" means the Board of Directors of the Corporation.

c) "Broker" means a Broker who is independent from the Corporation and who is a member of the stock exchange which is relevant for determining the value of Share Units.

d) "Common Share" means a common share without nominal or par value of the Corporation.

e) "Effective Date" has the meaning assigned in Section XXXXXXXXXX of the Plan and is as reflected in 14 below.

f) "Entitlement Date" has the meaning assigned in Section XXXXXXXXXX of the Plan and is as reflected in 10(d) below.

g) "Market Value" on any particular day means the market value of one Common Share of the Corporation on such day which, (1) for Eligible Directors resident in XXXXXXXXXX, shall be calculated on the basis of the closing price for a board lot of Common Shares on XXXXXXXXXX Stock Exchange on that day, or if at least one board lot of Common Shares shall not have been traded on XXXXXXXXXX Stock Exchange on that day, on the immediately preceding day for which at least one board lot was so traded, and (2) for all other Eligible Directors, shall be calculated on the basis of the closing price for a round lot of Common Shares on XXXXXXXXXX Stock Exchange on that day, or if at least one round lot of Common Shares shall not have been traded on XXXXXXXXXX Stock Exchange on that day, on the immediately preceding day for which at least one round lot was so traded; or if, at any time, the Common Shares are no longer listed on such stock exchange, then the Market Value shall be calculated on the basis of the closing price, on the aforesaid day, for a board or round lot of Common Shares on the stock exchange on which the Common Shares are listed and had the greatest volume of trading on that particular day.

h) "Quarter" means any of the four quarters of any financial year of the Corporation. Currently, the Corporation's Quarters end on XXXXXXXXXX.

i) "Quarterly Retainer Payment" means the amount, expressed in dollars, representing XXXXXXXXXX of the Annual Retainer Fee which would, but for the Plan, be payable in cash on the last day of each Quarter by the Corporation to an Eligible Director, or if, with respect to any Quarter, an Eligible Director has served during the applicable term as a member of the Board of Directors for a number of days that is less than the full Quarter, the amount, expressed in dollars, which is the product of: (1) the quotient determined by dividing: (A) the number of days in the particular Quarter during the term in which the Eligible Director served as a member of the Board, by (B) the aggregate number of days in the particular Quarter; and (2) the amount, expressed in dollars, of the Quarterly Retainer Payment which would otherwise have been payable for such Quarter had the Eligible Director served as a member of the Board for the full Quarter or the applicable term during which the Eligible Director served as a member of the Board been extended for the full Quarter.

j) "Reference Date", with respect to any Quarter, means the date which shall be used to determine, on a quarterly basis, the Market Value of a Common Share for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's account pursuant to Section XXXXXXXXXX of the Plan, which date shall be, unless otherwise determined by the Committee and approved by the Board, the last trading day of such Quarter on which the Market Value of a Common Share may be determined or, if a Participant's Termination of Board Service occurs during the Quarter prior to such last trading date, the date of Termination of Board Service of the Participant, provided that if the date of Termination of Board Service is not a trading day on which the Market Value of a Common Share may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value may be determined.

k) "Share Unit" means a unit credited by means of a bookkeeping entry on the books of the Corporation to a Participant's account in accordance with the terms and conditions of the Plan.

l) "Subsidiary" means any corporation a majority of whose shares normally entitled to vote in electing directors is owned directly or indirectly by the Corporation.

m) "Termination of Board Service" shall mean the earliest date on which both of the following conditions are met: (1) the Participant has ceased to be a member of the Board or of the Board of Directors of any Subsidiary of the Corporation for any reason whatsoever, including the death of a Participant; and (2) the Participant is neither an employee of the Corporation or of a Subsidiary of, nor a member of the Board of Directors of the Corporation or of the Board of Directors of any Subsidiary of the Corporation.

9. The principal features of the Plan will be as follows:

a) The Plan will be administered by the Committee of the Board of Directors, which is currently responsible for compensation related matters (the "Committee"). Each Eligible Director shall, as soon as practicable after the Effective Date, or, in the case of Eligible Directors who shall become members of the Board after such date, as soon as practicable after the date on which his or her term as a member of the Board commences, enter into an agreement with the Corporation (the "Agreement"). Such Agreement shall set out certain rights and obligations of the parties thereto under the Plan. An account will be established for each Eligible Director who has been awarded or elected to be paid Share Units under the Plan (a "Participant") in order to carry out the objectives of the Plan, more particularly described below.

b) Subject to confirmation by the Board of Directors, the Committee may provide for discretionary grants of Share Units, more particularly described below, by recommending that such Share Units be awarded to an Eligible Director. The Committee shall, subject to confirmation by the Board of Directors, recommend the effective date of each grant of Share Units and each grant shall be confirmed in writing by the Corporation to the Eligible Director.

c) An Eligible Director may elect, with respect to any particular calendar year, to be paid up to 100% of the Annual Retainer Fees otherwise payable to such Eligible Director in cash in that calendar year in the form of Share Units. In order to elect to participate in the Plan with respect to any particular calendar year in which Annual Retainer Fees will be payable, an Eligible Director shall, on or before the date that is the last business day of the calendar year ending immediately before the particular calendar year to which the Annual Retainer Fees relate (the "Election Expiry Date"), complete and deliver to the Corporation a written election specifying, in percentage form (the "Elected Percentage"), the extent to which such Eligible Director elects to participate in the Plan for the particular calendar year. Such election may be revoked or modified if written notification of such revocation or modification is received by the Corporation before the Election Expiry Date. Subject to confirmation by the Board, the Committee may substitute a new date for the Election Expiry Date, provided that such new date shall apply solely to the Annual Retainer Fees earned for services rendered after such new date.

In order for an Eligible Director to participate in the Plan in the calendar year in which such Eligible Director is first elected or appointed to the Board, the Eligible Director shall, before the earlier of: (i) the date that is thirty days after the date the Eligible Director is first elected or appointed to the Board; and (ii) the last business day of the particular Quarter in which the Eligible Director is first elected or appointed to the Board, complete and deliver to the Corporation a written election specifying the Eligible Director's Elected Percentage. Such election may be revoked or modified if written notification of such revocation or modification is received by the Corporation before the earlier of (i) and (ii) above.

d) The Plan shall be unfunded until payment of the Share Units as set out in Section XXXXXXXXXX of the Plan.

10. The following rules will apply with respect to an Eligible Director's participation in the Plan:

a) Where an Eligible Director elects to participate in the Plan pursuant to 9(c) above, the number of Share Units (including fractional Share Units) to be credited on a quarterly basis to an Eligible Director's account under Section XXXXXXXXXX of the Plan with respect to any particular Quarter shall be equal to the quotient determined by dividing: (1) the Elected Percentage, expressed in XXXXXXXXXX dollars for Eligible Directors resident in XXXXXXXXXX and expressed in XXXXXXXXXX dollars for all other Eligible Directors, of the Eligible Director's Quarterly Retainer Payment which would, but for the Plan, have been paid in cash with respect to such Quarter, by (2) the Market Value of a Common Share on the Reference Date for such Quarter.

b) Where an Eligible Director is granted Share Units pursuant to 9(b) above, a Participant's account shall be credited with the number of Share Units awarded to such Participant.

c) A Participant's account shall, from time to time during the term of the Participant's Agreement, including the period following the Participant's Termination of Board Service and until the Entitlement Date of the Participant, be credited with dividend equivalents when dividends are paid on the Common Shares and such dividend equivalents shall be converted into additional Share Units, the number of which shall be equal to the quotient determined by dividing: (1) the product determined by multiplying: (a) XXXXXXXXXX of the amount of each dividend declared and paid by the Corporation on its Common Shares, on a per share basis (excluding stock dividends, but including dividends which may be paid in cash or in shares at the option of the shareholder), converted into XXXXXXXXXX dollars for Participants resident in XXXXXXXXXX, by (b) the number of Share Units recorded in the Participant's account on the record date for the payment of such dividend, by (2) the Market Value of a Common Share on the payment date of such dividend, with fractions computed to four decimal places.

d) Except as may be determined by the Committee, and approved by the Board, or except as set forth in Section XXXXXXXXXX of the Plan, the Entitlement Date of a Participant with respect to whom Termination of Board Service has occurred shall be the fourth trading day following the release of the Corporation's quarterly or annual results immediately following Termination of Board Service by the Participant. In no event shall the Entitlement Date occur later than the end of the first calendar year commencing after Termination of Board Service by the Participant. A Participant shall receive no later than the end of the first calendar year commencing after Termination of Board Service by the Participant, at the discretion of the Committee, and as approved by the Board, in satisfaction of the number of Share Units recorded in the Participant's account on the Entitlement Date: (1) a number of Common Shares to be purchased on the open market equal to the number of Share Units then recorded in the account of the Participant, or as may be adjusted pursuant to Section XXXXXXXXXX of the Plan, and reduced by any applicable withholding taxes and other source deductions reflected in the form of Share Units, required by law to be withheld by the Corporation in connection with the total payments made in satisfaction of the Participant's Share Units; or (2) a cash payment equal to the product determined by multiplying: (a) the number of Share Units then recorded in the account of the Participant, by (b) the Market Value of a Common Share on the Entitlement Date, net of applicable withholdings. No payment of Share Units shall be made by the Corporation to a Participant under the Plan until Termination of Board Service has occurred with respect to such Participant.

e) Where the Corporation's Common Shares are to be purchased on the open market, the Corporation shall notify the Broker on the Entitlement Date as to the number of Common Shares to be purchased by the Broker on behalf of the Participant. As soon as practicable thereafter, the Broker shall purchase on the open market the number of Common Shares which the Corporation has requested the Broker to purchase and notify the Participant and the Corporation of: (1) the aggregate purchase price ("Aggregate Purchase Price") of the Common Shares, (2) the purchase price per Common Share or, if the Common Shares were purchased at different prices, the average purchase price (computed on a weighted average basis) per Common Share ("Price per Common Share"), (3) the amount of any related reasonable Brokerage commission, and (4) the settlement date for the purchase of the Common Shares. On the settlement date, upon payment of the Aggregate Purchase Price and related reasonable Brokerage commission by the Corporation, the Broker shall deliver to the Participant or to his legal representative the certificate representing the Common Shares. Regardless of whether a cash payment or Common Shares of the Corporation are used to satisfy the Participant's Share Unit entitlement, any entitlement to fractional Share Units shall be paid in cash based on the Price per Common Share, net of applicable withholdings.

11. A Participant who becomes an employee of the Corporation or of a Subsidiary of the Corporation shall no longer be eligible to receive Share Units under the Plan. In that case, starting with the Quarter in which the Participant became such an employee, all of his or her future Quarterly Retainer Payments, if any, shall be paid in cash. However, Share Units already credited to such person's account shall remain governed by the Plan for so long as there has been no Termination of Board Service with respect to such person.

12. The Board may from time to time amend, suspend or terminate the Plan in whole or in part. However, any such amendment, suspension or termination shall not adversely affect the rights of any Participant under any Agreement existing at the time of such amendment, suspension or termination without the consent of the affected Participant. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously satisfies the requirements of Regulation 6801(d) of the Act or any successor provision thereto.

If the Board terminates the Plan, prior awards of Share Units shall, at the discretion of the Board, either (1) become immediately payable in accordance with the terms of the Plan in effect at such time, or (2) remain outstanding and in effect and paid in due course in accordance with their applicable terms and conditions.

13. The Committee may, at its discretion, subject to confirmation by the Board, extend the plan to cover fees other than Annual Retainer Fees and thereby allow an Eligible Director to elect to receive such other fees which would otherwise be payable in cash in any particular calendar year, in the form of Share Units. In the event such extension should occur, the election shall be made on or before the date that is the last business day of the calendar year ending immediately before the particular calendar year to which such fees relate. In order for an Eligible Director to make the election in the calendar year in which such Eligible Director is first elected or appointed to the Board, the Eligible Director shall complete and deliver to the Corporation his or her written election, before the earlier of: (i) the date that is thirty days after the date the Eligible Director is first elected or appointed to the Board; and (ii) the day the Eligible Director first becomes entitled to receive payment of such other fees. The principles and methodologies described above will apply to any current or deferred payment of such fees subject to such conditions as the Committee may impose.

14. The Effective Date of the Plan shall be the date on which an advance income tax ruling is received from the Canada Customs and Revenue Agency confirming to the satisfaction of the Board that the Plan is a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations.

Purpose of the Proposed Transactions

15. The purpose of the proposed transactions is to enhance the Corporation's ability to attract and retain highly qualified individuals to serve as members of the Board and to promote a greater alignment of interests between non-employee members of the Board and the shareholders of the Corporation.

Rulings Given

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

B. The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

C. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and will therefore be excluded from the definition of a salary deferral arrangement as contained in subsection 248(1) of the Act.

D. When cash is received in satisfaction of a resident Participant's Share Units, as described in 10(d)(2) above, the Participant will include the amount paid by the Corporation, before withholding taxes, in his or her income for the year under paragraph 6(1)(c) of the Act.

E. When cash is received in satisfaction of a non-resident Participant's Share Units, as described in 10(d)(2) above, the non-resident Participant will include the amount, to the extent attributable to services rendered in Canada, paid by the Corporation, before withholding taxes, in his or her income for the year under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act.

F. The amount to be included in the income of a resident Participant for a year under the Plan, where the Participant has received Common Shares of the Corporation that were purchased by the designated Broker on the open market in satisfaction of the Participant's Share Units, as described in 10(d)(1) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the Participant (or his or her legal representative) for the rights related to fractional shares as described in 10(e) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the Broker (excluding Brokerage fees) to acquire the particular Common Shares distributed to the Participant (or his or her legal representative) as described in 10(d) above;

(c) under paragraph 6(1)(c) of the Act, the amount of the applicable Share Unit withholdings withheld by the Corporation as described in 10(d) above; and

(d) under paragraph 6(1)(c) of the Act, the amount of Brokerage fees paid by the Corporation for the acquisition of the particular Common Shares distributed to the Participant (or his or her legal representative) by the Broker as described in 10(e) above.

G. The amount to be included in the income of a non-resident Participant for a year under the Plan, where the Participant has received Common Shares of the Corporation that were purchased by the designated Broker on the open market in satisfaction of the Participant's Share Units, as described in 10(d)(1) above, 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 amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation to the Participant (or his or her legal representative) for the rights related to fractional shares as described in 10(e) above;

(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation to the Broker (excluding Brokerage fees) to acquire the particular Common Shares distributed to the Participant (or his or her legal representative), as described in subparagraph 10(d) above;

(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of the applicable Share Unit withholdings withheld by the Corporation as described in 10(d) above; and

(d) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount of Brokerage fees paid by the Corporation, to the extent attributable to services rendered in Canada, for the acquisition of the particular Common Shares distributed to the Participant (or his or her legal representative) by the Broker as described in 10(e) above.

H. The adjusted cost base to the Participant of the Common Shares acquired by the Participant on the open market shall be the aggregate of the cost to acquire the Common Shares which was included in the Participant's income in ruling F(b) and G(b) above, as the case may be, and the Brokerage fees paid by the Corporation, which were included in the Participant's income in ruling F(d) and G(d) above, as the case may be, with respect to the acquisition of such Common Shares.

I. The amount payable by the Corporation to the estate of a Participant as a result of the death of the Participant 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.

J. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings D, E, F, and G above that are paid by the Corporation in a particular year in respect of Participants, will be deductible by the Corporation 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.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate