2001 Ruling 2001-0107293 - DSU PLAN 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: 1) Will the payment of Director's fees in the form of deferred share units (DSUs) constitute an SDA for purposes of the Act?

2) Will the issuance of treasury shares in satisfaction of the DSUs result in the application of section 7 of the Act?

Position: 1) No 2) Yes

Reasons: 1) The provisions of Regulation 6801(d) are satisfied. 2) Where treasury shares are issued, section 7 would clearly apply.

XXXXXXXXXX 2001-010729

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

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

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

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

(iii) under objection by the Company 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.

Definitions

For the purpose of this ruling, the following terms have the meanings specified:

(a) "Act" means Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended;

(b) "Applicable Withholding Taxes" means any and all taxes and other source deductions or other amounts which the Company is required by law to withhold from any amount to be paid or credited under the Plan;

(c) "Award Date" means each date on which Deferred Share Units are credited to an Eligible Director in accordance with Section XXXXXXXXXX of the Plan, as described in 10(b) below, which shall be, unless otherwise determined by the Committee, the last business day of each calendar quarter of each year;

(d) "Award Market Value" means the last sale price of a board lot of Common Shares on XXXXXXXXXX Stock Exchange on the last trading day on such exchange prior to the Award Date on which there was a trade of a board lot of Common Shares;

(e) "Board" means the board of directors of the Company;

(f) "Committee" means the committee of the Board responsible for recommending to the Board the compensation of the Eligible Directors;

(g) "Common Shares" means a common share of the Company;

(h) "Company" means XXXXXXXXXX;

(i) "Deferred Share Unit" means a unit equivalent in value to a Common Share, credited by means of a bookkeeping entry in the books of the Company in accordance with Section XXXXXXXXXX of the Plan, as described in 10(b), (c), and (d) below;

(j) "Deferred Share Unit Amount" has the meaning given thereto in Section XXXXXXXXXX of the Plan, as described in 10(g) below;

(k) "Directors' Fees" means all amounts to be paid to the directors of the Company in respect of their service as directors, whether by way of basic retainer, board meeting fees, chairman's retainer (in the case of the Chair of the Board), committee chair retainer, committee fees or otherwise, but shall not include any amounts in respect of grant of stock options;

(l) "Dividend Equivalents" means a bookkeeping entry whereby each Deferred Share Unit is credited with the equivalent amount of the dividend paid on a Common Share in accordance with Section XXXXXXXXXX of the Plan;

(m) "Dividend Market Value" means the last sale price of a board lot of Common Shares on XXXXXXXXXX Stock Exchange on the last trading day on such exchange prior to a dividend payment date on which there was a trade of a board lot of Common Shares;

(n) "Election Form" means a document substantially in the form of XXXXXXXXXX to the Plan;

(o) "Eligible Director" means a person who is, at the relevant time, a director or former director of the Company;

(q) "Plan" means the Company's Deferred Share Unit Plan for Directors, as amended from time to time;

(r) "Public Corporation" has the meaning assigned by subsection 89(1) of the Act;

(s) "Redemption Date" means the date specified by the Eligible Director, or his or her estate, in an election filed with the secretary of the Company after the Termination Date, and shall not be later than XXXXXXXXXX of the first calendar year after the Termination Date. Where the Eligible Director, or his or her estate, fails to make an election within the above-mentioned period, his or her Redemption Date shall be XXXXXXXXXX of the first calendar year after the Eligible Director's Termination Date;

(t) "Redemption Value" means the last sale price of a board lot of Common Shares on the XXXXXXXXXX Stock Exchange on the last trading day on such exchange prior to the Redemption Date on which there was a trade of a board lot of Common Shares;

(u) "Regulation" means the Income Tax Regulations promulgated under the Act;

(v) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act; and

(u) "Termination Date" means the date upon which an Eligible Director ceases to be a member of the Board.

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

Facts

1. The Company is a Public Corporation and a Taxable Canadian Corporation. Its Common Shares are listed on the XXXXXXXXXX Stock Exchanges and trade under the symbol "XXXXXXXXXX". It has a XXXXXXXXXX fiscal and taxation year end.

2. The name of the Company was formerly XXXXXXXXXX. The Company was incorporated under the CBCA on XXXXXXXXXX.

3. XXXXXXXXXX.

4. The Company obtained an advance income tax ruling from the CCRA in connection with the XXXXXXXXXX.

5. XXXXXXXXXX.

6. The Company will file its income tax returns with the XXXXXXXXXX Taxation Centre and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

7. XXXXXXXXXX.

8. The Company currently pays its Directors' Fees in cash. Each director also participates in a directors' stock option plan in which there was an initial option grant and, subject to an annual review, an annual option grant. The directors of the Company must own a minimum number of Common Shares of the Corporation.

Proposed Plan

9. The Company will establish a Plan for the benefit of its resident and non-resident directors, subject to receipt of a favourable advance income tax ruling from CCRA. The effective date of the Plan will be XXXXXXXXXX or such later date as the Board may determine.

10. The relevant terms of the Plan are as follows:

(a) The Company will pay for the costs relating to the administration of the Plan. The Plan will be unfunded and will be administered by the Board. A notional account will be established and maintained for each Eligible Director on the books of the Company in order to carry out the objectives of the Plan.

(b) On each Award Date, XXXXXXXXXX the Deferred Share Units to be credited to an Eligible Director in a year will be credited to such account in respect of the portion of Directors' Fees to be credited in Deferred Share Units earned in the calendar quarter ending on that Award Date. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited as of each Award Date will be determined by dividing: (a) the amount of the applicable portion of the Directors' Fees to be credited in Deferred Share Units on that Award Date, by (b) the Award Market Value.

(c) Each Eligible Director shall have the right to elect once each calendar year the portion of the Director's Fees to be paid to that Eligible Director in that year which is to be in the form of Deferred Share Units. The election will be made by completing, signing and delivering to the Secretary of the Company the Election Form: (a) in the case of an existing director, by the end of the calendar year preceding the year to which such election is to apply; or (b) in the case of a new director, as soon as possible after the director's appointment. In each case, the election, when made, shall only apply prospectively with respect to the Directors' Fees yet to be earned. If no Election Form is filed with the Secretary of the Company, XXXXXXXXXX% of the Director's Fees will be received in the form of Deferred Share Units and the balance of Directors' Fees will be paid in cash.

(d) An Eligible Director's notional account will be credited with Dividend Equivalents in the form of additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Company on Common Shares. Such Dividend Equivalents will be computed by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of Deferred Share Units recorded in the Eligible Director's account on the record date for the payment of such dividend, by (b) the Dividend Market Value, with fractions computed to three decimal places.

(e) Subject to (f) below, in the event of the declaration of any stock dividend, a subdivision, consolidation, reclassification, exchange or other change with respect to the Common Shares, or a merger, consolidation, spin-off, or other distribution (other than ordinary course cash dividends) of the Company's assets to its shareholders, the account of each Eligible Director and the Deferred Share Units outstanding under the Plan shall be adjusted in such manner, if any, as the Board may in its discretion deem appropriate to reflect the event.

(f) No amount will be paid to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Eligible Director to compensate for a downward fluctuation in the price of Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

(g) An Eligible Director shall be entitled on the Redemption Date to redeem the Deferred Share Units credited to the Eligible Director's account for an amount (the "Deferred Share Unit Amount") equal to the product that results from multiplying: (i) the number of Deferred Share Units in the Eligible Director's Account on the Redemption Date, by (ii) the Redemption Value of the Common Shares. Upon payment in full of the value of the Deferred Share Unit Amount, the Deferred Share Units will be cancelled. The payment of the Eligible Director's benefits under the Plan will take place no later than XXXXXXXXXX of the first calendar year commencing after the Termination Date.

(h) An Eligible Director will have the option of having his or her Deferred Share Unit Amount, less any Applicable Withholding Taxes, paid in cash or in the form of Common Shares acquired on the open market on the Eligible Director's behalf through an independent broker designated by the Eligible Director (the "Designated Broker"). Notwithstanding the foregoing, the Company may, in its discretion; (i) pay the Deferred Share Unit Amount, less any Applicable Withholding Taxes, in cash if the Company considers that the purchase of Common Shares and delivery thereof to an Eligible Director in a jurisdiction would require the Company to comply with legal requirements of the jurisdiction applicable to the Eligible Director or the Company with respect to the purchase of Common Shares, or (ii) subject to the receipt of any necessary shareholder and regulatory approvals, issue to the Eligible Director such number of Common Shares from treasury as equals the number of Deferred Share Units recorded in the Eligible Director's account on the Redemption Date. If the Company issues Common Shares as aforesaid, such Common Shares will be issued in consideration for the past services of the Eligible Director to the Company and the entitlement of the Eligible Director under this Plan shall be satisfied in full by such issuance of Common Shares. The Company will also make a cash payment, less any Applicable Withholding Taxes, to the Eligible Director with respect to the value of fractional Deferred Share Units standing to the Eligible Director's credit after the maximum number of whole Common Shares has been issued by the Company as described above.

(i) If the Eligible Director has elected, and the Company has determined, that payment of the Deferred Share Unit Amount be made in the form of Common shares purchased on the open market through a Designated Broker, as described in 10(h) above, the Company will calculate the number of whole Common Shares to be purchased by the Designated Broker on the open market on behalf and for the benefit of the Eligible Director. The number of Common Shares will be determined by dividing: (i) the Deferred Share Unit Amount payable, less any Applicable Withholding Taxes, by (ii) the Redemption Value of a Common Share as determined on the Redemption Date. On the Redemption Date or, if the Redemption Date is not a trading date for shares on the XXXXXXXXXX Stock Exchange, on the next such trading date, the Company shall advise the Designated Broker of the specified number of whole Common Shares to be purchased on behalf of the Eligible Director. The Designated Broker will purchase the specified number of whole Common Shares as soon as practicable after being notified by the Company. On or before the date of settlement with respect to the purchase of the Common Shares by the Designated Broker, the Company acting as agent for the Eligible Director, will pay the purchase price of the specified number of Common Shares to the Designated Broker, together with any reasonable brokerage fees or commission fees related thereto. The Company will also make a cash payment, less any Applicable Withholding Taxes, to the Eligible Director, with respect to the value of fractional Deferred Share Units standing to the Eligible Director's credit after the maximum number of whole Common Shares has been purchased as described above.

(j) Notwithstanding the preceding paragraphs, if an Eligible Director is an employee of the Company or any of its subsidiaries, such Eligible Director will not be able to redeem the Deferred Share Units as set out above until the later of the date of cessation of employment with the Company or any of the subsidiaries and the date the director ceases to be a member of the Board (the "Separation Date"). The Eligible Director's Termination Date in these circumstances shall be the Separation Date for the purposes of the redemption of the Deferred Share Units.

(k) Upon the death of an Eligible Director prior to the redemption of the Deferred Share Units credited to the account of such Eligible Director under the Plan, the beneficiary, or, in the absence of a valid designation of a beneficiary, the estate of such Eligible Director, shall be entitled to redeem the Deferred Share Units in accordance with 10(h) or (i) above. For greater certainty, the Deferred Share Unit Amount payable shall be equivalent to the amount which would have been paid to the Eligible Director pursuant to and subject to 10(h) or (i) above, calculated as if the Eligible Director had previously ceased to be a director of the Company on the day prior to his or her death. The beneficiary or estate, as the case may be, shall be entitled to select the Redemption Date and the manner of payment in satisfaction of Deferred Share Units in the same manner as the Eligible Director would have been permitted to do so had he or she survived and ceased to be a director of the Company on the day prior to his or her death. Notwithstanding the foregoing, the Company may, in its discretion: (i) pay the Deferred Share Unit Amount, less any Applicable Withholding Taxes, in cash if the Company considers that the purchase of Common Shares and delivery thereof to an Eligible Director's beneficiary or estate, as the case may be, in a jurisdiction would require the Company to comply with legal requirements of the jurisdiction applicable to the beneficiary, the estate or the Company with respect to the purchase of Common Shares, or (ii) subject to the receipt of any necessary shareholder and regulatory approvals, issue from treasury to the beneficiary or estate, as the case may be, such number of Common Shares as equals the number of Deferred Share Units recorded in the Eligible Director's account on the Redemption Date.

(l) The Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan. However any such amendment, suspension, or termination shall not adversely affect the right of any Eligible Director with respect to Deferred Share Units credited to such Eligible Director at the time of such amendment, suspension or termination, without the consent of the affected Eligible Director. If the Board terminates the Plan, no new Deferred Share Units will be credited to the account of an Eligible Director, but previously credited Deferred Share Units shall remain outstanding, shall be entitled to Dividend Equivalents as provided under 10(d) above, and be paid in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Eligible Director receives payment, in cash or Common Shares, in satisfaction of all Deferred Share Units recorded in the Eligible Director's account. Notwithstanding the foregoing, any amendment, suspension, or termination of the Plan shall be such that the Plan continuously satisfies the requirements of paragraph (d) of Regulation 6801 of the Act or any successor provision thereto.

Purpose of the Proposed Plan

11. The Plan will be established to provide Eligible Directors with the opportunity to acquire share equivalent units convertible to cash or Common Shares of the Company upon their ceasing to act as directors. Acquiring such units will allow directors to participate in the long-term success of the Company and to promote a greater alignment of interests between the directors and the shareholders.

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 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.

B. The Plan will not constitute an "employee benefit plan", as that term is defined in subsection 248(1) of the Act.

C. Provided that the Plan remains unfunded, the Plan will not constitute a "retirement compensation arrangement", as that term is defined in subsection 248(1) of the Act.

D. When cash is received in satisfaction of a resident Eligible Director's Deferred Share Units as described in 10(h) above, the Eligible Director will include the amount paid by the Company, before any Applicable 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 Eligible Director's Deferred Share Units as described in 10(h) above, the non-resident Eligible Director will include the amount, to the extent attributable to services rendered in Canada, paid by the Company, before any Applicable 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 Eligible Director for a year under the Plan, where the Company issues Common Shares from treasury to the Eligible Director in satisfaction of the Eligible Director's Deferred Share Units as described in 10(h) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to fractional shares as described in 10(h) above;

(b) under paragraph 7(1)(a) of the Act, the amount representing the aggregate Redemption Value of the Company's Common Shares issued to the Eligible Director as described in 10(h) above; and

(c) under paragraph 6(1)(c) of the Act, the amount of Applicable Withholding Taxes withheld by the Company as described in 10(h) above.

G. The amount to be included in the income of a non-resident Eligible Director for the year under the Plan, where the Company issues Common Shares from treasury to the non-resident Eligible Director in satisfaction of the non-resident Eligible Director's Deferred Share Units as described in 10(h) 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 Company to the non-resident Eligible Director for the rights related to fractional shares as described in 10(h) above;

(b) under paragraph 7(1)(a) of the Act and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, representing the aggregate Redemption Value of the Company's Common Shares issued to the non-resident Eligible Director as described in 10(h) above; and

(c) under paragraph 6(1)(c) of the Act and subparagraph 115(1)(a) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of Applicable Withholding Taxes withheld by the Company as described in 10(h) above.

H. The amount to be included in the income of a resident Eligible Director for the year under the Plan, where the Eligible Director has received Common Shares of the Company that were purchased by the Designated Broker on the open market in satisfaction of the Eligible Director's Deferred Share Units as described in 10(h) and (i) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to the fractional shares as described in 10(i) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Designated Broker (excluding brokerage fees or commission fees) to acquire the particular Common Shares of the Company that will be distributed to the Eligible Director as described in 10(h) and (i) above;

(c) under paragraph 6(1)(c) of the Act, the amount of Applicable Withholding Taxes withheld by the Company as described in 10(i); and

(d) under paragraph 6(1)(c) of the Act, the amount of brokerage fees or commission fees paid by the Company to the Designated Broker for the acquisition of the Common Shares of the Company distributed by the Designated Broker to the Eligible Director as described in 10(i) above.

I. The amount to be included in the income of a non-resident Eligible Director for the year under the Plan, where the non-resident Eligible Director has received Common Shares of the Company that were purchased by the Designated Broker on the open market in satisfaction of the non-resident Eligible Director's Deferred Share Units as described in 10(h) and (i) 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 Company to the non-resident Eligible Director for the rights related to the fractional shares as described in 10(i) 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 Company to the Designated Broker (excluding brokerage fees or commission fees) to acquire the particular Common Shares of the Company that will be distributed to the non-resident Eligible Director as described in 10(h) and (i) 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 Applicable Withholding Taxes withheld by the Company as described in 10(i) above; and

(d) 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 brokerage fees or commission fees paid by the Company to the Designated Broker for the acquisition of the Common Shares of the Company distributed by the Designated Broker to the non-resident Eligible Director as described in 10(i) above.

J. The adjusted cost base to a resident Eligible Director of Common Shares that the Company issues from treasury to the resident Eligible Director shall include, pursuant to paragraph 53(1)(j) of the Act, the amount included in the Eligible Director's income in ruling F(b) above.

K. The adjusted cost base to a resident Eligible Director of any Common Shares of the Company acquired by the resident Eligible Director on the open market shall be the aggregate of the cost to acquire the Common Shares which was included in the Eligible Director's income in ruling H(b) above, and the brokerage fees or commission fees paid by the Company, and included in the income of the Eligible Director in ruling H(d) above.

L. The amount payable by the Company to the named beneficiary or estate of the Eligible Director as a result of the Eligible Director's death as described in 10(k) above will constitute a right or thing held by the deceased Eligible Director at the time of death for the purposes of subsection 70(2) of the Act.

M. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts paid in the year under the Plan referred to in rulings D, E, F(a), F(c), G(a), G(c), H and I above, and any costs incurred by the Company in the year in administering the Plan, will be deductible by the Company 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

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