2002 Ruling 2002-0117243 - DSU PLAN

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?

Position: No.

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

XXXXXXXXXX 						2002-011724

XXXXXXXXXX, 2002

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 taxpayer. We also acknowledge your letters 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.

Definitions

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

(a) The "Corporation" is a Canadian corporation as described in 1.

(b) The phrase "Annual Retainer" means the retainer payable to an Eligible Director for services as a member of the Board during a calendar year, and for greater certainty: (1) includes the annual retainer payable to the Chairman of the Board; and (2) does not include any additional compensation payable to an Eligible Director for any other service, including without limitation, any Chairman fees, Board committee chair fees and Board committee meeting fees.

(c) The phrase "Award Market Value" means the last sale price per share of the last board lot sale of the Corporation's common shares on the XXXXXXXXXX Stock Exchange occurring prior to the date on which DSUs are awarded to an Eligible Director in accordance with the Plan.

(d) The term "Board" means the board of directors of the Corporation.

(e) The term "Committee" means the committee of the Board responsible for recommending to the Board the compensation of the Eligible Directors, which at the effective date of the Plan is the Corporate Governance Committee.

(f) The term "DSU" means a deferred share unit equivalent in value to a Corporation common share, credited by means of a bookkeeping entry on the books of the Corporation.

(g) The term "DSU Account" has the meaning assigned by 2.c).

(h) The phrase "Eligible Director" means a person who is, at the relevant time, a member of the Board other than a person who is also a full-time employee of the Corporation.

(i) The term "Plan" has the meaning assigned in 2.

(j) The phrase "Separation Date" has the meaning assigned in 2.g).

(k) Each of the terms "corporation", "employee benefit plan", "retirement compensation arrangement", "salary deferral arrangement", "taxable Canadian corporation", "property", and "public corporation", have the meanings assigned to them by subsection 248(1) of the Act.

(l) The term "Act" means the Income Tax Act (Canada), as amended from time to time.

(m) The term "Regulation(s)" means the Income Tax Regulations, Consolidated Regulations of Canada, Chapter 945 (Consolidated as of December 31, 1997) proclaimed in force August 15, 1979, as amended to July 15, 2001.

(n) "CCRA" means the Canada Customs and Revenue Agency.

Facts

1. The Corporation is a corporation that exists under the Business Corporations Act (Canada). The Corporation is a taxable Canadian corporation and a public corporation. The Corporation's common shares are posted for trading on the XXXXXXXXXX stock exchanges. International Depositary Receipts, representing the Corporation's common shares, are listed on the XXXXXXXXXX. The Corporation is a XXXXXXXXXX company with consolidated assets of about $XXXXXXXXXX. The Corporation's consolidated interests are principally engaged in the 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.

Proposed Plan

2. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of certain Eligible Directors of the Corporation. The Plan will comprise a Plan text and written agreement between the Corporation and each Eligible Director setting out the terms of the Eligible Director's participation in the Plan. The relevant features of the Plan are as follows:

a) The Plan will be administered by the Committee, beginning with the calendar year in which the Corporation receives a ruling from the CCRA that the Plan is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Regulations.

b) Each Eligible Director may elect, once each calendar year, to be paid a percentage (from zero to one hundred percent) of his or her Annual Retainer in cash, net of withholding taxes, with the balance, if any, being paid in the form of a number of DSUs. In the case of an existing Eligible Director, the election must be completed, signed and delivered to the Corporation by the end of the calendar year preceding the year to which such election is to apply. In the case of a new Eligible Director, the election must be completed, signed and delivered to the Corporation as soon as possible, and, in any event, no later than 30 days, after the director's appointment, with such election to be effective on the first day of the calendar quarter of the Corporation next following the date of the Corporation's receipt of the election until the final day of the calendar year of appointment. For the first year of the Plan, Eligible Directors must make such election as soon as possible, and, in any event, no later than 30 days, after adoption of the Plan and such election shall be effective on the first day of the calendar quarter of the Corporation next following the date of the Corporation's receipt of the election until the final day of the XXXXXXXXXX calendar year. If no election is made in respect of a particular calendar year, the new or existing Eligible Director will receive the Annual Retainer in cash.

c) On the last business day of each calendar quarter, the Eligible Director will be entitled to receive one-quarter of his or her Annual Retainer. The percentage to be paid in the form of DSUs will be multiplied by one-quarter of the Eligible Director's Annual Retainer to determine a deferred value. The number of DSUs to be credited to the Eligible Director's notional account on the books of the Corporation ("DSU Account") will be determined by dividing the deferred value attributable to the particular Eligible Director by the Award Market Value of a DSU on that particular date.

d) If an Eligible Director is resident in a jurisdiction in which the award of DSUs under the Plan might be considered to be income which is subject to taxation at the time of such award, the Eligible Director may elect not to participate in the Plan in which case no part of the Annual Retainer will be paid in the form of DSUs under the Plan.

e) Whenever cash dividends are paid on the Corporation's common shares, additional DSUs will be credited to the Eligible Director's DSU Account. The number of such additional DSUs will be calculated by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Corporation common share by the number of DSUs recorded in the Eligible Director's DSU Account on the record date for the payment of such dividend, by (b) the last sale price per share of the last board lot sale of the Corporation's common shares on the XXXXXXXXXX Stock Exchange occurring prior to the dividend record date.

f) In the event of the declaration of any subdivision, consolidation, stock dividend, capital reorganization, reclassification, exchange, or other change with respect to the Corporation's common shares, or a consolidation, amalgamation, merger, spin-off, sale, lease or exchange of all or substantially all of the property of the Corporation or other distribution (other than cash dividends) of the Corporation's assets to shareholders, then the account of each Eligible Director and the DSUs outstanding under the Plan will be adjusted in such manner, if any, as the Board may in its discretion deem appropriate to preserve, proportionally the interest of participants under the Plan.

g) The DSUs credited to an Eligible Director's DSU Account will be redeemed by the Eligible Director (or, where the Eligible Director has died, his or her estate) on:

(i) the date the Eligible Director has ceased to be an Eligible Director for any reason whatsoever, including the death of the Eligible Director (the "Separation Date"); or

(ii) such later date as elected by the Eligible Director or the Eligible Director's estate, provided that in no event will an Eligible Director or the Eligible Director's estate be permitted to elect a date which is later than the last business day of the calendar year following the calendar year in which the Separation Date occurs.

h) Except as required by law, the rights of a participant under the Plan are not capable of being anticipated, assigned, transferred, alienated, sold, encumbered, pledged, mortgaged or charged and are not capable of being subject to attachment or legal process for the payment of any debts or obligations of the Director.

i) Under no circumstances will DSUs be considered Corporation common shares nor will they entitle any director to exercise voting rights or any other rights attaching to ownership of the Corporation's common shares.

j) No amount will be paid to, or in respect of, a participant under the Plan to compensate for a downward fluctuation in the price of a Corporation common share, nor will any other form of benefit be conferred upon, or in respect of, a participant for such purpose.

k) From time to time, the Board may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan, suspend or terminate the Plan or amend the terms of any DSU granted under the Plan; provided, however, that any approvals required under applicable provisions of law are obtained and no such amendments or termination will be made at any time which has the effect of adversely affecting the DSU's previously granted to an Eligible Director under the Plan without his or her consent. Notwithstanding the foregoing, any amendment or termination of the Plan will be such that the Plan continuously meets the requirements of Regulation 6801(d) or any successor provision thereto.

l) When the Eligible Director redeems the DSU Account, as described in 2.g), the amount received by the Eligible Director will be calculated by multiplying the number of DSUs recorded in the Eligible Director's DSU Account on the redemption date by the last sale price of a Corporation common share of the last board lot sale of Corporation common shares on the XXXXXXXXXX Stock Exchange occurring prior to the redemption date.

Purpose of the Proposed Plan

3. The Corporation wishes to attract and retain talented directors by allowing them to participate in the long-term success of the Corporation.

4. The Corporation wishes to promote a greater alignment of interest between such directors and the Corporation's shareholders by providing Eligible Directors with the opportunity to acquire deferred share units.

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 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 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 DSUs, as described in 2.g) above, the resident Eligible Director 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 Eligible Director's DSUs, as described in 2.g) above, the non-resident Eligible Director 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. An amount payable under the Plan to an Eligible Director's estate as a result of the Eligible Director's death will constitute a right or thing held by the deceased Eligible Director at the time of death for purposes of subsection 70(2) of the Act.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts paid under the Plan referred to in rulings D and E will be deductible by the Corporation in calculating its income for the year in which the cash payment is made and taxes are withheld, 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