2002 Ruling 2002-0118963 - PHANTOM STOCK 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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Will the payment of Director fees in the form of deferred share units result in an SDA?

Position: No

Reasons: 6801(d) is satisfied

XXXXXXXXXX 2002-011896

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

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

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayer.

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

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

(ii) being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer 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, and

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person;

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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 the purpose of the proposed plan is as follows:

Definitions

1. For the purposes of this request for an advance tax ruling, the relevant definitions are as follows:

(a) "Affiliate" means an affiliate of the Company as that term is defined in paragraph 3 of Canada Customs and Revenue Agency's Interpretation Bulletin IT-337R3, Retiring Allowances.

(b) "Beneficiary" means an individual who, on the date of an Eligible Director's death, is the person who has been designated in accordance with the Plan and the laws applying to the Plan to receive the value of any DSUs standing to the credit of the Eligible Director at that time, or where no such individual has been validly designated by the Eligible Director, or where the individual does not survive the Eligible Director, the Eligible Director's legal representative;

(c) "Board" means those individuals who serve from time to time as the Board of Directors of the Company.

(d) "Committee" means the Corporate Governance and Nominations Committee of the Board, or such other persons or other committee of the Board as may be designated by the Board.

(e) "Conversion Date" means, with respect to any Quarter, the date used to determine the Fair Market Value for purposes of determining the number of DSUs to be awarded in respect of that Quarter to an Eligible Director, which date shall be the date recommended by the Committee and confirmed by the Board and which shall for the Quarter commencing on the effective date of the Plan be the last business day of that Quarter and thereafter shall generally be the last business day of each Quarter and, in any event, shall not be earlier than the first business day, or later than December 31, of the year in respect of which the DSUs are being provided.

(f) "Directors' Quarterly Remuneration" means all amounts payable to an Eligible Director by the Company in respect of the services provided to the Company by the Eligible Director in a calendar quarter, including without limitation: (i) the quarter base retainer fee for serving as a director; (ii) the quarter retainer fee for serving as a member of a board committee; (iii) the quarter retainer fee for chairing a board committee; and (iv) the fees for attending meetings of the board of directors or board committees, but, for greater certainty, excludes amounts received by an Eligible Director as a reimbursement for expenses incurred in attending meetings.

(g) "DSU" (Deferred Share Unit) means a unit credited by the Company to an Eligible Director by way of a bookkeeping entry in the books of the Company and administered pursuant to the terms of the Plan, the value of which, on a particular date, shall be equal to the Fair Market Value at that date.

(h) "Eligible Director" means all directors of the Company (resident and non-resident).

(i) "Entitlement Date" with respect to an Eligible Director who had a Termination Date, shall be the day specified by the Eligible Director in an election filed with the Company no later than November 15 of the calendar year commencing immediately after the Eligible Director's Termination Date, which date shall not be before the later of the date on which the election is filed and 30 days after the Eligible Director's Termination Date and shall not be later than December 15 of the calendar year commencing immediately after the Eligible Director's Termination Date. Where an Eligible Director fails to make an election within the permissible period set out above in this definition, his or her Entitlement Date shall, subject to the subsequent paragraphs of this definition, be December 15 of the calendar year commencing immediately after the Eligible Director's Termination Date.

Notwithstanding the foregoing, if an Eligible Director's Entitlement Date falls between the record date and the payment date for dividends on Shares, such Eligible Director's Entitlement Date shall be deemed to be the date immediately following the dividend payment date.

Notwithstanding the foregoing, if the Committee is unable to calculate the number of DSUs credited to an Eligible Director's account due to the lack of necessary data, such Eligible Director's Entitlement Date shall be the next trading day on which such data is available to the Committee.

Notwithstanding the foregoing, if, on an Eligible Director's Entitlement Date, such Eligible Director is, in the opinion of the Committee, in possession of material undisclosed information regarding the Company and/or the Shares, the Eligible Director's Entitlement Date shall be delayed until the earliest of the date on which (i) the Committee is satisfied the Eligible Director is no longer in possession of any such material undisclosed information, or (ii) December 15 of the year following the year of the Eligible Director's Termination Date.

In any event, DSUs will be redeemed and amounts payable under the Plan to or in respect of an Eligible Director will be paid to the Eligible Director or the Eligible Director's Beneficiary on or before December 31st of the calendar year immediately following the year in which the Eligible Director's Termination Date occurred.

(j) "Fair Market Value" means, with respect to any particular date, the average closing price of a Share on the XXXXXXXXXX Stock Exchange, or if the Shares are not listed on the XXXXXXXXXX Stock Exchange, on such other stock exchange in Canada on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market, on the ten trading days prior to that date on which at least one board lot of the Shares was traded.

(k) "Quarter" means a fiscal quarter of the Company, which, until changed by the Company, shall be the three month period ending March 31, June 30, September 30 or December 31 in any calendar year.

(l) "Related Corporation" means a corporation related to the Company for the purposes of the Act.

(m) "Share" means a common share, without nominal or par value, of the capital stock of the Company.

(n) "Termination Date" means, with respect to an Eligible Director, the earliest date on which both of the following conditions are met: (i) the Eligible Director has ceased to be employed by the Company or any Affiliate for any reason whatsoever; and (ii) the Eligible Director is not a member of the Board nor a director of an Affiliate.

Facts

2. The Company is incorporated under the laws of Canada and is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. The Shares of the Company trade principally on the XXXXXXXXXX Stock Exchange. The Company has a fiscal year-end of XXXXXXXXXX.

The Company's address is XXXXXXXXXX. The Company files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3. XXXXXXXXXX.

4. The Company currently provides Eligible Directors with Directors' Quarterly Remuneration which includes all amounts paid by the Company to the Eligible Directors in respect of the services they perform as directors of the Company, other than amounts paid as a reimbursement of expenses. Directors' Quarterly Remuneration generally comprises quarterly retainer fees for serving as a director, additional quarterly retainer fees for service as a member or chair of a committee of the board of directors of the Company and meeting fees for attending committee and general board meetings.

5. The amount of Directors' Quarterly Remuneration for a year is determined by the Board. The Directors' Quarterly Remuneration referable to services performed in a Quarter by an Eligible Director becomes payable to the Eligible Director at the end of the Quarter. In general, this means that XXXXXXXXXX % of an Eligible Director's retainer fees for a year and meeting fees for meetings held within a Quarter in that year become payable at the end of the Quarter.

Proposed Plan

6. The Company will establish the "XXXXXXXXXX" (the "Plan") effective XXXXXXXXXX, for the benefit of its resident and non-resident Eligible Directors. Unless otherwise determined by the Committee, the Plan will be unfunded and will be administered by the Committee. The Company will be responsible for the costs relating to the administration of the Plan, as determined by Committee. A copy of the terms of the Plan was provided with your submission for an advance income tax ruling.

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

(a) The establishment of the plan is subject to the receipt of an advance income tax ruling confirming that the Plan meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations").

(b) Each Eligible Director will be permitted to elect to receive his or her Directors' Quarterly Remuneration in the form of cash (net of applicable withholding taxes), or DSUs or a combination thereof by filing a written election with the Company within the time periods described below for such elections, specifying, in whole percentages, the percentage of his or her Directors' Quarterly Remuneration to be provided in cash and DSUs. If the Eligible Director elects to participate in the Plan, he or she may choose one of the four following options: (i) XXXXXXXXXX%, (ii) XXXXXXXXXX%, (iii) XXXXXXXXXX% or (iv) XXXXXXXXXX% of his or her Directors' Quarterly Remuneration in DSUs under the Plan with the remainder of such Directors' Quarterly Remuneration to be paid in cash to the Eligible Director. Notwithstanding an Eligible Director's election as described above in this section, the Committee may, in its sole discretion, decline to award DSUs to an Eligible Director in respect of a particular Quarter or require the Eligible Director, notwithstanding his or her election, to receive a percentage, as specified by the Committee, of the Eligible Director's Directors' Quarterly Remuneration in DSUs under the Plan.

(c) Eligible Directors were required to make their elections for the first Quarter of the XXXXXXXXXX calendar year on or before XXXXXXXXXX. The election was made in writing and expressly provided that participation of the Eligible Director in the Plan and the award of DSUs thereunder was conditional upon the Company receiving an advance income tax ruling.

(d) With respect to all Quarters commencing after XXXXXXXXXX, an Eligible Director may change his or her election with respect to the form of payment of his or her Directors' Quarterly Remuneration by filing a new written election with the Company by no later than XXXXXXXXXX business days before the end of a Quarter. An election under the Plan shall continue in force until it is changed by the Eligible Director.

(e) The Company shall maintain or cause to be maintained in its books a notional account for each Eligible Director recording at all times the number of DSUs standing to the credit of the Eligible Director. Upon payment in satisfaction of DSUs credited to an Eligible Director in the manner described in 7(k) below, such DSUs shall be cancelled.

(f) The number of DSUs credited to an Eligible Director for a Quarter shall be determined by dividing the portion of the Directors' Quarter Remuneration payable to the Eligible Director at the end of the Quarter in DSUs by the Fair Market Value of a Share on the Conversion Date for that Quarter.

(g) DSUs will be fully vested upon being credited to an Eligible Director.

(h) In the event that any cash dividend is declared and paid by the Company on Shares, an Eligible Director shall be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the total amount of the dividends that would have been paid to such Eligible Director if the DSUs in the Eligible Director's account, determined as at the dividend record date, were Shares by the Fair Market Value of a Share on the date on which the cash dividends are paid by the Company.

(i) In the event of any stock dividend, stock split, combination or exchange of Shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of the Company's assets to shareholders, or any other change in the capital of the Company affecting the Shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change shall be made with respect to the number of DSUs credited to the accounts maintained for the Eligible Directors.

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

(k) On his or her Entitlement Date, an Eligible Director or the Eligible Director's Beneficiary shall be entitled to redeem the DSUs credited to the Eligible Director's account on that date and receive, an amount equal to the number of DSUs standing to the Eligible Director's credit on the Entitlement Date, multiplied by the Fair Market Value on that date. The amount payable to the Eligible Director (or the Eligible Director's Beneficiary) shall be paid by the Company as a lump sum in cash, net of applicable withholdings.

(l) Except as specifically set out in the Plan, no employee of the Company, including any Eligible Director or other person shall have any claim or right to any Shares or other benefit in respect of DSUs granted pursuant to the Plan. Neither the Plan nor any award thereunder shall be construed as granting an Eligible Director a right to be retained as a member of the Board or otherwise to continue in the employment of the Company, or a claim or right to any future grants of DSUs. Rights of Eligible Directors respecting DSUs shall not be transferable or assignable other than by will or the laws of descent and distribution. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Eligible Director or other person to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Eligible Director or other person be considered the owner of Shares by virtue of the Plan.

(m) The Plan may be amended or terminated in whole or in part at any time by the Board, provided that no such amendment or termination shall, unless required by law, adversely affect the rights of any Eligible Director with respect to DSUs to which he or she is then entitled under the Plan without the consent of the affected Eligible Director and any amendment or termination shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor to such provision.

Purposes of the Proposed Plan

8. The Plan will be established:

(a) to promote a greater alignment of interests between directors of the Company and the shareholders of the Company;

(b) to provide a compensation system for directors that is reflective of the responsibility, commitment and risk accompanying board membership;

(c) to assist the Company to attract and retain individuals with experience and ability to act as directors; and

(d) to allow directors of the Company to participate in the long-term success of the Company.

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. 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.

C. Except for those amounts identified in Rulings D and E below, no amount will be included pursuant to section 3, subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of an Eligible Director in respect of the Deferred Share Units credited to his or her notional account under the Plan.

D. The amount to be included in the income of a resident Eligible Director for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the cash payments paid by the Company to the Eligible Director as described in 7(k) above; and

(b) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Company as described in 7(k) above; and

E. The amount to be included in the income of a non-resident Eligible Director for a year under the Plan 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 cash payments, to the extent attributable to services rendered in Canada, paid by the Company to the Eligible Director as described in 7(k) above; and

(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, of applicable withholding taxes withheld by the Company as described in 7(k) above.

F. The amount payable by the Company to the Eligible Director's Beneficiary or the estate of an Eligible Director 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 subsections 70(2) and 70(3) of the Act.

G. 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.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D and E above that is paid by the Company in respect of its Eligible Directors in a particular year will be deductible by the Company under 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
Policy and Legislation Branch