2002 Ruling 2002-0123203 - DEFERRED SHARE/UNIT PLAN DIRECTORS

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 creation of a deferred share unit plan result in an SDA?

Position: No.

Reasons: Requirements of Regulation 6801(d) are met.

XXXXXXXXXX  		2002-012320

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

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

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your correspondence dated XXXXXXXXXX.

Definitions

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act (Canada), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

(b) "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.

(c) "Beneficiary" means the person who at the time of an Eligible Director's death is entitled, under the terms of the Plan and applicable law, to receive the value of any DSUs standing to the credit of the Eligible Director at that time.

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

(e) "Committee" means the XXXXXXXXXX, or such other persons or other Committee of the Board as may be designated by the Board.

(f) "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 day of that Quarter and thereafter shall generally be the last 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.

(g) "Directors' Annual Remuneration" means all amounts payable to an Eligible Director in a calendar year by the Company in respect of services provided to the Company by the Eligible Director, including without limitation (i) the annual base retainer fee for serving as a director, (ii) the annual retainer fee for serving as a member of a board committee, (iii) the annual retainer fee for chairing a board committee, (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.

(h) "DSU" 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 Plan, the value of which, on a particular date, shall be equal to the Fair Market Value at that date.

(i) "Eligible Director" means all directors of the Company who are not otherwise employees of the Company or any Affiliate.

(j) "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 XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date. An Entitlement Date shall not be before the later of the date on which the election is filed and the Eligible Director's Termination Date and shall not be later than XXXXXXXXXX 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 be XXXXXXXXXX of the calendar year commencing immediately after the Eligible Director's Termination Date.

i) 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.

ii) 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 following trading day on which such data is available to the Committee.

iii) 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) XXXXXXXXXX of the year following the year of the Eligible Director's Termination Date.

iv) 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.

(k) "Fair Market Value" means, with respect to any particular date, the weighted average price for all sales of Shares on XXXXXXXXXX Stock Exchange, or if the Shares are not listed on 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, on the over-the-counter market, during the ten consecutive trading days prior to that date;

(l) "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.

(m) "Related Corporation" shall mean a corporation related to the Company for the purposes of the Act.

(n) "Share" means a common share of the Company including any rights attached thereto which trade therewith and any other share that may be added thereto or substituted therefore; and

(o) "Termination Date" means the earliest date on which both of the following conditions are met: (1) the Eligible Director has ceased to be a member of the Board, and (2) the Eligible Director is not an employee of the Company or an Affiliate, nor a member of the board of directors of an Affiliate.

Our understanding of the facts, proposed plan and purpose of the proposed plan is as set forth below.

Facts

1. The Company is incorporated under the laws of Canada. The Company 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 are principally traded on XXXXXXXXXX Stock Exchange. The Company has a fiscal year-end of XXXXXXXXXX.

2. The mailing address of the Company is XXXXXXXXXX. The Company files its income tax returns at the XXXXXXXXXX Tax Centre and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

3. The Company carries on an active XXXXXXXXXX business in XXXXXXXXXX.

4. The Company has a Board of Directors. The individuals who serve on the Board may be residents or non-residents of Canada. The Company currently provides Eligible Directors with Directors' Annual Remuneration which, as noted above, 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' Annual Remuneration generally comprises annual retainer fees for serving as a director, additional annual retainer fees for service as a member or chair of a committee of the Board and meeting fees for attending committee and general Board meetings.

5. The amount of Directors' Annual Remuneration for a year is determined by the Board. The portion of Directors' Annual 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 percent 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") for Eligible Directors effective XXXXXXXXXX, subject to receipt of an advance income tax ruling that the Plan is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations"). The proposed text of the Plan and election forms associated with the Plan were included with your submission.

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

(a) The Plan will be administered by the Committee.

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

(c) For the first year in which the Plan is effective, Eligible Directors will be given until the day that is XXXXXXXXXX business days before the end of the Quarter that includes the effective date of the Plan to make an election with respect to the portion of his or her Directors' Annual Remuneration payable on and after the end of such Quarter.

(d) With respect to all years commencing after XXXXXXXXXX, an Eligible Director may change his or her election with respect to the form of payment of his or her Directors' Annual Remuneration for a particular year by filing a new written election with the Committee on or before the last business day of the calendar year immediately prior to the particular year, specifying, in whole percentages, the percentage of his or her Directors' Annual Remuneration for the particular year to be provided in cash and DSUs. An election under the Plan, as described in this paragraph and in 7(c) above, as the case may be, shall continue in force with respect to Directors' Annual Remuneration for subsequent years, subject to the Eligible Director's right to change his or her election, as described herein.

(e) The Company shall maintain in its books or cause to be maintained 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' Annual Remuneration payable to the Eligible Director at the end of the Quarter in the form of DSUs by the Fair Market Value on the Conversion Date for that Quarter.

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

(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 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 then recorded in each Eligible Director's account under the Plan.

(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 DSU's 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, where the Eligible Director has died, 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 in cash, net of applicable withholdings.

(l) Except as specifically set out in the Plan, no 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 a claim or right to any future grants of DSUs or other benefits under the Plan. Neither the Plan nor any action taken thereunder shall interfere with the right of the Company to terminate the membership of an Eligible Director on the Board at any time. 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 Plan

7. The purposes of the Plan are:

(a) to promote a greater alignment of interests between directors and 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.

Other Information:

To the best of your knowledge, and that of the taxpayer, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre 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) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Rulings

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, our rulings are 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 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 defined in subsection 248(1) of the Act.

D. Except for those amounts identified in Rulings E and F, no amount will be included in the income of any Eligible Director, under subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act as a result of the awarding of DSUs under the Plan to an Eligible Director.

E. Amounts received under the Plan by or on behalf of an Eligible Director who is resident in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Director pursuant to paragraph 6(1)(c) of the Act in the year of receipt.

F. Amounts received under the Plan by or on behalf of an Eligible Director who is not resident in Canada, to the extent attributable to services performed in Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Director pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

G. All amounts payable under the Plan to or on behalf of the Beneficiary of an Eligible Director as a result of an Eligible Director's death, will constitute a right or thing held by the Eligible Director at the time of death for purposes of subsections 70(2) and 70(3) of the Act.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Company makes a cash payment to an Eligible Director, or if the Eligible Director has died, to his or her Beneficiary, in respect of services rendered by such Eligible Director as a director of the Company, in satisfaction of all or any part of the Eligible Director's interest under the Plan, the Company will be entitled to deduct the gross amount of that cash payment, including any amount withheld in respect of taxes and other source deductions, in calculating its income in respect of the year in which the cash payment was made, in accordance with section 9 of the Act.

The above advance income tax rulings, which are based on the Act and Regulations in their 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 Advance Income Tax Rulings, dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch