2002 Ruling 2002-0138973 - 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 						2002-013897

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge receipt of your correspondence dated XXXXXXXXXX and the information provided during our various telephone conversations in connection with your request.

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

Facts

1. XXXXXXXXXX (the "Corporation") is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").

2. The mailing address of the Corporation is 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.

3. The Corporation carries on an XXXXXXXXXX business.

4. The Corporation's common shares are listed and traded on XXXXXXXXXX Stock Exchange.

5. The Corporation currently pays members of its Board of Directors an annual board retainer, fees for services on a committee of the Board of Directors, fees for chairing a committee of the board of directors, fees for attending meetings of the board of directors or committees of the board of directors. The meetings of the Board of Directors and committees of the Board of Directors are held in Canada. XXXXXXXXXX.

Proposed Plan

6. The Corporation will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its resident and non-resident non-employee directors. XXXXXXXXXX. Unless otherwise determined by the Board of Directors of the Corporation, the Plan will be unfunded and will be administered by the XXXXXXXXXX of the Corporation's Board of Directors. The Corporation will be responsible for all costs relating to the administration of the Plan. A copy of the proposed text of the final Plan was provided with your submission for an advance income tax ruling.

7. Certain terms used in the Plan are generally defined as follows:

(a) "Affiliated Entity" means any related or associated corporation (as defined in the Act) or any corporation that is a member of a group of corporations that do not deal at arm's length (as defined in the Act), notwithstanding that they may not be related or associated;

(b) "Board" means the Board of Directors of the Corporation;

(c) "Broker" means a broker independent from the Corporation or any Affiliate Entity who has been designated by the Corporation as the broker that will purchase Common Shares pursuant to the Plan and who is a member of the principal Canadian stock exchange or other public exchange on which the Common Shares are listed or, if the Common Shares are not then listed, as selected by the Committee acting in good faith;

(d) "Committee" means the XXXXXXXXXX of the Board or such other committee or persons (including the Board) that may be designated as such by the Board for the purposes of the Plan;

(e) "Common Share" means a common share of the Corporation;

(f) "Deferred Share Unit" means a notional unit credited by the Corporation to an Eligible Director by way of a bookkeeping entry in the books of the Corporation 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;

(g) "Dividend Equivalent" means the dividends that would have been paid to an Eligible Director if the Deferred Share Units in the Eligible Director's notional account had been Common Shares;

(h) "Eligible Director" means all directors of the Corporation or an Affiliated Entity who are not employees of the Corporation or an Affiliated Entity;

(i) "Fair Market Value" means the average of the high and low prices per Common Share at which Common Shares are traded on the principal Canadian stock exchange on which the Common Shares are traded on the applicable day, or if such stock exchange is not open on such day, or if there are no prices per Common Share quoted on such day, on the last preceding day on which such stock exchange is open or there is a quoted price, as the case may be. If the Common Shares are not listed on a stock exchange, the Fair Market Value shall be the value established by the Committee based on the price per Common Share on any other public exchange on which the Common Shares are listed, or if the Common Shares are not listed on any public exchange, by the Committee acting in good faith; and

(j) "Termination of Service" means

(i) if the Eligible Director has become an employee of the Corporation or an Affiliated Entity of the Corporation, the date that is the later of the date the Eligible Director ceases, for whatever reason, to be a member of the Board and the date that the Eligible Director ceases, for whatever reason, to be employed by the Corporation or an Affiliated Entity of the Corporation, and

(ii) in any other case, the date on which the Eligible Director is not a member of the Board or a board of directors of an Affiliated Entity.

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

(a) The effective date of the Plan will be XXXXXXXXXX.

(b) A notional account will be established for each Eligible Director who participates in the Plan. The Committee will grant Deferred Share Units to each Eligible Director in accordance with the Plan. The Deferred Share Units' granted to each Eligible Director will be credited to the Eligible Director's notional account. The number of Deferred Share Units to be credited to each Eligible Director will be determined in the discretion of the Committee. No Deferred Share Units will be granted prior to the issuance of an advanced income tax ruling.

(c) Under no circumstances shall the Deferred Share Units be considered Common Shares of the Corporation nor shall they entitle any Eligible Director to exercise voting rights or any other rights attaching to the ownership of the Corporation's Common Shares nor shall any Eligible Director with Deferred Share Units credited to his or her account be considered the owner of Common Shares of the Corporation.

(d) An Eligible Director's notional account will be credited with additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Corporation on its Common Shares. The number of additional Deferred Share Units will be computed by dividing: (a) the Dividend Equivalent, by (b) the Fair Market Value of a Common Share on such date.

(e) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than ordinary course cash dividends) of Corporation assets to shareholders, or any other similar changes made by the Corporation affecting the Common Shares, the Committee may in its discretion make proportionate adjustments, to reflect such change or changes, to the number of Deferred Share Units outstanding under the Plan and, in its discretion make appropriate adjustments to the maximum number of Deferred Share Units which may be granted under the Plan.

(f) The Deferred Share Units credited to an Eligible Director's notional account will not be payable until after the Eligible Director's Termination of Service.

(g) Upon a Termination of Service, other than death, an Eligible Director may redeem the Deferred Share Units credited to the Eligible Director's account by filing a notice of redemption on a prescribed form during the period commencing the second business day after the next release of the Corporation's quarterly or annual financial results following the date of the Eligible Director's Termination of Service and ending on XXXXXXXXXX of the year following the Termination of Service (the "Redemption Period"). If the Eligible Director fails to file a notice of redemption within the Redemption Period, then the Eligible Director shall be deemed to have filed a notice of redemption on the final day of the Redemption Period.

(h) An Eligible Director's notice of redemption will state the date that the Eligible Director elects to have the Deferred Share Units paid out by the Corporation (the "Redemption Date)". The notice of redemption filed by the Eligible Director will also specify how the Eligible Director wants the Deferred Share Units paid out under the Plan.

Eligible Directors may elect to receive either:

(i) a cash payment equal to the number of Deferred Share Units credited to the Eligible Director's notional account as of the Redemption Date multiplied by the Fair Market Value per Common Share on the Redemption Date, net of applicable withholdings; or

(ii) Common Shares of the Corporation purchased on the Eligible Director's behalf on the open market by a Broker, or

(iii) a percentage of the Deferred Share Units paid out in cash and the remaining percentage of the Deferred Share Units paid out as Common Shares of the Corporation purchased on the Eligible Director's behalf on the open market by a Broker.

If a notice of redemption is deemed to be filed or the notice of redemption filed does not specify the type of payment, the Eligible Director shall be deemed to have elected to receive the entire payment in cash.

Where the Corporation's Common Shares are purchased on the open market on the Eligible Director's behalf, the Corporation will remit all or a portion of the final payment to the Broker, and the Broker will be required to (within ten business days) use the amount to purchase Common Shares in the open market on the principal Canadian stock exchange or any other public exchange on which the Common Shares are traded. The number of Common Shares will be computed by taking the number of Deferred Share Units on which the Eligible Director elected to receive in Common Shares on the Redemption Date, net of the number of Deferred Share Units that would equal the applicable withholding taxes. Any Common Shares acquired by the Broker from all or a portion of the final payment and any cash remaining therefrom shall be delivered directly to the Eligible Director forthwith as soon as practicable upon completion of such purchases. The Corporation will pay all brokerage fees arising in connection with the purchase of Common Shares by the Broker in accordance with the Plan.

(i) The Corporation will make all of the payments described in (h) above to the Eligible Director or the Broker, within XXXXXXXXXX days of the Redemption Date. In any event, the payment date will be no later than XXXXXXXXXX of the first calendar year commencing after the Eligible Director's Termination of Service.

(j) In the event of the death of an Eligible Director while in office or after ceasing to hold all positions with the Corporation or any Affiliated Entity but before filing a notice of redemption with the Corporation as described in (g) above, the Corporation shall, within one (1) year of the Eligible Director's death, make a lump sum cash payment in each case to or for the benefit of the legal representative or beneficiary of the Eligible Director. In any event, the payment date will be no later than XXXXXXXXXX of the first calendar year commencing after the Eligible Director's death. The lump sum cash payment shall be equal to the number of Deferred Share Units credited to the Eligible Director's account on the date of death multiplied by the Fair Market Value per Share on the day immediately preceding the date of death, net of any applicable withholdings. If permitted by applicable law, the Eligible Director may appoint a beneficiary of his or her rights under the Plan.

(k) 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 Deferred Share Units will be granted to such Eligible Director to compensate for a downward fluctuation in the price of the Corporation's Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

9. The terms of the Plan will provide that the Board can unilaterally amend or terminate the Plan at any time except with respect to rights that have accrued to an Eligible Director at the date of the amendment or termination. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.

Purpose of the Proposed Plan

10. The purpose of the Plan is to enhance the Corporation's ability to attract and retain talented 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.

Additional Information

11. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Corporation or of a person related to the Corporation;

(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Corporation or of a person related to the Corporation;

(c) is under objection by the Corporation or by a person related to the Corporation;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to 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 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 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. Except for those amounts identified in Rulings E and F 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.

E. 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 amount paid by the Corporation to an Eligible Director's Broker to purchase Common Shares on the open market as described in paragraph 8(h)(ii) and 8(h)(iii) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid to an Eligible Director in respect of the Deferred Share Units credited to his or her notional account as described in paragraph 8(h)(i) and 8(h)(iii) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in paragraph 8(h) 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 Eligible Director (or his or her legal representative) by the Broker as described in 8(h) above.

F. 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 amount, to the extent attributable to services rendered in Canada, paid by the Corporation to an Eligible Director's investment account to purchase Common Shares on the open market as described in paragraph 8(h)(ii) and 8(h)(iii) above;

(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, paid to an Eligible Director in respect of the Deferred Share Units credited to his or her notional account as described in paragraph 8(h)(i) and 8(h)(iii) above;

(c) 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 Corporation as described in paragraph 8(h) 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 Eligible Director (or his or her legal representative) by the Broker as described in 8(h) above.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings E and F above that is paid by the Corporation in respect of any Eligible Directors in a particular year will be deductible by the Corporation under 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.

Yours truly,

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