2002 Ruling 2002-0167253 - 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 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 proposed DSU plan be excluded from the SDA rules?

Position: Yes

Reasons: Complies with 6801(d) provisions

XXXXXXXXXX 2002-016725

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

RE: Advance Tax Ruling
XXXXXXXXXX - Deferred Share Unit Plans for Directors and Executives

This is in reply to your letter of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above-noted corporation.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

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

b. "Affiliate" means: an affiliate of the Corporation as that term is defined in paragraph 3 of Interpretation Bulletin IT-337R3, Retiring Allowances;

c. "Board" means: the board of directors of the Corporation;

d. "Bonus Plan" means: XXXXXXXXXX;

e. "Cease Trade Date" means: the date on which the Shares cease to be traded on the Stock Exchange, provided such cessation in trading is not reasonably expected to be temporary;

f. "Committee" means: XXXXXXXXXX;

g. "Conversion Date" means: in general, the last day of a Quarter, on which Participants remuneration for that Quarter will be converted into DSUs in accordance with the Plans;

h. "Corporation" means: XXXXXXXXXX, a public corporation and a taxable Canadian corporation, incorporated under the laws of XXXXXXXXXX, the Shares of which are principally traded on the Stock Exchange and the XXXXXXXXXX Stock Exchange. The Corporation has a fiscal year-end of XXXXXXXXXX and files under tax account number XXXXXXXXXX through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

The Mailing address of the Corporation is:

XXXXXXXXXX.

i. "DSU" means: a "Deferred Share Unit" which is a bookkeeping entry on the books of the Corporation, the value of which on any particular date shall be equal to the Market Value;

j. "Director" means: a member of the Board who is not an employee of the Corporation otherwise than as a member of the Board;

k. "Directors' Remuneration" means: all amounts payable to a Director by the Corporation in respect of the services provided to the Corporation by the Director as a member of the Board in a calendar year, 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; and

(iv) the fees for attending meetings of the Board or Board committees,

but, for greater certainty, excluding amounts received by a Director as a reimbursement for expenses incurred in attending meetings;

l. "Directors' Plan" means: the Plan described in 3, 5 and 6 below;

m. "Eligible Executive" means: any employee of the Corporation that the Committee may designate from time to time as eligible to participate in the Senior Executives' Plan;

n. "Employer" means: with respect to an Eligible Executive employed by the Corporation, the Corporation, and with respect to an Eligible Executive employed by a Related Corporation, such Related Corporation;

o. "Incentive Compensation Award" means: the remuneration payable under the Bonus Plan as described in 1 below;

p. "Market Value" means: with respect to a particular date, the closing price of a Share on the Stock Exchange on the Trading Day immediately prior to that date or such other value as may be determined as provided in 5(i) and (j) below;

q. "Participant" means: with respect to the Directors' Plan, a Director who has received a grant of DSUs under that Plan, and with respect to the Senior Executives' Plan, an Eligible Executive who has received a grant of DSUs under that Plan;

r. "Performance Period" means: a calendar year in respect of which an Eligible Executive may be or become entitled to an Incentive Compensation Award based on the criteria taken into account under the Bonus Plan;

s. "Plan" means: either the Directors' Plan or the Senior Executives' Plan, as applicable, (collectively, the "Plans");

t. "Quarter" means: a fiscal quarter of the Corporation, which, until changed by the Corporation, shall be the three-month period ending March 31, June 30, September 30 or December 31 in any calendar year;

u. "Redemption Date" means: the date specified in the written redemption notice filed by the Participant, or where the Participant has died, by the Participant's legal representative, with the Secretary of the Corporation, which in any event shall be after the date of filing of the redemption notice and within the period from the Participant's Termination Date to December 15 of the first calendar year commencing after the Participant's Termination Date;

v. "Regulations" means: the Income Tax Regulations;

w. "Related Corporation" means: a corporation related to the Corporation for purposes of the Act;

x. "Senior Executives' Plan" means: the Plan described in 4, 5 and 7 below;

y. "Share" means: a common share of the Corporation and such other share as is substituted therefore as a result of amendments to the articles of the Corporation, reorganization or otherwise, including any rights that form a part of the common share or substituted share but not including any other rights that are attached thereto and trade therewith or any other share that is added thereto;

z. "Stock Exchange" means: XXXXXXXXXX Stock Exchange, or if the Shares are not listed on XXXXXXXXXX Stock Exchange, 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;

aa. "Termination Date" means: the earliest date on which a Participant:

(1) is not a member of the Board or of the board of directors of an Affiliate; and

(2) is not otherwise employed by the Corporation or an Affiliate;

bb. "Trading Day" means: any date on which the Stock Exchange is open for the trading of Shares and on which one or more Shares actually traded.

In addition, in this letter, the terms "Canadian-controlled private corporation", "employee", "officer", "public corporation" and "taxable Canadian corporation" have the meanings defined in subsection 248(1) of the Act; and, the term "arm's length" has the meaning assigned by subsection 251(1) of the Act.

Facts

1. The Corporation currently operates the Bonus Plan for Eligible Executives, pursuant to which an Eligible Executive may receive Incentive Compensation Awards, based on corporate performance and the Eligible Executive's individual contribution to the Corporation's financial results and/or the financial results of a Related Corporation during a Performance Period, measured against predetermined objectives. Under the Bonus Plan, shortly after the end of each Performance Period, management and the Board determine the amount of any Incentive Compensation Award to be made to an Eligible Executive for that Performance Period having regard to the extent to which the predetermined objectives for that Performance Period were met. Incentive Compensation Awards under the Bonus Plan are payable in the first quarter of the year immediately following the year to which the Awards relate.

2. The Corporation wishes to establish the proposed Plans for certain Eligible Executives and Directors.

Proposed Plans

3. The Corporation will establish the Directors' Plan. The Directors' Plan will comprise a plan text and written agreements between the Corporation and each Director setting out the terms of the Director's participation in the Directors' Plan. Copies of the proposed Directors' Plan, together with the related schedules thereto, were provided with your request. However, the Plan documentation provided will be revised to be consistent with this letter. The Plan may be amended or terminated at any time by the Board, except as to rights already accrued thereunder by the Directors. 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 Regulations or any successor provision thereto.

4. The Corporation will also establish the Senior Executives' Plan. The Senior Executives' Plan will comprise a plan text and written agreements between the Corporation and each Eligible Executive setting out the terms of the Eligible Executive's participation in the Senior Executives' Plan. Copies of the proposed Senior Executives' Plan, together with the related schedules thereto, were provided with your request. However, the Plan documentation provided will be revised to be consistent with this letter. The Plan may be amended or terminated at any time by the Board, except as to rights already accrued thereunder by the Eligible Executives. 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 Regulations or any successor provision thereto.

5. The relevant common features of the Plans are as follows:

(a) The establishment of the Plans will be conditional on the receipt of this advance income tax ruling and the applicable Committee will administer the Plans effective on the date of receipt by the Corporation of this advance income tax ruling.

(b) Under the Plans, the Corporation will grant a specific number of DSUs to Participants. Under the Directors' Plan, the grants will be annual grants of XXXXXXXXXX DSUs for each Director as described in 6(a) below. Under the Senior Executives' Plan, the grants will be at such times and for such numbers of DSUs as the Committee determines as described in 7(a) below.

(c) Each Plan will also permit a Participant to elect to receive DSUs in lieu of specified types of cash remuneration that the Participant might otherwise receive from the Corporation. The provisions of the Directors' Plan relating to the election to receive DSUs under that Plan is described in more detail in 6(b) below. The provisions of the Senior Executives' Plan relating to the election to receive DSUs under that Plan is described in more detail in 7(b) below.

(d) In the event that a cash dividend is declared and paid by the Corporation on Shares, a Participant will 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 the Participant if the DSUs in the Participant's account had been Shares, by the closing price of a Share on the Stock Exchange on the date on which the cash dividends were paid on the Shares. However, in the event a Cease Trade Date has occurred, the value of a Share (or the share of a Related Corporation, as the case may be) used to calculate the number of additional DSUs to be credited in respect of dividends will be the value determined on a reasonable and equitable basis by the Board.

(e) In the event of:

i. a stock dividend, stock split, combination or exchange of shares;

ii. a merger, arrangement, re-organization, re-capitalization, consolidation, or spin-off;

iii. a distribution (other than a normal cash dividend) of the Corporation's assets to shareholders; or

iv. some other similar change affecting the Shares,

such proportionate adjustments shall be made with respect to the number of DSUs then outstanding under the Plans as the Board, in its sole discretion, may determine.

(f) No amount will be paid to, or in respect of, a Participant under the Plans or pursuant to any other arrangement, no additional DSUs will be granted and no other benefit will be conferred upon or in respect of a Participant, in order to compensate for a downward fluctuation in the fair market value of the Shares.

(g) The Corporation shall maintain in its books an account for each Participant which shall be credited with the DSUs issued to the Participant from time to time.

(h) The Participant or, where the Participant has died, the Participant's legal representative, may redeem the value of the DSUs credited to the Participant's account following the Participant's Termination Date by filing a written redemption notice with the Secretary of the Corporation specifying the applicable Redemption Date.

(i) As soon as practicable after the Redemption Date specified by a Participant or the Participant's legal representative, as the case may be, and, in any event no later than December 31 of the first calendar year commencing after the Participant's Termination Date, the value of the DSUs redeemed by or in respect of the Participant shall be paid to the Participant, or if the Participant has died, to the Participant's estate, in the form of a lump sum cash payment, net of any applicable withholdings. The value of the DSUs redeemed by or in respect of a Participant shall be determined based on the Market Value unless a Cease Trade Date has occurred in which case the Market Value will be calculated in the manner described in 5(j) below.

(j) For purposes of valuing DSUs on a Redemption Date that is after a Cease Trade Date, if the Participant's Termination Date is before or not more than XXXXXXXXXX days after the last Trading Day before the Cease Trade Date, the value of such DSUs on the Participant's Redemption Date will be the Market Value on the Cease Trade Date determined without regard for this section and if the Participant's Termination Date is more than XXXXXXXXXX days after the last Trading Day before the Cease Trade Date, the value of such DSUs on the Participant's Redemption Date will be based on the fair market value of a share of the Corporation (or of a share of a Related Corporation) as determined on a reasonable and equitable basis by the Board after obtaining the advice of one or more reputable, independent investment banks.

(k) The Plans may be amended or terminated in whole or in part at any time by the Board, except as to rights already accrued by the Participants under the Plans. Notwithstanding the foregoing, any amendment or termination of the Plans shall be such that the Plans continuously meet the requirements of Regulation 6801(d) or any successor provision thereto.

6. Specifically with respect to the Directors' Plan:

(a) Each year, the Corporation will grant XXXXXXXXXX DSUs to each Director. In the first year in which the Directors' Plan is effective, the grant of DSUs will be effective on the date of receipt by the Corporation of this advance income tax ruling for any Director who is a Director on that date. For years following the first year in which the Directors' Plan is effective, the grant of DSUs will be effective as of January 1st of such year for any Director who is a Director on January 1st of a year. In any case where an individual becomes a Director after the date of this ruling and after January 1st of a particular year, the grant will be effective as of the Participant's date of appointment to the Board.

(b) Each Director will also be permitted to elect to receive their Directors' Remuneration in the form of cash, or DSUs or a combination thereof, by filing a written election with the Secretary of the Corporation within the time periods described below for such elections, specifying, in whole percentages, the percentage of their Directors' Remuneration to be provided in cash and DSUs. Subject to 6(e) below, a Director may elect to receive:

(i) XXXXXXXXXX%,
(ii) XXXXXXXXXX%,
(iii) XXXXXXXXXX%, or
(iv) XXXXXXXXXX%

of their Directors' Remuneration in DSUs under the Directors' Plan, with the remainder, if any, of such Directors' Remuneration to be paid in cash to the Director.

(c) For the first such election under the Director's Plan, Directors will be given until the day that is XXXXXXXXXX business days before the end of the first quarter of 2003 to make an election with respect to the portion of their Directors' Remuneration payable after such date.

(d) With respect to all years commencing after 2003, a Director may change an election with respect to the form of payment of the Directors' Remuneration for a particular year by filing a new written election with the Secretary of the Corporation on or before the last business day of the calendar year immediately prior to the particular year, specifying, in whole percentages as set out in 6(b) above, the percentage of the Participant's Directors' Remuneration for the particular year to be provided in cash and DSUs. An election or revised election under the Directors' Plan, shall continue in force with respect to Directors' Remuneration for subsequent years, subject to the Director's right to change the election, as described in this paragraph.

(e) Notwithstanding the Director's election as described in 6(b), (c) or (d) above, the Committee may, in its sole discretion, decline to award DSUs to a Director.

(f) The number of DSUs credited to a Director for a Quarter shall be equal to the amount of Directors' Remuneration payable to the Director at the end of the Quarter, multiplied by the percentage of such Directors' Remuneration designated by the Director as payable in DSUs, divided by the Market Value on the "Conversion Date" for that Quarter.

(g) DSUs will be fully vested upon being awarded to a Director.

7. Specifically with respect to the Senior Executives' Plan:

(a) DSUs may be granted to an Eligible Executive by the Committee in such number, at such date and subject to such conditions with respect to vesting or otherwise, if any, as the Committee may specify in the written agreement, as referred to in 4 above, between the Corporation and the Eligible Executive with respect to such DSUs provided that, for greater certainty, any conditions attached to such DSUs shall in no case cause these DSUs or the Senior Executives' Plan to cease to comply with the requirements of paragraph 6801(d) of the Regulations or any successor provisions thereto.

(b) Each Eligible Executive will also be permitted to elect in respect of a calendar year whether to participate in the Senior Executives' Plan. If the Eligible Executive elects to participate in the Senior Executives' Plan, the Eligible Executive may elect by filing a written election with the Secretary of the Corporation within the time periods described below for such elections, specifying, in whole percentages, the percentage of their Incentive Compensation Award to be provided in cash and DSUs. The Eligible Executive may elect to receive:

(i) XXXXXXXXXX%,
(ii) XXXXXXXXXX%,
(iii) XXXXXXXXXX%, or
(iv) XXXXXXXXXX%

of the Eligible Executives potential Incentive Compensation Award calculated in accordance with the Bonus Plan in DSUs under the Senior Executives' Plan, with the remainder of the Eligible Executive's potential Incentive Compensation Award, if any, paid in cash to the Eligible Executive in accordance with the terms of the Bonus Plan.

(c) For 2003, subject to receipt by the Corporation of this ruling in or before 2003, Eligible Executives will be given until the day that is XXXXXXXXXX business days following the date on which the Corporation receives this ruling to make an election with respect to the portion of their Incentive Compensation Award payable in respect of the 2003 Performance Period.

(d) Subject to 7(c) above, with respect to all years commencing after 2003, the Eligible Executive will be required to make the Participant's election before the commencement of the Performance Period in respect of which the election is made. Once made, an election will be irrevocable on the part of the Eligible Executive with respect to the Performance Period in respect of which it is made.

(e) Notwithstanding the Eligible Executive's election as described in 7(b), (c) and (d) above, the Committee may in its sole discretion decline to award DSUs to an Eligible Executive in respect of the Eligible Executive's participation in the Senior Executives' Plan in a particular year.

(f) Subject to 7(b), (c) and (d) above, each Eligible Executive who has elected to participate in the Senior Executives' Plan for a particular calendar year will be eligible to receive DSUs subject to meeting the applicable corporate and personal performance criteria under the Bonus Plan for the Performance Period in question. After the end of a calendar year, the Committee will, subject to its discretion to decline to award DSUs to an Eligible Executive as provided under 7(e) above:

(i) determine the amount that would have been awarded to the Eligible Executive under the Bonus Plan as if all of the Eligible Executive's Incentive Compensation Award for the relevant Performance Period were provided under that plan;

(ii) multiply the amount determined under (i) by the percentage of the Eligible Executive's Incentive Compensation Award for such Performance Period that the Eligible Executive has elected to receive under the Senior Executives' Plan or the percentage determined by the Committee, as applicable;

(iii) divide the product thereof by the Market Value determined as of the last business day of the relevant Performance Period to obtain the number of DSUs to be awarded to the Eligible Executive; and

(iv) credit such number of DSUs to the Eligible Executive's account under the Senior Executives' Plan.

(g) DSUs granted to an Eligible Executive under 7(a) will vest in such proportions and at such times as may be specified in the written agreement between the Corporation and the Eligible Executive with respect to those DSUs. DSUs granted to an Eligible Executive under section 7(f) will be fully vested upon being awarded to the Eligible Executive.

Purpose of the Proposed Plans

8. The purpose of the Plans is to promote a greater alignment of interests between the Directors and the Eligible Executives and the shareholders of the Corporation.

Additional Information

9. To the best of your knowledge and that of the Corporation, none of the issues involved in this ruling are:

i) in an earlier return of the Corporation, a Participant, or any person related to the Corporation or a Participant;

ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation, a Participant, or any person related to the Corporation or a Participant;

iii) under objection by the Corporation, a Participant, or any person related to the Corporation or a Participant;

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 an income tax ruling previously issued by CCRA to the Corporation.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed Plans and the purpose of the proposed Plans, and provided the wording of the proposed Plans are and continue to be substantially as described above, we rule as follows:

A. Each Plan will be a prescribed plan or arrangement set out in Regulation 6801(d) and thus will not be, for the purposes of the Act, a "salary deferral arrangement" as defined in subsection 248(1) of the Act.

B. Neither Plan will, for the purposes of the Act, constitute an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.

C. Neither Plan will, for the purposes of the Act, constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act, provided that the particular Plan remains unfunded.

D. No amount will be included in the income of any Director pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act, solely as a result of a grant of DSUs under the Directors' Plan to a Director.

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

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

G. No amount will be included in the income of any Eligible Executive pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act, solely as a result of a grant of DSUs under the Senior Executives' Plan to an Eligible Executive.

H. Amounts received under the Senior Executives' Plan by or on behalf of an Eligible Executive who is a resident of Canada, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Eligible Executive pursuant to subsection 5(1) of the Act in the year of receipt.

I. Amounts received under the Senior Executives' Plan by or on behalf of an Eligible Executive who is not a resident of Canada at the time of the receipt, to the extent the amount is attributable to services performed in Canada and, if the Eligible Executive was resident in Canada at the time the Eligible Executive performed the services, outside Canada, including any amount withheld in respect of taxes or other source deductions, will be included in the income of the Eligible Executive pursuant to subsection 5(1) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

J. All amounts payable under the Plans to the estate of a Participant shall constitute a right or thing held by the deceased Participant at the time of death for purposes of subsection 70(2) of the Act.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a payment described in the above rulings to a Director or if the Director has died, the Director's estate, in satisfaction of all or any part of the Director's interest under the Directors' Plan, the Corporation will be entitled to deduct the amount paid including any amount withheld in respect of taxes and other source deductions, in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

L. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a payment described in the above rulings to an Eligible Executive or if the Eligible Executive has died, the Eligible Executive's estate, in satisfaction of all or any part of the Eligible Executive's interest under the Senior Executives' Plan, the Corporation will be entitled to deduct the amount paid including any amount withheld in respect of taxes and other source deductions, in calculating its income for the year in which the payment is made 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 70-6R5 dated May 17, 2002, and are binding on the CCRA provided that the Plans are implemented by XXXXXXXXXX.

Nothing in this ruling should be construed as implying that the CCRA has reviewed or is making a determination in respect of the fair market value of any share referred to herein or that the term Market Value means fair market value. However, in our opinion for the purposes of paragraph 6801(d) of the Regulations, the determination of the Market Value of a Share as described in the Plans, would depend on the fair market value of a Share.

Yours truly,

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