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:
1. Will the proposed payment of some or all of a participant's annual bonus in the form of phantom shares result in an SDA?
2. Will the fact that the unit values are tied to the value of a special redeemable preferred share of the subsidiary XXXXXXXXXX violate 6801(d)?
Position:
1. No.
2. No.
Reasons:
1. The conditions in paragraph 6801(d) are satisfied.
2. Meets the condition that the value of units be based on the FMV of shares of the corporation or of a related corporation.
XXXXXXXXXX 2002-016910
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named Corporation. We also acknowledge the additional information provided with your submissions of XXXXXXXXXX, and the information provided during our telephone conversations XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in this ruling request is:
(a) in an earlier return of the Corporation or a related person;
(b) 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;
(c) under objection by the Corporation or a related person;
(d) before the courts; nor
(e) the subject of a ruling previously issued to the Corporation or a related person by the Income Tax Rulings Directorate.
Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:
Facts
1. The Corporation is a taxable Canadian corporation. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
2. The Corporation files its tax returns at the XXXXXXXXXX Tax Services Office and deals with that office. The head office of the Corporation is XXXXXXXXXX.
3. A new corporation ("Subco") will be incorporated. Subco will be a taxable Canadian corporation, as defined in subsection 89(1) of the Act and a wholly-owned subsidiary of the Corporation.
4. The Corporation has established a comprehensive benefit program for its executives that includes a registered pension plan, a supplementary pension plan, a long-term incentive plan, a short-term bonus plan, a stock option plan, insurance and medical programs and an annual cash bonus. Not all executives participate in all the plans.
5. The cash component of compensation paid to executives of the Corporation consists of salary plus discretionary performance bonus.
Proposed Plan
6. The Corporation proposes to establish a deferred compensation plan for certain eligible employees (the "Plan"). The Plan will be implemented only after the advance tax ruling is granted.
7. An employee will be eligible to participate in the Plan for a particular year if selected by the Corporation as being eligible to participate (the "Participant"). Only employees selected for a particular year may defer compensation under this Plan that they would otherwise receive in that particular year.
8. Each year, a Participant must defer a minimum amount of his or her annual cash bonus (the "Mandatory Deferral Amount"). In addition, the Participant may elect to defer an additional portion of his or her cash bonus. The total amount that a Participant may elect to defer in a particular year cannot exceed the lesser of any maximum deferral limits established by the Corporation or the annual cash bonus of the Participant for the year.
9. In respect of each year, a Participant must elect in writing to defer any of his or her annual cash bonus in excess of the Mandatory Deferral Amount. The election must be made and filed with the Corporation before the Participant would otherwise be entitled to receive the annual cash bonus. Elections must be made within the time limit established by the Corporation and filed with the Corporation annually. An election, once made, may not be revoked for the year to which it relates.
10. The articles of Subco will authorize the issuance of special classes of non-cumulative redeemable preferred shares ("Special Shares"). Subco will issue a number of such classes of Special Shares to the Corporation. XXXXXXXXXX. The redemption value (and therefore the fair market value) of a XXXXXXXXXX Share will be equal to XXXXXXXXXX.
11. Under the Plan, a number of different classes of phantom stock units ("PSUs") will be created. One class of PSUs will correspond to common shares of the Corporation. Each class of the remaining classes of PSUs will correspond to a class of the Special Shares. The value of a PSU will equal the value of the common share or the Special Share to which it corresponds.
12. Each Participant will be allocated PSUs under the Plan. The number of PSUs allocated to a Participant will be equal to the amount of cash bonus deferred by the Participant divided by the value of the PSU at the time of the allocation.
13. A Participant will have no legal ownership of or beneficial interest in the common shares of the Corporation or in the Special Shares or XXXXXXXXXX by virtue of the allocation of PSUs. For greater certainty, a PSU will not entitle a Participant to any shareholder rights vis à vis the Corporation or Subco, including without limitation, voting rights, dividend entitlements or rights on liquidation.
14. In the year in which the Mandatory Deferral Amount is allocated to the Plan, this amount must be allocated to PSUs the value of which is based on common shares of the Corporation. At the next date when the Participant could make an election as to how the deferred amounts in his or her account are to be allocated following the XXXXXXXXXX anniversary of the date on which the particular Mandatory Deferral Amount was allocated to the PSUs that track the Corporation's common shares, the Participant may convert XXXXXXXXXX% of those PSUs to other PSUs, the value of which is based on the value of Subco's Special Shares. In the following year and thereafter, the Participant may convert the remaining PSUs that base their value on the Corporation's common shares to PSUs, the value of which is based on the value of Subco's Special Shares. PSUs that base their value on the value of Subco's Special Shares cannot be converted to PSUs that base their value on the Corporation's common shares.
15. Subject to the restrictions set out in paragraph 14 above, the Participants will be able to elect which class or classes of PSUs they want to have their deferred compensation allocated. The election once made is irrevocable for that year.
16. Periodically, at such time as determined by the Corporation and subject to the restrictions set out in paragraph 14 above, a Participant, including a Participant who was not selected in a particular year to defer any portion of his or her compensation, may elect to convert previous allocations of PSUs into another class of PSUs. The election to convert a previous allocation of PSUs into another class of PSUs is irrevocable once made for that period. XXXXXXXXXX. The allocation and conversion of PSUs will be based upon the fair market value of the class of Special Shares to which the PSU relates, at the time of allocation or conversion, as described above in paragraph 11. The fair market value of the new PSUs at the time of conversion will not exceed the fair market value at that time of the converted PSUs to which they correspond.
17. A notional account ("Notional Account") will be established for each Participant. The number of PSUs allocated to the Participant and the value of those PSUs will be recorded in the Notional Account. The amounts credited to the Notional Account shall be recorded as a book reserve of the Corporation.
18. In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin off or other distribution affecting the fair market value of the common shares of the Corporation or the fair market value of Special Shares, the number of PSUs credited to a Participant's Notional Account will be adjusted accordingly.
19. A Participant may appoint a beneficiary to receive amounts under the Plan in the event of the participant's death.
20. The PSUs allocated to a Participant under the Plan that are attributable to the Mandatory Deferral Amount will vest after XXXXXXXXXX. The remaining PSUs will vest immediately upon allocation. However, the Participant will not have any right to receive any benefits under the Plan until termination of employment, retirement or death.
21. All benefits under the Plan will be distributed to a Participant (or to the Participant's beneficiary in the event of death) no later than the end of the calendar year immediately following the year in which the employee retires, terminates employment or dies. The amount of the benefits payable to a Participant will depend on the value of the PSUs in his or her Notional Account, determined at some time in the period commencing one year before the employees' retirement, termination of employment or death and ending with the date of payment. Benefits will be paid in cash and/or common shares of the Corporation, at the discretion of the Corporation. When common shares are distributed, the value of the common shares purchased on the open market will be equal to the value of the PSUs that they are being distributed in satisfaction of, net of any brokerage fees paid to acquire the common shares. When common shares are purchased on the open market they will be distributed immediately to a Participant. In no event shall the Corporation distribute assets to a Participant that consists of treasury shares of the Corporation or a related corporation.
22. A committee of persons appointed by the Corporation will administer the Plan. The Corporation will pay all costs and expenses associated with establishing the Plan. An annual fee based on the value of the PSUs allocated in the year to a Participant's Notional Account may be charged to each Participant's Notional Account thus reducing the amount ultimately received by the Participant. This fee may be altered from time to time.
23. The Plan may be amended or terminated by the Corporation at any time. However, no such amendment or termination will adversely affect the PSUs allocated to the Participant's Notional Account without his or her consent. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously satisfies the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.
24. The Plan will be unfunded. However, the Corporation may use derivative products to hedge its obligations under the Plan. Any assets held or acquired under a hedging strategy will form part of the general assets of the Corporation and will be accessible to the general creditors of the Corporation. The Participants will have no legal claim or beneficial interest in any assets held or acquired under a hedging strategy.
25. No amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement and no additional PSUs will be granted to such Participant as compensation for a downward fluctuation in the value of any Special Shares of Subco or the common shares of the Corporation nor will any other form of benefit be conferred upon or in respect of a Participant for such purpose.
Purpose of the Proposed Plan
26. The purpose for establishing the Plan is to encourage the retention of employees of the Corporation who are believed to contribute significantly to the financial success of 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 further that the terms of the proposed 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. 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. The Plan will not constitute an investment contract as that term is defined in subsection 12(11) of the Act, and the allocation of PSUs to a Participant's Notional Account will not constitute interest income from an investment contract pursuant to subsection 12(4) of the Act.
D. No amount will be included in the income of a Participant pursuant to subsection 5(1) or paragraph 6(1)(a) of the Act solely as a result of allocating PSUs to the Participant's Notional Account.
E. The amount to be included in the income of a Participant (other than a deceased Participant) for a year under the Plan by virtue of subsection 5(1) will include any amount paid by the Corporation, as described in paragraph 21, to the Participant or to acquire the common shares distributed to the Participant, including any related brokerage fees and commissions. The amount paid by the Corporation includes any amounts withheld in respect of taxes or other source deductions.
F. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments made in the year under the Plan from the general assets of the Corporation, referred to in Ruling E above, and all costs incurred in establishing the Plan that are paid for by the Corporation, referred to in 22 above, will be deductible in computing the Corporation's income in the year in which the payments are made or the costs were incurred, respectively, in accordance with section 9 of the Act.
G. All amounts payable under the Plan to or on behalf of the beneficiary of a Participant, as described in 19 above, as a result of a Participant's death, will constitute a right or thing held by the deceased Participant at the time of death for the purposes of subsections 70(2) and 70(3) of the Act.
The above 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 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed Plan is 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.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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