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 amendment to a deferred share unit plan to add units with values that are tied to the values of special redeemable preferred shares of a subsidiary, that derive their values from earmarked portfolio investments, violate 6801(d)?
Position: No.
Reasons:
The proposed amendments do not cause the conditions in paragraph 6801(d) to not be satisfied. The condition that the value of units be based on the FMV of shares of the corporation or of a related corporation is not offended by the amendments.
XXXXXXXXXX 2002-016912
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")
XXXXXXXXXX
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) of 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 amendments to the deferred share unit plan (the "DSU Plan") and purpose of the proposed amendments to the DSU 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 Business Number of the Corporation is XXXXXXXXXX. 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. The cash component of compensation paid to executives of the Corporation consists of salary plus discretionary performance bonus.
4. The Corporation has established the DSU Plan for the benefit of certain executives. Under the DSU Plan, deferred stock units ("DSUs") are created that correspond to common shares of the Corporation. The DSU Plan functions as follows:
(a) Certain special incentive bonus awards ("bonus awards") that a participating executive (the "Participant") would otherwise have received will be denominated in DSUs. In respect of each year, a Participant must elect in writing whether to defer any of his or her bonus awards. The election must be made and filed with the Corporation before the Participant would otherwise be entitled to receive the bonus awards. 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.
(b) Each DSU has a value equal to the value of a common share of the Corporation. Each Participant will be allocated DSUs under the DSU Plan. The number of DSUs allocated to a Participant is equal to the amount of bonus awards deferred by the Participant divided by the value of the DSU at the time of the allocation.
(c) The Participant in the DSU Plan will be credited with additional DSUs in respect of any dividends declared on the common shares of the Corporation.
(d) The DSUs vest over time. If certain performance criteria are satisfied, the vesting of the DSUs will be accelerated. Vesting will also be accelerated in the event of a Participant's death, termination without cause or if the Chairman of the Board of Directors of the Corporation or the Management Resources and Compensation Committee of the Corporation's Board of Directors so directs where employment of the Participant has been otherwise terminated.
(e) A Participant may appoint a beneficiary to receive amounts under the DSU Plan in the event of the Participant's death.
(f) The Participant will not have any right to receive any benefits under the DSU Plan until termination of employment, retirement or death. All benefits under the DSU 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 DSUs 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 or common shares of the Corporation. When common shares are distributed, the value of the common shares purchased on the open market, by a broker (the "Broker"), on behalf of a Participant, will be equal to the value of the DSUs that they are being distributed in satisfaction of, less any applicable taxes withheld by the Corporation, with no adjustment for any broker fees paid to acquire the common shares. Any common shares acquired by the Broker on behalf of a Participant shall be delivered directly to the Participant, the legal representative or the beneficiary, as the case may be, forthwith as soon as practicable upon completion of such purchases. In no event shall the Corporation distribute assets to a Participant that consists of treasury shares of the Corporation or a related corporation.
(g) Separate trusts (the "Trusts") have been established for each Participant and the Corporation has contributed to the Trusts. The trustees of the Trusts have purchased common shares of the Corporation on the open market. Each Trust is a retirement compensation arrangement as defined in subsection 248(1) of the Act. The assets held by the Trusts will be used exclusively to fund the payment of benefits under the DSU Plan and to pay any taxes that the Trusts may be liable for.
Proposed Amendments to the DSU Plan
5. 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.
6. The Corporation proposes to amend the existing DSU Plan by adding additional classes of DSUs in respect of which the benefits under the DSU Plan may be valued.
7. 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. Each class of Special Shares will represent different portfolio investments that the Corporation or its affiliates currently offer directly to its customers or employees, such as mutual funds and other investment vehicles. The redemption value (and therefore the fair market value) of a Special Share will be equal to the fair market value of a unit in the underlying portfolio investment of the class of shares to which the Special Share belongs.
8. Each class of the new DSUs will correspond to a class of the Special Shares. The value of a DSU will equal the value of the Special Share to which it corresponds.
9. A Participant will have no legal ownership of or beneficial interest in the common shares of the Corporation or in the Special Shares or any underlying portfolio investments of Subco by virtue of the allocation of DSUs. For greater certainty, a DSU 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.
10. All unvested DSUs must be of a class of DSUs the value of which is based on the value of the common shares of the Corporation. Once a DSU has vested, the Participant can elect periodically to reallocate the deferred bonus to other classes of DSUs the value of which is based on the value of a particular class or classes of Subco's Special Shares. DSUs that base their value on the value of Subco's Special Shares cannot be converted to DSUs that base their value on the Corporation's common shares.
11. Periodically, at such time as determined by the Corporation and subject to the restrictions set out in paragraph 10 above, a Participant may elect to convert previous allocations of DSUs into another class of DSUs. The election to convert a previous allocation of DSUs into another class of DSUs is irrevocable once made for that period. The allocation and conversion of DSUs will be based upon the fair market value of the class of Special Shares to which the DSU relates, at the time of allocation or conversion, as described in paragraph 8 above. The fair market value of the new DSUs at the time of conversion will not exceed the fair market value at that time of the converted DSUs to which they correspond.
12. If a portfolio investment underlying a class of Special Shares distributes income, in most cases, additional DSUs will be allocated to Participants and notionally invested in the DSU Plan.
13. A notional account ("Notional Account") will be established for each Participant. The number of DSUs allocated to the Participant and the value of those DSUs will be recorded in the Notional Account. The amounts credited to the Notional Account shall be recorded as a book reserve of the Corporation. The reserve in respect of a Participant will equal the excess of the value of the Participant's DSUs under the DSU Plan over the assets, if any, in the corresponding Trust for that Participant, described in 4(g) above.
14. 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 Special Shares, the number of DSUs credited to a Participant's Notional Account will be adjusted accordingly.
15. No amount will be paid to, or in respect of, a Participant under the DSU Plan or pursuant to any other arrangement and no additional DSUs 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.
16. The Trusts referred to in 4(g) above will all be wound up before any benefit payouts occur under the DSU Plan. All amounts held by the Trusts will be paid to the Corporation and included in the general assets of the Corporation. After the Trusts have all been wound up, the DSU Plan will be unfunded. However, the Corporation may hedge its obligations under the DSU Plan by the use of derivative products and/or by holding the underlying portfolio investments which the Special Shares referred to in 7. above represent. 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.
17. In all other material matters, the terms of the DSU Plan will remain the same.
Purpose of the Proposed Amendments to the DSU Plan
18. The purpose for modifying the DSU Plan is to encourage the retention of employees of the Corporation who are believed to contribute significantly to the financial success of the Corporation and to ensure their interests are aligned with the retail and investment operations of the Corporation.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendments to the DSU Plan and purpose of the proposed amendments to the DSU Plan, and provided further that the terms of the DSU Plan are as described above, we rule as follows:
A. The proposed amendments, in and by themselves, will not cause the DSU Plan to not be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations").
B. The proposed amendments, in and by themselves, will not cause the DSU Plan to constitute an investment contract as defined in subsection 12(11) of the Act, nor will they cause the allocation of DSUs to a Participant's Notional Account to constitute interest income from an investment contract pursuant to subsection 12(4) of the Act.
C. The proposed amendments, in and by themselves, will not cause an amount to 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 DSUs to the Participant's Notional Account.
D. Amounts received by the Corporation, as a result of the wind up of the Trusts as described in 16. above, will be included in the income of the Corporation in the year of receipt, pursuant to paragraph 12(1)(n.3) of the Act.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, the proposed amendments, in and by themselves, will not cause any costs incurred by the Corporation in a year in administering the DSU Plan, to not be deductible by the Corporation in that year in accordance with section 9 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 amendments to the DSU Plan 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.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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