2003 Ruling 2002-0177293 - 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 a DSU plan continue to qualify as a prescribed plan under paragraph 6801(d) of the Regulations where certain amendments are made to the plan?

Position: Yes

Reasons: Paragraph 6801(d) is not offended by the amendments.

XXXXXXXXXX 2002-017729

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Parentco") (XXXXXXXXXX)
XXXXXXXXXX ("Subco") (XXXXXXXXXX)

This is in reply to your letters of XXXXXXXXXX in which you request an advance income tax ruling on behalf of Parentco and Subco (collectively the "Companies") and further to our telephone conversations (XXXXXXXXXX) in connection therewith.

We understand that, to the best of your knowledge and that of the Companies, none of the issues involved in the ruling request is:

(i) in an earlier return of the Companies or a related person,

(ii) being considered by a tax services office or tax centre in connection with a previously-filed tax return of the Companies or a related person,

(iii) under objection by the Companies or a related person,

(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 a ruling previously issued by the Directorate to the Companies or a related person other than the ruling and supplemental rulings described in 3 below.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed amendments to the DSU Plan and the purpose of the proposed amendments to the DSU Plan is as follows:

Facts

1. Parentco and Subco are incorporated under the laws of Canada. The Companies both have a fiscal year-end of XXXXXXXXXX. Parentco is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. The Shares of Parentco are principally traded on the XXXXXXXXXX Stock Exchange. Parentco's registered head office is located at XXXXXXXXXX. Parentco is served by the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Tax Services Office.

Subco is a taxable Canadian corporation and a "subsidiary wholly-owned corporation" of Parentco within the meaning assigned by subsection 248(1) of the Act. Subco's registered head office is located XXXXXXXXXX. Subco is served by the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Tax Services Office.

2. XXXXXXXXXX.

3. Effective XXXXXXXXXX, Parentco established a deferred share unit plan for certain of its executives and executives of Subco and other related companies (the "DSU Plan"). Parentco received an advance income tax ruling dated XXXXXXXXXX, 2000 (2000-004324) in respect of the implementation of the DSU Plan. The advance income tax ruling was the subject of supplemental ruling 2001-006969, dated XXXXXXXXXX, 2001 and supplemental ruling 2001-0101301 dated XXXXXXXXXX, 2001 (hereinafter collectively referred to as the "Ruling"). Unless stated otherwise, defined terms in this letter are as defined in the Ruling.

4. Eligible Executives have made their elections to participate in the DSU Plan for the XXXXXXXXXX calendar years. As of the date of this letter, Eligible Executives have not yet made their elections to participate in the DSU Plan for the XXXXXXXXXX (or any subsequent) calendar year.

5. The DSU Plan currently provides for the following:

a) an Eligible Executive or an Eligible Executive's Beneficiary may elect the specific date as of which the vested DSUs credited to the Eligible Executive's account under the DSU Plan shall be redeemed ("Entitlement Date") by filing an irrevocable written election with the Committee within 30 days after the Eligible Executive's Termination Date.

b) for any particular date on or after XXXXXXXXXX, a ten day average Share price is used for purposes of determining the Fair Market Value ("FMV") for the redemption of vested DSUs and awards of dividend equivalent DSUs, and a thirty day average is used as the FMV for purposes of determining the number of DSUs awarded to an Eligible Executive under the provisions of Section XXXXXXXXXX of the DSU Plan.

Proposed Amendments to the DSU Plan

6. Pursuant to its amending power under the DSU Plan, Parentco proposes to amend the DSU Plan, with effect from the date on which an advance income tax ruling in respect of the proposed amendments is received from the Canada Customs and Revenue Agency ("CCRA"). The DSU Plan will be amended to:

a) provide that for all purposes under the DSU Plan, other than for the purpose of awards of DSUs under Section XXXXXXXXXX of the DSU Plan, the FMV as of a particular date will be calculated on the basis of the closing price of a Share on the last day immediately prior to the particular date on which the Shares were traded. For purposes of awards under Section XXXXXXXXXX of the DSU Plan, the FMV will be as described in 6(b) below. For purposes of awards under Section XXXXXXXXXX of the DSU Plan, the FMV as of a particular date will continue to be calculated on the basis of the average closing price of a Share on the 30 days on which the Shares were traded prior to the particular date;

b) provide that for purposes of awarding DSUs under Section XXXXXXXXXX of the DSU Plan for the XXXXXXXXXX Performance Period and all subsequent Performance Periods, the Share value to be used in calculating the applicable FMV will be the average closing price of a Share on the last 5 days on which the Shares were traded immediately prior to the date on which the award relating to the particular Performance Period would have been paid to the Eligible Executive had he or she not made the election to participate in the DSU Plan.

c) allow Eligible Executives or the Eligible Executive's Beneficiary to select up to five Entitlement Dates. These dates must result in all amounts received under the DSU Plan being received by the Eligible Executive or the Eligible Executive's Beneficiary after the Eligible Executive's Termination Date and no later than the end of the first calendar year commencing after the Eligible Executive's Termination Date;

d) give the Committee an express discretion to require an Eligible Executive to elect his or her Entitlement Date(s) prior to the date that is 60 days after his or her Termination Date;

e) provide an Eligible Executive's Beneficiary with an overriding commutation right, notwithstanding prior payment elections made by the Eligible Executive;

f) give the Committee an express discretion to preclude an Eligible Executive's Beneficiary from making the foregoing commutation election, and

g) allow Eligible Executives to make their elections relating to the XXXXXXXXXX Performance Period up to 15 business days following the date on which the Companies receive the advance income tax ruling in respect of the amendments to the DSU Plan from the CCRA.

Purpose of the proposed amendments to the DSU Plan

7. The purpose of the proposed amendments to the DSU Plan is to create consistency with other similar plans implemented by Parentco and Subco and to provide greater flexibility for the Participants while continuing to attract and retain individuals with experience and ability to act as senior management of Parentco, Subco and other related companies and to provide them with a compensation system that reflects the responsibility, commitment and risk accompanying their management role.

Ruling 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 that the proposed amendments to the DSU Plan are as described in 6 above, we rule as follows:

A. Provided the DSU Plan was implemented prior to the deadlines set out in the Ruling, the rulings issued in our Ruling will continue to be binding on the CCRA in accordance with the practice outlined in Information Circular 70-6R5 dated May 17, 2002.

The above advance income tax ruling, which is based on the Act and Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CCRA provided that the proposed amendments are made by XXXXXXXXXX. However, these rulings will be binding only in respect of the DSU Plan described in the Ruling, as amended in 6 above, and may not be binding in the event other amendments have been or are made to the DSU Plan as provided for under its terms.

Yours truly,

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