2003 Ruling 2002-0178933 - AMENDED 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 amendments to an existing DSU plan result in the plan ceasing to qualify under paragraph 6801(d) of the Regulations?

Position: No

Reasons: Plan still complies with 6801(d) provisions

XXXXXXXXXX 2002-017893

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Company") (XXXXXXXXXX)

This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Company.

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

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

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the Company or a related person,

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

(iv) is before the courts, or

(v) is the subject of a ruling, other than the ruling referred to in 11 below, previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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 DSUP and the purpose of the proposed amendments to the DSUP is as follows:

Facts

1. The Company is incorporated under the laws of Canada and has its head office in XXXXXXXXXX. The Company is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. Effective XXXXXXXXXX the legal name of the Company was changed from XXXXXXXXXX. The Company's common shares (the "Shares") are traded principally on XXXXXXXXXX. The Company has a fiscal year-end of XXXXXXXXXX.

2. The Company's mailing address is:

XXXXXXXXXX.

Attention: XXXXXXXXXX

The Company files its income tax returns with the XXXXXXXXXX Taxation Centre and is served by the XXXXXXXXXX Tax Services Office.

3. The Company is the parent company of an international group involved in XXXXXXXXXX. Certain of the Company's subsidiaries are resident in Canada or carry on business in Canada through a permanent establishment in Canada (hereinafter the Company and these subsidiaries will be referred to as the "Group").

4. The tax account number of each of the members of the Group is as follows:

XXXXXXXXXX.

All members of the Group file their income tax returns with the XXXXXXXXXX Taxation Centre and are served by the XXXXXXXXXX Tax Services Office.

5. Effective XXXXXXXXXX, the Company established the XXXXXXXXXX (the "Plan"). The Plan is one component of the Company's senior executive and management employee long-term incentive program. Each year the Personnel Committee (the "Committee") of the Company's Board of Directors (the "Board") determines which senior executives and management employees (the "Eligible Employees") are eligible to participate in the Plan. The Plan is a cash incentive plan which provides performance awards to Eligible Employees (including Eligible Employees who will not be eligible to participate in the Deferred Share Unit Plan described in 11 below) based on the relative performance of the Company's Share value and the Company's Share dividend yield compared to other corporations included in the XXXXXXXXXX measured over a XXXXXXXXXX year period (the "Performance Period"). The Committee determines in respect of each such Eligible Employee a target or potential cash award applicable to the ensuing Performance Period. The first such Performance Period commenced on XXXXXXXXXX. Cash awards under the Plan are also dependent on the Company's assessment of an Eligible Employee's individual performance over the Performance Period. In XXXXXXXXXX, the Committee set the target cash awards for each Eligible Employee applicable to the Performance Period commencing XXXXXXXXXX. The cash award under the Plan, if any, will be paid to the Eligible Employee as soon as practicable following the completion of the related Performance Period. For clarity, the cash award (if any) relating to the first Performance Period will be paid as soon as practicable following completion of the Performance Period ending XXXXXXXXXX.

6. The amount of the cash award that will be paid to the particular Eligible Employee under the Plan, if any, will be determined based on the increase in market price of a Share of the Company and the cumulative dividend yield on a Share of the Company determined over the particular Performance Period compared to the increase in value and cumulative dividend yield on common shares of other corporations included in the XXXXXXXXXX determined over the same Performance Period. If the results for the Shares during a Performance Period rank below the XXXXXXXXXX percentile compared to all companies in the XXXXXXXXXX, the Eligible Employee will not receive any cash award in respect of that Performance Period. If Shares rank at the XXXXXXXXXX percentile (i.e. compared to all corporations in the XXXXXXXXXX), the Eligible Employee will be paid an amount equal to XXXXXXXXXX % of the target cash award set by the Committee in respect of that Performance Period. At the XXXXXXXXXX percentile rank, the Eligible Employee will be paid an amount equal to XXXXXXXXXX % of the target cash award set by the Committee and at or above the XXXXXXXXXX percentile rank, the Eligible Employee will be paid an amount (i.e. the maximum) equal to XXXXXXXXXX% of the target cash award set by the Committee in respect of that Performance Period. The actual amount (if any) will be pro-rated between the percentile rankings.

7. In the event of a termination of the Eligible Employee's employment prior to the completion of a Performance Period due to retirement (in accordance with the Company's retirement policies), disability or death, the Eligible Employee will be eligible to receive an award paid at the same time as other Eligible Employees following the completion of the Performance Period based on the same criteria as described above and then pro-rated to reflect the actual period of the Eligible Employee's active employment during the Performance Period. In the event of a termination of the Eligible Employee's employment for any other reason, including resignation, prior to the completion of the Performance Period, the Eligible Employee will not receive any target cash award in respect of that Performance Period and will not be eligible for any other potential award under the Plan.

8. Effective XXXXXXXXXX, the Company also established the XXXXXXXXXX (the "EPA Plan"). The EPA Plan is a cash based annual incentive plan pursuant to which an employee (the "Participant") may receive a cash award based on corporate, business group or unit and individual performance over the course of a calendar year.

9. The amount of cash award under the EPA Plan with respect to a calendar year, if any, is determined based on: (i) actual annual economic value added performance of the Company and its affiliates or that of a Participant's business group or unit within the Group compared against annual economic value added targets set by the Committee and (ii) attainment of annual strategic performance objectives at the corporate, business group and business unit levels. Early in each year, the Group sets its strategic performance objectives for that year as part of its annual business planning process.

Target awards in respect of each Participant eligible to participate in the EPA Plan will be set at the beginning of each year by the Group and each year the Company will specify a threshold economic value added amount which must be met in order for any award under the EPA Plan to be paid to the particular Participant for that year. The amount of award paid to a Participant under the EPA Plan for a year may also be affected by the Group's assessment of the particular Participant's individual performance.

10. Cash awards under the EPA Plan are determined based on the criteria described in 8 and 9 above, are measured over the course of the entire calendar year and are paid in the following calendar year typically prior to XXXXXXXXXX. Where a Participant's employment is terminated for cause, he or she will receive no award for that year under the EPA Plan. If a Participant's employment is terminated for reasons other than cause, awards will be determined based on the criteria described in 8 and 9 above measured over the entire calendar year and then prorated to reflect the Participant's actual period of employment during the particular year. In this situation, the award will be paid to the Participant as soon as practicable in the year following the year in which employment is terminated. Where a Participant dies during the year, the Participant's beneficiary will receive an immediate cash payment based on the target award applicable to that Participant and prorated to reflect the period between XXXXXXXXXX and the date of death.

11. The Company has an existing Deferred Share Unit Plan ("DSUP") which was reviewed and approved by the Canada Customs and Revenue Agency (CCRA) in its Income Tax Ruling #970030 dated XXXXXXXXXX, 1997 (the "Ruling"). Under the existing DSUP, certain executives (the "Executives") are entitled to participate in the DSUP. The Executives that elect to participate in the DSUP for a particular year are awarded deferred stock units instead of cash when they are eligible to receive annual performance awards under the Group's Executive Performance Award Plan described in the Ruling.

Proposed Amendments to the DSUP

12. The Company will amend the terms of the existing DSUP (the "Amended DSUP") with effect from the date of this advance income tax ruling. For clarity, regardless of when the Company adopts the amendments to the DSUP, the amendments will not come into effect before the date of this advance income tax ruling. The relevant amendments to the DSUP are as follows:

(a) The Amended DSUP will be administered jointly by the Company's Human Resources (Executive Compensation) Department and XXXXXXXXXX.

(b) Each Executive eligible to participate in the DSUP will be permitted in respect of a calendar year (commencing with XXXXXXXXXX) to elect to have part or all of his or her potential cash award under the EPA Plan paid in deferred share units ("DSUs") under the Amended DSUP. If the Executive elects to participate in this part of the Amended DSUP, he or she may specify a percentage (in multiples of XXXXXXXXXX%) of his or her potential cash award under the EPA Plan for the following calendar year to be settled in DSUs under the Amended DSUP with the remainder of his or her potential award under the EPA Plan (if any) to be paid in cash pursuant to the terms of the EPA Plan. Each Executive will be required to make his/her election before the commencement of the calendar year in respect of which the election is made. Once made, an election cannot be revoked or altered by the Executive and it will only apply to the particular calendar year.

With respect to the XXXXXXXXXX calendar year only, the elections will expressly provide that the participation of the Executive in the Amended DSUP with respect to his or her potential EPA Plan award and the consequential award of DSUs are conditional upon the Company receiving the requested advance income tax rulings.

(c) Each Executive will also be permitted in respect of a Performance Period (commencing with the period starting XXXXXXXXXX) to elect whether to participate in the Amended DSUP with respect to his or her potential award under the Plan. If the Executive elects to participate in this part of the Amended DSUP, he or she may specify a percentage (in multiples of XXXXXXXXXX%) of his or her potential award under the Plan for that Performance Period to be settled in DSUs under the Amended DSUP with the remainder of the Eligible Employee's potential award under the Plan (if any) to be paid in cash pursuant to the terms of the Plan. Each Executive will be required to make his or her election with respect to a Performance Period on or before XXXXXXXXXX months prior to the end of that Performance Period. Once made, the election cannot be revoked or altered by the Executive and it will only apply to the particular Performance Period. Any election made by an Executive to receive part or all of his or her potential award relating to a Performance Period (including the first Performance Period which started on XXXXXXXXXX) under the Plan in DSUs or in the form of cash (or in a combination of DSUs and cash) would be made at a time before the actual award relating to that Performance Period (if any) is quantifiable, ascertainable or payable. In fact, at the time of any such election there could not be any award relating to the Performance Period since the relative performance of Share value and Share dividend yield compared to other corporations included in the XXXXXXXXXX could not be determined until the entire XXXXXXXXXX year Performance Period has been completed.

(d) Each Executive that elects to participate in the Amended DSUP in respect of his or her entitlements under the EPA Plan as described in (b) above will be eligible to receive DSUs, subject to meeting the applicable performance criteria under the EPA Plan for the calendar year in question. Specifically, after the end of the calendar year, the administrator of the DSUP will (i) determine the amount that would have been paid to the Executive under the EPA Plan (if any) as if all of his/her annual incentive compensation for that year under the EPA Plan was paid in cash; (ii) multiply that amount (which is in Canadian or United States currency as determined by the Company) by the percentage elected by the Executive to be paid in the form of DSUs in respect of that year; (iii) divide the product thereof by the average share price of the Company's Shares (expressed in Canadian currency or United States currency as determined by the Company) determined as of the last day of the calendar year preceding the year to which the Executive's election relates; and (iv) credit such number of DSUs to the Executive's notional account under the Amended DSUP. For clarity, in the case of the XXXXXXXXXX calendar year, the Average Share Price, as defined in the DSUP, used for this purpose will be determined as of XXXXXXXXXX and DSUs will be administered and valued in Canadian currency or United States currency, as determined by the Company. DSUs credited herein will be fully vested upon being awarded to the Executive.

(e) Each Executive that elects to participate in the Amended DSUP in respect of his or her entitlements under the Plan as described in (c) above will become eligible to receive DSUs, subject to the relative performance and dividend yield on Shares over the Performance Period in question as determined pursuant to the Plan. Specifically, after the end of a Performance Period (e.g., as soon as practicable after XXXXXXXXXX), the administrator of the DSUP will (i) determine the amount (if any) that would have been paid to the Executive under the Plan if he/she had not made any election to be paid in DSUs with respect to that Performance Period; (ii) multiply that amount (which is in U.S. currency) by the percentage elected to be paid in DSUs by the Executive in respect of that Performance Period; (iii) divide the product thereof by the Average Share Price of a Share of the Company (expressed in U.S. currency) determined as of the last day of the relevant Performance Period to obtain the number of DSUs to be awarded to the Executive; and (iv) credit such number of DSUs to the Executive's notional account under the Amended DSUP. For clarity, in the case of the Performance Period commencing XXXXXXXXXX and ending XXXXXXXXXX, the Average Share Price used for this purpose will be determined as of XXXXXXXXXX and DSUs herein will be administered and valued in United States currency. DSUs credited herein will be fully vested upon being awarded to the Executive.

(f) In addition to the DSUs awarded as described in (d) and (e) above, the Company shall have the discretion to award an Executive with additional DSUs provided that, for greater certainty, any conditions attached to such DSUs shall in no case cause these DSUs or the Amended DSUP to cease to comply with the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations") or any successor provision thereto. The Company will never grant additional DSUs for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Company's Shares. Such additional DSUs may be awarded by the Company regardless of the Executive's election(s) described above and will be valued and administered in Canadian currency or United States currency as determined by the Company. DSUs awarded herein will be subject to such vesting requirements specified in the written instrument issued by the Company to the Executive documenting the award of the discretionary DSUs.

13. Where an Executive terminates his or her employment with the Group or where the Executive dies, the Executive's employer on the Termination Date, as defined in the DSUP, (the "Final Employer") will be responsible for making the cash payment to the Executive or the Executive's Beneficiary for the vested DSUs credited to his or her notional account on the Payment Date, as defined in the DSUP. Where the Executive worked for another employer in the Group (the "Former Employer") when DSUs were credited to his or her notional account under the Amended DSUP, the administrator of the Amended DSUP will allocate a proportion of the amount paid to the Executive by the Final Employer (including any amount withheld in respect of taxes and other source deductions) to each of the Executive's Former Employers based upon the number of DSUs credited to his or her notional account while employed by the particular Former Employer. Each of the Former Employers will reimburse the Final Employer for its proportion of the payment made (including any amount withheld in respect of taxes and other source deductions) by the Final Employer to, or in respect of, the Executive (i.e. the amount allocated to it by the administrator of the DSUP). For greater certainty, the Executive's Final Employer and each of the Executive's Former Employers will only claim its proportion of the cash payment (including any amount withheld in respect of taxes and other source deductions), based on the allocation computed by the administrator of the Amended DSUP, made to the Executive as a deduction in computing its income for the particular year that the Executive is paid an amount under the Amended DSUP.

Purpose of the Proposed Amendments to the DSUP

14. The Company is proposing to amend the DSUP in order to:

a) further strengthen the link between the interests of Members and the Company's shareholders by encouraging the former to voluntarily elect to have a portion of their incentive remuneration tied to the long term performance of the Company's shares; and

b) assist the Company to attract and retain talented individuals.

Rulings

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

A. Provided the DSUP 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.

B. The reimbursement made by an Executive's Former Employer to the Executive's Final Employer, as described in 13 above, will not constitute a benefit to the Final Employer for the purposes of subsection 15(1) of the Act or otherwise under 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 CCRA provided that the proposed amendments to the DSUP are made by XXXXXXXXXX. However, these rulings will be binding only in respect of the DSUP described in the Ruling, as amended in 12 above, and may not be binding in the event other relevant amendments have been or are made to the DSUP as provided for under its terms.

Yours truly,

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