2004 Ruling 2003-0018783 - DEFERRED SHARE UNITS ISSUE OF SHARES

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.

Principal Issues: Will section 7 apply to the proposed DSU plan that will issue shares from treasury to settle any DSU obligations?

Position: Yes.

Reasons: The proposed plan will constitute an agreement to issue shares to employees, therefore, the provisions of section 7 will prevail.

XXXXXXXXXX 2003-001878

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") - Business Number 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.

This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

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.

Definitions

For the purpose of this advance income tax ruling, the following terms have the meanings specified:

(a) "Annual Retainer" for a particular Director means either

(i) the aggregate of the annual retainer (including any additional amounts payable for serving as lead Director or committee Chair or member of the Audit Committee) and the Attendance Fee, payable to that Director, or

(ii) the annual retainer (including any additional amounts payable for serving as lead Director or committee Chair or member of the Audit Committee), payable to that Director
as determined by the Board.

(b) "Attendance Fee" means, for any XXXXXXXXXX period, amounts payable to a Director as a Board meeting attendance fee or a committee meeting attendance fee.

(c) "Board" means the Board of Directors of the Corporation.

(d) "Director" means a member of the Board.

(e) "DSU" means a right granted by the Corporation to an Eligible Person to receive, on a deferred payment basis, a Share on the terms contained in the Plan.

(f) "DSU Account" has the meaning assigned in 3(c) below.

(g) "Eligible Person" means any Director of the Corporation who is not an officer of the Corporation nor a nominee of XXXXXXXXXX and who elects to participate in the Plan; it being understood that for the purposes of the Plan, the Chairman of the Board shall not be considered to be an officer of the Corporation.

(h) "Eligible Remuneration" means all discretionary amounts payable in respect of employment to an Eligible Person by the Corporation as determined by the Board in its sole and absolute discretion, including all or part of amounts payable in satisfaction of the Annual Retainer payable to an Eligible Person; it being understood that the amount of Eligible Remuneration payable to any Eligible Person may be calculated by the Board in a different manner than Eligible Remuneration payable to another Eligible Person.

(i) "Fair Market Value" means a value not less than the closing sale price per Share at which Shares are traded on the XXXXXXXXXX on the relevant date. If the Shares are not listed on the XXXXXXXXXX, the Fair Market Value will be the value established by the Board based on the average of the closing prices per Share on any other public exchange on which the Shares are listed, or if the Shares are not listed on any public exchange, by the Board based on its determination of the fair value of the Shares.

(j) "Filing Date" means the date on which a notice of redemption is filed or deemed to be filed in accordance with 3(f) below.

(k) "Plan" has the meaning assigned in 3 below.

(l) "Remuneration Period" means the period commencing on the date on which Directors are elected at the annual meeting of shareholders of the Corporation and ending on the next succeeding annual meeting, or where the context requires, any portion of such period.

(m) "Share" means a common share in the capital of the Corporation.

(n) "Terminated Service" means that an Eligible Person has, except as a result of death, ceased to be a Director of the Corporation or otherwise employed by the Corporation or a company related to the Corporation.

(o) "U.S. Director" means a Director who is a United States citizen or a United States resident as defined under U.S. tax law.

(p) Each of the terms "corporation", "retirement compensation arrangement", "salary deferral arrangement", "taxable Canadian corporation", "property", and "public corporation" have the meanings assigned to them by subsection 248(1) of the Act.

(q) The term "related" has the meaning assigned to it by subsection 251(2) of the Act.

(r) "Act" means the Income Tax Act (Canada), as amended to the date hereof.

(s) "Regulation(s)" means the Income Tax Regulations, (Canada) in relation to the Act, as amended to the date hereof.

(t) "CRA" means the Canada Revenue Agency.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Corporation is a corporation that exists under the Canada Business Corporations Act. The Corporation is a taxable Canadian corporation and a public corporation. The Shares of the Corporation are posted for trading on the XXXXXXXXXX stock exchanges. The Corporation is a XXXXXXXXXX company with consolidated assets of about U.S. $XXXXXXXXXX. The Corporation's consolidated interests are principally engaged in the XXXXXXXXXX.

2. The Business Number of the Corporation is XXXXXXXXXX. The Corporation files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

Proposed Transactions

3. The Corporation will establish the "Deferred Share Unit Plan for Directors" (the "Plan") for the benefit of certain Eligible Persons. The relevant features of the Plan are as follows:

(a) The Plan will be effective on the date that the Corporation receives this advance income tax ruling from the CRA.

(b) Each Eligible Person may elect, with respect to a Remuneration Period, to be paid a percentage (from zero to one hundred percent) of his or her Eligible Remuneration that represents the Annual Retainer, in DSUs, with the balance, if any, net of any applicable withholding taxes, being paid in Shares. The election must be completed, signed and delivered to the Corporation

(i) subject to (iii), for the Remuneration Period from the effective date of the Plan until the next annual meeting of shareholders of the Corporation, within 30 days of the effective date of the Plan, in which case the election will only apply to the portion of the Annual Retainer payable with respect to services rendered no earlier than 30 days after the delivery of the election,

(ii) subject to (iii), for any other Remuneration Period, by XXXXXXXXXX of each year, in which case the election will apply to all amounts of the Annual Retainer payable with respect to services rendered during the entire Remuneration Period commencing after delivery of the election, and

(iii) for an Eligible Person who was not an Eligible Person either on the effective date of the Plan or on XXXXXXXXXX of a particular year, within 30 days of becoming an Eligible Person, in which case the election will only apply to the portion of the Annual Retainer payable with respect to services rendered no earlier than 30 days after the delivery of the election.

If no election is made in respect of a particular Remuneration Period, the new or existing Eligible Person will receive the Eligible Remuneration in Shares.

(c) On the date approved by the Board, the Eligible Person will be entitled to receive his or her Eligible Remuneration. The percentage to be paid in the form of DSUs will be multiplied by the Eligible Person's Eligible Remuneration to determine a deferred value. The number of DSUs to be credited to the Eligible Person's notional account on the books of the Corporation (the "DSU Account) will be determined by dividing the amount of the Eligible Remuneration to be deferred by the Fair Market Value of a DSU on that particular date.

(d) On any date on which a dividend is paid by the Corporation on outstanding Shares, an Eligible Person's DSU Account will be credited with the number of DSUs calculated by (i) multiplying the amount of the dividend per Share by the aggregate number of DSUs that were credited to the Eligible Person's DSU Account as of the record date for payment of the dividend, and (ii) dividing the amount obtained in (i) by the Fair Market Value per Share on the date on which the dividend is paid.

(e) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution of the Corporation's assets to shareholders, or any other change in the capital of the Corporation affecting Shares, the Board, in its sole and absolute discretion, will make, with respect to the number of DSUs outstanding under the Plan, any proportionate adjustments as it considers appropriate to reflect that change.

(f) The DSUs credited to an Eligible Person's DSU Account (where the Eligible Person is not a U.S. Director) will be redeemed by the Eligible Person after the Eligible Person has Terminated Service. Redemption will commence with filing a notice of redemption in the form prescribed from time to time by the Corporation on or before XXXXXXXXXX of the first calendar year commencing after the date of the Eligible Person's Terminated Service. If the Eligible Person fails to file such notice by that XXXXXXXXXX, the Eligible Person will be deemed to have filed a notice of redemption on that XXXXXXXXXX.

(g) The notice filed by the Eligible Person who is not a U.S. Director will specify that the Eligible Person desires to receive a Share for each DSU (net of any applicable withholding tax). The Corporation shall issue from treasury one Share for each whole DSU to the Eligible Person. Such payment shall be made by the Corporation as soon as reasonably possible following the Filing Date. In no event will payment be made later than December 31 of the first calendar year commencing after the Eligible Person has Terminated Service. Fractional Shares shall not be issued, and where an Eligible Person would be entitled to receive a fractional Share in respect of any fractional DSU, the Corporation shall pay to such Eligible Person, in lieu of such fractional Share, cash equal to the Fair Market Value of such fractional Share.

XXXXXXXXXX

(h) In the event of the death of an Eligible Person who is not a U.S. Director, the Corporation will, within XXXXXXXXXX months of the Eligible Person's death, issue from treasury one Share for each whole DSU credited to the deceased Eligible Person's DSU Account (net of applicable withholding tax) to or for the benefit of the legal representative of the Eligible Person. Fractional Shares shall not be issued, and where the legal representative would be entitled to receive a fractional Share in respect of any fractional DSU, the Corporation shall pay to such legal representative, in lieu of such fractional Share, cash equal to the Fair Market Value of such fractional Share.

(i) The DSUs credited to an Eligible Person's DSU Account (where the Person is a U.S. Director) will be redeemed by the Corporation after the Eligible Person has Terminated Service. The Corporation will issue from treasury one Share for each whole DSU (net of any applicable withholding tax) to the Eligible Person. Such payment shall be made by the Corporation as soon as reasonably possible following the date the Eligible Person Terminated Service. Fractional Shares shall not be issued and where the Eligible Person would be entitled to receive a fractional Share in respect of any fractional DSU, the Corporation will pay to such Eligible Person, in lieu of such fractional Share, cash equal to the Fair Market Value of such fractional Share.

(j) In the event of the death of an Eligible Person who is a U.S. Director, the Corporation will issue from treasury one Share for each whole DSU credited to the deceased Eligible Person's DSU Account (net of any applicable withholding tax) to or for the benefit of the legal representative of the Eligible Person. Such payment shall be made by the Corporation as soon as reasonably possible following the date of death of the Eligible Person. Fractional Shares shall not be issued, and where the legal representative would be entitled to receive a fractional Share in respect of any fractional DSU, the Corporation shall pay to such legal representative, in lieu of such fractional Share, cash equal to the Fair Market Value of such fractional Share.

(k) The Eligible Person may not assign any DSU or any other right, benefit or interest in this Plan without the written consent of the Corporation.

(l) Under no circumstances will DSUs be considered Shares or other securities of the Corporation, nor will a DSU entitle any Eligible Person to exercise voting rights or any other rights attaching to ownership of Shares or other securities of the Corporation. An Eligible Person shall not be considered the owner of the Shares by virtue of the award of a DSU.

(m) No amount will be paid to, or in respect of, an Eligible Person under the Plan to compensate for a downward fluctuation in the price of a Share, nor will any other form of benefit be conferred upon or in respect of, an Eligible Person for such purpose.

(n) The Board may terminate the Plan at any time, but no termination will, without the consent of the Eligible Person or unless required by law, adversely affect the rights of an Eligible Person with respect to DSUs to which the Eligible Person is then entitled under the Plan. In the event that the Plan is terminated, settlement of any DSUs will be in accordance with (f), (g) or (h) above, as applicable.

(o) The Plan will be unfunded.

Purpose of the Proposed Transactions

4. The Corporation wishes to attract and retain talented Directors by allowing them to participate in the long-term success of the Corporation.

5. The Corporation wishes to promote a greater alignment of interest between such Directors and the Corporation's shareholders by providing Directors with the opportunity to acquire DSUs.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, we rule as follows:

A. Section 7 of the Act will apply in respect of the Shares that are issued in accordance with 3(b), (g), (h), (i) or (j) above.

B. Paragraph 7(3)(a) of the Act will apply to the crediting of DSUs under the Plan in accordance with 3(b), (c), (d) or (e) above, such that no amount will be included, pursuant to subsection 5(1), section 6, or subparagraph 115(1)(a)(i) of the Act, in computing the income of any Eligible Person in respect of the crediting of the DSUs.

C. Pursuant to paragraph 7(3)(b) of the Act, no deduction will be allowed from the income of the Corporation in respect of the DSUs credited to an Eligible Person in accordance with 3(b), (c), (d) or (e) above, or in respect of the Shares that are issued in accordance with 3(b), (g), (h), (i) or (j) above.

D. Amounts received in cash by a resident Eligible Person, or the legal representative of the Eligible Person, in respect of their rights relating to fractional Shares, as described in 3(g) or (i) above, before any applicable withholding taxes, will be included in the income of the Eligible Person, in the year received, pursuant to paragraph 6(1)(c) of the Act.

E. Amounts received in cash by a non-resident Eligible Person, or the legal representative of the Eligible Person, in respect of their rights relating to fractional Shares, as described in 3(g) or (i) above, before any applicable withholding taxes, will be included in the income of the Eligible Person, in the year received, pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, to the extent the amounts are attributable to services performed in Canada.

F. Amounts withheld in a year, on behalf of a resident Eligible Person, in respect of Shares issued in accordance with 3(g), (h), (i) or (j) above, will be included in the income for that year of the Eligible Person pursuant to paragraph 6(1)(c) of the Act.

G. Amounts withheld in a year, on behalf of a non-resident Eligible Person, in respect of Shares issued in accordance with 3(g), (h), (i) or (j) above, will be included in the income for that year of the Eligible Person pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, to the extent the amounts are attributable to services performed in Canada.

H. Where a notice of redemption has not been filed, all amounts payable under the Plan as a result of an Eligible Person's death, to or on behalf of the legal representative of an Eligible Person, in accordance with 3(h) or (j) above, will constitute a right or thing held by the deceased Eligible Person at the time of death for purposes of subsection 70(2) of the Act.

I. Subject to paragraph 18(1)(a) and section 67 of the Act, amounts paid in cash in a particular year by the Corporation that relate to fractional Shares, as described in 3(g), (h), (i) or (j) above, as well as withholding tax withheld in accordance with 3(g), (h), (i) or (j) above, remitted to CRA by the Corporation in a particular year, will be deductible by the Corporation in accordance with section 9 of the Act.

J. 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.

K. The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

Comments

Neither paragraph 110(1)(d) nor subsection 7(8) of the Act will apply to the Shares referred to in Ruling A above.

In our view, the only amounts that will constitute a right or thing held by the deceased Eligible Person at the time of death for the purposes of subsection 70(2) of the Act, are those that become payable under the Plan to or on behalf of the legal representative of an Eligible Person as a result of the death of the Eligible Person pursuant to (h), (i) or (j) above, where a notice of redemption has not been filed with the Corporation.

In a situation where a notice of redemption was filed prior to the death of the Eligible Person, amounts paid to or on behalf of the legal representative as a result of the death of the Eligible Person, should be included in income in the final tax return of the Eligible Person for the year of death, pursuant to paragraph 6(1)(c) of the Act. Reference may be made to Interpretation Bulletin IT-210R2 - Income of Deceased Persons - Periodic Payments and Investment Tax Credit, for additional commentary.

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 CRA provided that the proposed Plan is implemented by XXXXXXXXXX.

Nothing in this ruling should be construed as implying that the CRA 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