2003 Ruling 2003-0019263 - DEFERRED SHARE UNIT 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: Does the proposed plan satisfy 6801(d)?

Position: Yes

Reasons: 6801(d) provisions met

XXXXXXXXXX 2003-001926

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Tax Ruling - Deferred Share Unit Plan

This is in reply to your correspondence of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above-noted corporation.

Definitions and Abbreviations

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.

In this letter, the following terms have the meanings specified:

a. "Account" means: an account maintained for each Participant on the books of the Corporation which will be credited with DSUs and Dividend Equivalents, in accordance with the terms of the Plan;

b. "Board" means: the Board of Directors of the Corporation;

c. "Bonus Entitlement Period" means: means a XXXXXXXXXX period during which executive officers of the Corporation earn a bonus, the amount and payment of which is based on various factors determined by the CHRC;

d. "Broker" means: a broker, independent from the Corporation or any of its affiliates, who has been designated by the Corporation as the broker that will purchase Shares pursuant to the Plan and who is a member of the Exchange or other public exchange on which the Shares are listed, or, if the Shares are not then listed, as selected by the CHRC acting in good faith;

e. "CHRC" means: the Compensation and Human Resources Committee of the Board;

f. "Class B Share" means: a Class B Non-Voting share of the Corporation, that is listed on the Exchange;

g. "Common Share" means: a common share of the Corporation, that is listed on the Exchange;

h. "Corporation" means: XXXXXXXXXX, a taxable Canadian corporation and a public corporation XXXXXXXXXX under the laws of Canada pursuant to Articles of XXXXXXXXXX dated XXXXXXXXXX.

The Corporation has a fiscal year-end of XXXXXXXXXX and files under tax account number XXXXXXXXXX through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

Its mailing address is:

XXXXXXXXXX;

i. "DSU" means: a "Deferred Share Unit" which is a bookkeeping entry equivalent in value to a Common Share or a Class B Share, as applicable, credited to a Participant's Account in accordance with section XXXXXXXXXX of the Plan as described in 4(d) below;

j. "Dividend Equivalent" means: a bookkeeping entry equivalent in value to a dividend paid on a Share credited to a Participant's Account in accordance with section XXXXXXXXXX of the Plan as described in 4(k) below;

k. "Exchange" means: the XXXXXXXXXX Stock Exchange;

l. "Grant" means: the grant of a DSU credited to the Account of a Participant in accordance with section XXXXXXXXXX of the Plan as described in 4(d) below;

m. "Notice of Redemption" means: a written notice to the Corporation, on a prescribed form, by the Participant, or the legal personal representative of the Participant, of the Participant's wish to redeem the Participant's DSUs for cash or Shares of the Corporation;

n. "Participant" means: a director of the Corporation or an executive officer of the Corporation or any of its Subsidiaries who is designated by the CHRC as eligible to participate in the Plan;

o. "Plan" means: Deferred Share Unit Plan;

p. "Regulations" means: the Income Tax Regulations;

q. "Share" means: a Common Share and/or a Class B Share, as applicable;

r. "Share Price" means: the closing price of a Share on the Exchange, averaged over the five (5) consecutive trading days immediately preceding either

(a) in the case of a director, the last day of the fiscal quarter preceding the date of Grant, or, in the case of an executive officer, the date of the bonus payment as determined by the CHRC; and

(b) the Termination Date, as applicable, or, in the event such shares are not traded on the Exchange, the fair market value of such shares as determined by the CHRC acting in good faith;

s. "Subsidiaries" means: XXXXXXXXXX, a wholly-owned subsidiary of the Corporation and any other subsidiaries of the Corporation; and

t. "Termination Date" means: the date upon which a Participant ceases to hold any position as a director or executive officer of the Corporation or any of its Subsidiaries and is no longer otherwise employed by the Corporation or any of its Subsidiaries, and includes the date of the death of a Participant.

Facts

1. The Corporation currently pays members of its Board an annual board retainer, fees for services on a committee of the Board, fees for chairing a committee of the Board, and fees for attending meetings of the Board or committees of the Board. The meetings of the Board and committees of the Board are held in Canada. The Corporation also awards bonuses to executive officers from time to time. Some Participants are not resident in Canada.

Proposed Plan

2. The Corporation will establish the Plan for Participants. The Plan will be unfunded and will be administered by the CHRC. The Corporation will be responsible for all costs relating to the administration of the Plan. A copy of the proposed Plan dated XXXXXXXXXX was provided to us.

3. The effective date of the Plan will be as of the later of XXXXXXXXXX, and the date upon which the Corporation receives an advance tax ruling from the Canada Customs and Revenue Agency that the Plan is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Regulations [Plan section XXXXXXXXXX].

4. The salient terms and conditions of the Plan are as follows:

(a) The CHRC shall determine which executive officers of the Corporation and any of its Subsidiaries are eligible to participate in the Plan [Plan section XXXXXXXXXX)];

(b) Directors:

i. Each Participant that is a director may elect, once each calendar year, to be paid a percentage of the Director's annual retainer in the form of DSUs, with the balance, if any, being paid in cash.

ii. For the first year of the Plan, directors must make their election as soon as possible, and, in any event, no later than XXXXXXXXXX days after adoption of the Plan. The election shall be effective on the first day of the next fiscal quarter of the Corporation following the date of the Corporation's receipt of the election until the final day of that fiscal year.

iii. For any subsequent year, the election must be made (completed, signed and delivered to the Corporation), in the case of an existing director, by the end of the fiscal year preceding the fiscal year to which such election is to apply, and, in the case of a new director, as soon as possible and no later than XXXXXXXXXX days after the director's appointment, with such election taking effect on the first day of the next quarter until the last day of the fiscal year of appointment.

iv. If a Participant does not make an election in respect of a particular fiscal year, the Participant will receive the annual retainer in cash [Plan section XXXXXXXXXX];

(c) Executive Officers:

i. Each Participant that is an executive officer may elect, XXXXXXXXXX each calendar year, to be paid a percentage of the Participant's bonus entitlements, not to exceed XXXXXXXXXX% of the Participant's annual base salary, in the form of DSUs with the balance being paid in cash.

ii. The election of an executive officer must be made (completed, signed and delivered to the Corporation) by the XXXXXXXXXX day preceding the payment of the bonus entitlement to which the election is to apply. The timing of the payment of bonus entitlements shall be determined by the CHRC.

iii. If no election is made in respect of a particular Bonus Entitlement Period, the Participant will receive the bonus entitlement in cash [Plan section XXXXXXXXXX];

(d) The number of DSUs that a Participant is entitled to receive, in any quarter or for any Bonus Entitlement Period, is based upon the percentage that the Participant has elected to receive in DSUs multiplied by, in the case of a director, one quarter of such Participant's annual retainer, or, in the case of an executive officer, such Participant's bonus entitlements, as the case may be, divided by the applicable Share Price [Plan section XXXXXXXXXX];

XXXXXXXXXX

(e) Except where a Participant has died, each Participant shall be entitled to redeem DSUs during the period commencing on the business day immediately following the Participant's Termination Date and ending on the XXXXXXXXXX day following the Participant's Termination Date, by providing a written Notice of Redemption to the Corporation. In the event of the death of a Participant, the Participant's legal representative or beneficiary may provide the written Notice of Redemption to the Corporation during the period commencing on the business day immediately following the Termination Date and ending on the XXXXXXXXXX day following the Termination Date. For this purpose, the beneficiary must be a dependent, related person, or the estate of the Participant [Plan section XXXXXXXXXX];

(f) A Notice of Redemption must specify an election to receive a final payment of:

i. cash equal to the number of DSUs credited to the Participant's Account as of the Termination Date multiplied by the Share Price on the Termination Date, net of applicable withholding taxes; or

ii. Common Shares or Class B Shares, as applicable, to be purchased on the Participant's behalf on the open market by a Broker [Plan section XXXXXXXXXX];

(g) Where the Shares are purchased on the open market on the Participant's behalf, the Corporation will remit all or a portion of the final payment to the Broker, and the Broker will be required to (within XXXXXXXXXX business days) use the amount to purchase the Shares in the open market on the principal Canadian stock exchange or any other public exchange on which the Shares are traded. The amount remitted to the Broker will be equal to the number of DSUs that the Participant, the legal representative or the beneficiary, as the case may be, elected to receive in Common Shares or Class B Shares net of the number of DSUs that would equal the applicable withholding taxes, multiplied by the Share Price on the Termination Date. The actual number of Shares purchased by the Broker will be that number that the Broker is able to acquire with the amount remitted to the Broker [Plan section XXXXXXXXXX];

(h) Any Shares acquired by the Broker from all or a portion of the final payment and any cash remaining therefrom 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. The Corporation will pay all brokerage fees and commissions arising in connection with the purchase of the Shares by the Broker in accordance with the Plan. The CHRC will determine, in its absolute discretion, whether the redemption of a DSU is satisfied by reference to a Common Share or a Class B Share [Plan section XXXXXXXXXX];

(i) Unless otherwise agreed to by the Participant (or their legal representative or beneficiary) and the CHRC, the Corporation will make all of the payments described in 4(f) through (h) above, to the Participant or the Broker within XXXXXXXXXX days of the Termination Date. Upon making such payment to the Participant or the Broker, the DSUs upon which such payment was based shall be cancelled and no further payments shall be made from the Plan in relation to such DSUs. In any event, the payment date will be no later than the end of the first calendar year immediately following the Termination Date [Plan section XXXXXXXXXX];

(j) In the event of the death of a Participant, provided that a Notice of Redemption is not filed with the Corporation as described in 4(e) above, the Corporation shall, within one calendar year of the Participant's death, make a lump sum cash payment in each case to or for the benefit of the legal representative or beneficiary of the Participant. In any event, the payment date will be no later than the end of the first calendar year commencing after the Participant's death. The lump sum cash payment shall be equal to the number of DSUs credited to the Participant's account on the date of death multiplied by the Share Price as of the Termination Date, net of any withholding taxes. If permitted by applicable law, the Participant may appoint a beneficiary who, after the death of the Participant, will obtain the Participant's rights under the Plan. For this purpose, the beneficiary must be a dependent, related person, or the estate of the Participant [Plan section XXXXXXXXXX];

(k) Dividend Equivalents will be awarded in respect of DSUs in a Participant's Account on the same basis as dividends declared and paid on Common Shares or Class B Shares, as applicable, as if the Participant was a shareholder of record of Common Shares or Class B Shares, as applicable, on the relevant record date. These Dividend Equivalents will be credited to the Participant's Account as additional DSUs (or fractions thereof), with the number of additional DSUs based on:

i. the actual amount of dividends that would have been paid if the Participant had held Common Shares or Class B Shares, as applicable, under the Plan on the applicable record date

divided by

ii. the closing price for Common Shares or Class B Non-Voting Shares, as applicable, on the Exchange on the date on which the dividends on Common Shares or Class B Shares, as applicable, are payable.

For greater certainty, no DSUs representing Dividend Equivalents will be credited to a Participant's Account in relation to DSUs that have been previously cancelled or paid out of the Plan [Plan section XXXXXXXXXX];

(l) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Corporation assets to shareholders, or any other change affecting shares, such proportionate adjustments, if any, as CHRC in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of DSUs outstanding under the Plan [Plan section XXXXXXXXXX];

(m) Unless otherwise determined by the CHRC, the Plan will be unfunded. To the extent any Participant or the Participant's estate holds any rights by virtue of a Grant of DSUs under the Plan, such rights (unless otherwise determined by CHRC) shall be no greater than the rights of an unsecured creditor of the Corporation. Notwithstanding the foregoing, any determinations made shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto [Plan section XXXXXXXXXX];

(n) The CHRC may amend or terminate the Plan as deemed necessary or desirable; however, no amendment shall, in the opinion of the CHRC adversely affect the interests of the Participants or cause or permit DSUs and the related Dividend Equivalents held in Participants' Accounts at the time of such amendment to be converted to an arrangement that is of less than comparable value to the Participants. The CHRC may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent deemed necessary or desirable. Notwithstanding the foregoing, any conversion or amendment of a Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto [Plan section XXXXXXXXXX];

(o) The CHRC may decide to discontinue granting awards under the Plan and terminate the Plan, as provided under (n) above, at any time in, which case no further DSUs will be awarded or credited under section XXXXXXXXXX the Plan as described in 4(d) above. Any DSUs that remain outstanding in a Participant's account at that time, shall continue to be dealt with according to the terms of the Plan. For greater certainty, DSUs shall continue to be awarded, as appropriate, in respect of any outstanding DSUs pursuant to section XXXXXXXXXX of the Plan as described in 4(k) above. The Plan will terminate when all payments owing pursuant to the Plan have been made and all DSUs have been cancelled in all Participant's Accounts [Plan section XXXXXXXXXX];

(p) No amount will be paid to, or in respect of, a Participant under the Plan to compensate for a downward fluctuation in the price of the Shares, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose [Plan section XXXXXXXXXX];

(q) Under no circumstances shall DSUs be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of any Shares by virtue of the award of DSUs [Plan section XXXXXXXXXX]; and

(r) Except as required by law, the rights of a Participant under the Plan are not capable of being anticipated, assigned, transferred, alienated, sold, encumbered, pledged, mortgaged or charged and are not capable of being subject to attachment or legal process for the payment of any debts or obligations of the Participant [Plan section XXXXXXXXXX];

Purpose for the Implementation of the Proposed Plan

5. The purpose of the Plan is to promote the interests of the Corporation by attracting and retaining qualified persons to serve on the Board and as executive officers of the Corporation or any of its Subsidiaries and to afford such Participants an opportunity to receive some or all of a Participant's compensation for serving as a director or as an executive officer of the Corporation in the form of Common Shares or Class B Shares.

Additional Information

6. To the best of your knowledge and that of the Corporation, none of the issues involved in this ruling request is:

? in an earlier return of the Corporation, a Participant or a person related to the Corporation or a Participant;
? being considered by a tax services office or by a taxation centre in connection with a previously filed tax return of the Corporation, a Participant or a person related to the Corporation or a Participant;
? under objection by the Corporation, a Participant or a person related to the Corporation or a Participant;
? before the courts; nor
? the subject of a ruling previously issued by the Directorate to the Corporation, a Participant or a person related to the Corporation or a Participant.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of the facts, the proposed Plan, and the purpose of the proposed Plan and the wording of the Plan continues to be substantially 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. The Plan will not constitute, for the purposes of the Act, an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.

C. Provided 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.

D. No amount will be included in the income of any Participant pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act, solely as a result of a grant of DSUs under the Plan.

E. Except to the extent subsection 70(2) applies to amounts received by a Participant's legal representative, the amount to be included in the income for a year of a Participant who is a resident of Canada by virtue of subsection 5(1) of the Act, will include amounts received in cash as described in 4(b)(i), (iv), 4(c)(i) or (iii) above, as the case may be, brokerage fees and commissions paid by the Corporation as described under 4(h) above and amounts determined under the Plan as described in paragraphs 4(f)(i), 4(g) and (h) above as the case may be, that are paid by the Corporation to the Participant (or to the Participant's legal representative) or that are paid to acquire the Shares distributed to the Participant, including amounts withheld by the Corporation in respect of taxes or other source deductions.

F. Amounts received in cash as described in 4(b)(i), (iv), 4(c)(i) or (iii) above, as the case may be, brokerage fees and commissions paid by the Corporation as described under 4(h) above and amounts determined under the Plan as described in paragraphs 4(f)(i), 4(g) and (h) above as the case may be, that are paid by the Corporation to the Participant (or to the Participant's legal representative) or that are paid to acquire the Shares distributed to the Participant, including any amounts withheld by the Corporation in respect of taxes or other source deductions shall, except to the extent subsection 70(2) applies to amounts received by a Participant's legal representative will, by virtue of subsection 5(1) and subparagraph 115(1)(a)(i) of the Act, be included in the income for a year of a Participant who is not a resident of Canada at the time the amounts are received to the extent the amount is attributable to services performed in Canada and, if the Participant was resident in Canada at the time the Participant performed the services, outside Canada.

G. All amounts payable under the Plan as a result of a Participant's death, as described in 4 above, to the Participant's estate or to or on behalf of a beneficiary of a Participant, 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.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a payment described in the above rulings, in respect of services provided by a Participant as a director of the Corporation, to the Participant or, if the Participant has died, to the Participant's legal representative or beneficiary, in satisfaction of all or any part of the Participant's interest under the Plan, the Corporation will be entitled to deduct the amount paid including any amount withheld in respect of taxes and other source deductions in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

L. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a payment of an amount described in the above rulings in respect of services provided by a Participant as an executive of the Corporation who was employed by the Corporation throughout the Participant's entire period of participation in satisfaction of all or any part of the Participant's interest under the Plan, the Corporation will be entitled to deduct the amount paid including any amount withheld in respect of taxes and other source deductions, in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

M. Subject to paragraph 18(1)(a) and section 67 of the Act, where another corporation (referred to herein as the "Employer") has a legal obligation to repay the Corporation for a payment of an amount described in the above rulings in respect of services provided by a Participant as an executive of the Employer who was employed by the Employer throughout the Participant's entire period of participation in the Plan in satisfaction of all or any part of the Participant's interest under the Plan, the Employer will be entitled to deduct the amount paid including any amount withheld in respect of taxes and other source deductions, in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

N. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Corporation makes a payment of an amount described in the above rulings in respect of services provided by the Participant as an executive, and the Participant was employed by the Corporation and/or one or more Employers during the Participant's period of participation in the Plan, in satisfaction of all or any part of the Participant's interest under the Plan, the Corporation will be entitled to deduct a portion of the amount paid in accordance with section 9 of the Act in calculating its income for the year in which the payment is made and each Employer will be entitled to deduct in accordance with section 9 of the Act in calculating its income for the year in which the payment is made, that portion of the amount that each Employer has a legal obligation to repay to the Corporation, provided the total of all of the deductions made does not exceed the amount paid by the Corporation.

CAVEATS

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CCRA on May 17, 2002, and are binding on CCRA provided the Proposed Plan is implemented before XXXXXXXXXX.

Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted that the Share Price as determined in accordance with the Plan at any time will represents the fair market value of the Share at that particular time.

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