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 a bonus plan be considered a plan to which paragraph (k) of the SDA rules apply such that it is not considered to be an SDA?
Position: The Plan fits under the provisions of paragraph (k) of the SDA provisions.
Reasons: The amount is a bonus that is paid within 3 years
XXXXXXXXXX 2003-003181
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)
This is in reply to your letters of XXXXXXXXXX and our various telephone calls in which you requested an advance income tax ruling on behalf of the Corporation.
We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in this ruling request is:
(i) in an earlier return of the Corporation or a related person;
(ii) being considered by a tax services office or by a taxation centre in connection with a previously filed tax return of the Corporation or a related person;
(iii) under objection by the Corporation or a related person;
(iv) before the courts; nor
(v) the subject of a ruling previously issued by the Directorate to the Corporation or a related person.
Definitions and Abbreviations
In this letter, the following terms have the meaning specified:
(a) "Account" means the record kept by the Board of all Allocations made to an individual Member;
(b) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended;
(c) "Allocation" means, in respect of an individual Member, the amount of unfunded bonus that is credited to a Member's Account;
(d) "Board" means the board of directors of the Corporation;
(e) "Corporation" means
XXXXXXXXXX
Business Number XXXXXXXXXX
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Tax Centre;
(f) "Member" means an employee of the Corporation who meets the criteria in the Plan. All Members are Canadian residents;
(g) "Original Allocation" means an Allocation made to an Original Member prior to such Allocation being forfeited;
(h) "Original Member" means a Member who forfeits their Allocation which forfeiture results in the reallocation of all or part of the Original Allocation;
(i) "Plan" means the employee bonus plan proposed to be adopted by the Corporation;
(j) "Reallocated Amount" means an Allocation that is not vested and is forfeited by a Member and reallocated among the Accounts of other Members; and
(k) "Reallocated Member" means a Member to whom the Reallocated Amount is reallocated to.
Our understanding of the facts, proposed Plan and the purpose of the proposed Plan are as follows:
FACTS
1. The Corporation is the result of the amalgamation of XXXXXXXXXX, on XXXXXXXXXX pursuant to the Business Corporations Act (Canada).
2. The taxation year of the Corporation ends on XXXXXXXXXX of each year.
3. The Corporation carries on the business of XXXXXXXXXX.
4. In accordance with subsection 250(4) of the Act, the Corporation is a resident of Canada as it was incorporated in Canada after April 26, 1965. The Corporation is a Canadian-controlled private corporation.
PROPOSED PLAN
5. The Corporation proposes to institute the Plan for the benefit of its employees to participate in the successful operations of the Corporation.
6. The Plan will be administered by the Board.
7. The Plan will be established as an unfunded bonus plan based on internal criteria to be determined, from time to time, by the Corporation at its sole discretion. The Corporation will not make any contributions to a third party, i.e., trustee, custodian or otherwise, set aside any property or otherwise make any of its property unavailable to its general creditors, in connection with or as a result of its obligations under the Plan.
8. The Corporation will keep records of Allocations from the Corporation's operating funds to Accounts in the names of individual Members.
9. The timing and amount of Allocations made by the Corporation to the Accounts of Members, as well as which Members shall be entitled to Allocations, will be in the sole discretion of the Corporation and will only be made if the Corporation has a positive financial result at the end of any particular fiscal year having regard to the need of the Corporation to retain funds for internal financing purposes.
10. The Corporation shall name those Members who shall be entitled to Allocations in respect of a particular fiscal year either prior to the end of that fiscal year or within XXXXXXXXXX days after the end of that fiscal year. The Corporation shall also determine the aggregate amount of the Allocations to be made to the named Members within XXXXXXXXXX days after the end of the fiscal year in respect of which the Allocations are to be made.
11. A Member's Allocation, if any, shall be entered as a credit to such Member's Account within XXXXXXXXXX days of the calculation of said Allocation in accordance with paragraphs 9 and 10 above.
12. Annual Allocations that are made to a Member's Account will vest irrevocably in that Member in XXXXXXXXXX equal amounts on XXXXXXXXXX of each of the XXXXXXXXXX consecutive and successive calendar years immediately following the fiscal year in respect of which such Allocation is made, unless such amount is otherwise forfeited by such Member. Within XXXXXXXXXX business days of an amount in respect of an Allocation vesting in a Member, that amount will be paid to that Member and the Corporation, in accordance with applicable law, shall withhold all source deductions from that amount.
13. A Member will have no entitlement or claim whatsoever to the Allocations until such time as an amount in respect of an Allocation has vested in that Member, at which time, any entitlement or claim arises only in respect of the amount vested.
14. Upon the occurrence of any one of the following events, any unvested portion of an Allocation shall be forfeited by the Member and this forfeited portion of the Allocation will be reallocated among the Accounts of other Members who were Members at any time in the fiscal year in respect of which the Original Allocation was made and in such proportions as the Corporation may determine in its sole discretion. Such determination and consequent reallocation shall be made within XXXXXXXXXX days of the occurrence of the forfeiture but, in any event, no later than XXXXXXXXXX of the calendar year in which one of the following forfeiture events occurs:
(a) if the Member's employment with the Corporation is terminated either with or without cause or if the Member resigns from his employment with the Corporation otherwise than by reason of death, illness, disability or retirement;
(b) if the Member assigns, charges, alienates, sells, disposes of or transfers, or attempts to assign, charge, alienate, sell, dispose of or transfer, in whole or in part, his right or interest under the Plan;
(c) if the interest of the Member under the Plan is at any time subject to attachment, execution, garnishment, sequestration or other seizure under any legal, equitable or other process;
(d) the interest of the Member under the Plan is at any time determined by XXXXXXXXXX or other similar legislation of any other jurisdiction, or to be included in any form of joint property or community of property regime; or
(e) if the Member becomes insolvent or is adjudged bankrupt.
15. The Reallocated Amount shall vest in a Reallocated Member as follows:
(a) in the event that no portion of an Original Allocation has vested in an Original Member prior to forfeiture, XXXXXXXXXX of the Reallocated Amount shall vest irrevocably in the Reallocated Member Account on XXXXXXXXXX of each of the XXXXXXXXXX consecutive and successive calendar years immediately following the fiscal year in respect of which the Original Allocation was made;
(b) in the event that only XXXXXXXXXX of an Original Allocation has vested irrevocably in an Original Member prior to forfeiture, XXXXXXXXXX percent of the Reallocated Amount shall vest irrevocably in the Reallocated Member on XXXXXXXXXX of each of the XXXXXXXXXX consecutive and successive calendar years immediately following the fiscal year in respect of which the Original Allocation was made; and
(c) in the event that only XXXXXXXXXX of an Original Allocation has vested irrevocably in an Original Member prior to forfeiture, XXXXXXXXXX percent of the Reallocated Amount shall vest irrevocably in the Reallocated Member on XXXXXXXXXX of the XXXXXXXXXX consecutive calendar year immediately following the fiscal year in which the Original Allocation was made.
Within XXXXXXXXXX business days of an amount in respect of the Reallocated Amount vesting in a Reallocated Member, that amount will be paid to that Reallocated Member, and the Corporation, in accordance with applicable law, shall withhold all source deductions from that amount.
16. In the event of the death or retirement of a Member, no further Allocations shall be made by the Corporation to the Account of the Member as of the date of death or retirement, as the case may be. Those Allocations standing to the credit of the Account of the Member as at the date of death or retirement, as the case may be, shall continue to vest irrevocably as described in 12 above in the Member or his estate, as the case may be, on XXXXXXXXXX of each of the XXXXXXXXXX consecutive and successive calendar years immediately following the fiscal year in respect of which such Allocations were made, regardless of whether such XXXXXXXXXX -year period ends in a year after the Member's retirement. Within XXXXXXXXXX business days of an amount in respect of an Allocation vesting in a Member or his estate, as the case may be, that amount will be paid to the Member or his estate, as the case may be, and the Corporation, in accordance with applicable law shall withhold all source deductions from that amount.
17. In the event of the resignation of a Member from his employment due to illness or disability, no further Allocations shall be made by the Corporation to the Account of the Member as at the date of cessation of employment. Those Allocations standing to the credit of the Account of the Member as at the date of cessation of employment shall continue to vest irrevocably as described in 12 above in the Member on XXXXXXXXXX of each of the XXXXXXXXXX consecutive and successive calendar years immediately following the fiscal year in respect of which such Allocations were made. Within XXXXXXXXXX business days of an amount in respect of an Allocation vesting in a Member, that amount will be paid to the Member and the Corporation, in accordance with the applicable law, shall withhold all source deductions from that amount.
18. Notwithstanding anything else contained herein, all amounts allocated and payable to a Member or Reallocated Member, or in respect of a Member or Reallocated Member's Account, shall be paid within XXXXXXXXXX calendar years immediately following the fiscal year in respect of which the Allocation or Original Allocation was made.
PURPOSE OF PROPOSED PLAN
19. The Corporation wishes to adopt a discretionary bonus plan so that its employees may, as an incentive, share in the positive financial growth of the Corporation during the course of their employment with the Corporation. The Plan is not intended to fund benefits after retirement, but rather to provide a means by which employees may receive a bonus within XXXXXXXXXX years in respect of services rendered by the employee in the year.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed Plan and purpose of the proposed Plan, and provided that the terms of the Plan are as described above, we rule as follows:
A. The Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.
B. 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.
C. The Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act, by virtue of paragraph (k) of that definition.
D. No amount will be included in a Member or Reallocated Member's income pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) of the Act solely as a result of the implementation of the Plan or an Allocation or Reallocation to a Member or Reallocated Member under the Plan.
E. All amounts paid by the Corporation to a Member or Reallocated Member will be included in the income of the Member or Reallocated Member, respectively, pursuant to subsection 5(1) and section 6 of the Act in the year the amount is received. The amount paid by the Corporation includes any amounts withheld in respect of taxes or other source deductions.
F. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts paid referred to in E, as well the costs incurred in the administration of the Plan, that are paid in a particular year by the Corporation in respect of an employee of the Corporation, will be deductible in computing the Corporation's income in the year in which the payments are made or the costs incurred, respectively, in accordance with section 9 of the Act.
The above advance income tax 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 Advance Income Tax Rulings, dated May 17, 2002 and are binding on the CCRA provided that the proposed Plan is implemented by XXXXXXXXXX.
The above rulings are based on the salient terms of the Plan that were submitted in draft with the request, which are described above. Any substantive difference between that version and the final version of the Plan would invalidate the rulings provided.
In addition, this letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any reference thereto are provided solely for the convenience of the reader.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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