2003 Ruling 2003-0033723 - EXCHANGEABLE DSU

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:

1. Will the payment of part of an employee's remuneration in the form of deferred stock units ("DSU's") of a subsidiary corporation result in an SDA?

2. Will the fact that the FMV of each class of shares of a subsidiary corporation will be based on investments attributable to the particular shares affect the application of 6801(d)?

3. Will the entitlement to elect which class(es) of shares their DSUs will correspond to, or the entitlement to convert previously allocated DSUs to another class of DSUs violate 6801(d)?

Position:

1. No
2. No
3. No

Reasons:

1. The plan meets the requirements of paragraph 6801(d) of the Regulations.

2. 6801(d) merely requires that the value be based on the FMV of shares of the employer corporation or a corporation related thereto.

3. If the FMV of the DSUs originally allocated equals the compensation deferred, and if the FMV of the DSUs originally allocated equals the FMV of the DSUs as converted, 6801(d) is satisfied. This is also consistent with prior positions.

XXXXXXXXXX 2003-003372

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also confirm our several conversations (XXXXXXXXXX), your electronic correspondence of XXXXXXXXXX and the resulting amendments necessitated to the deferred share unit plan since your original submission.

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

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

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

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

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

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 plan and the purpose of the proposed plan is as follows:

Facts

1. XXXXXXXXXX ("Holdco") was incorporated in XXXXXXXXXX and is indirectly controlled by XXXXXXXXXX ("Controlco"), a taxable Canadian corporation and a public corporation within the meaning of subsection 89(1) of the Act. Holdco's taxation year-end is XXXXXXXXXX and its Business Number is XXXXXXXXXX.

2. Holdco is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act and a XXXXXXXXXX within the meaning of subsection 142.2(1) of the Act. Holdco is a corporation whose sole activity is that of holding of interest in its subsidiaries and other investments.

3. Holdco's head office is located at XXXXXXXXXX. Holdco deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

4. XXXXXXXXXX . (the "Corporation") was incorporated under XXXXXXXXXX and is indirectly controlled by Controlco. The Corporation was created in XXXXXXXXXX through the amalgamation of XXXXXXXXXX. The Corporation is a subsidiary of Holdco.

5. The Corporation is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act and a XXXXXXXXXX within the meaning of subsection 142.2(1) of the Act. It is a XXXXXXXXXX within the meaning of subsection 248(1) of the Act. The Corporation's taxation year-end is XXXXXXXXXX and its Business Number is XXXXXXXXXX.

6. The Corporation's address is XXXXXXXXXX. The Corporation deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

7. The Corporation has established a comprehensive benefit program for its employees that includes a registered pension plan, a supplementary unfunded pension plan, a long-term incentive plan, a short-term bonus plan and insurance and medical programs.

8. The cash component of compensation paid to employees of the Corporation is determined according to one of the following methods depending on job classification: salary plus discretionary performance bonus; salary plus commissions, based on sales contracts, plus discretionary performance bonus; and straight commission, based on sales contract.

9. XXXXXXXXXX ("Affiliate1") was incorporated under XXXXXXXXXX and is indirectly controlled by Controlco. It is a subsidiary of the Corporation.

10. Affiliate1 is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act, a XXXXXXXXXX within the meaning of subsection 142.2(1) of the Act and a XXXXXXXXXX within the meaning of subsection 248(1) of the Act. Affiliate1's taxation year-end is XXXXXXXXXX. Affiliate1's Business Number is XXXXXXXXXX.

11. Affiliate1's address is XXXXXXXXXX. Affiliate1 deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

12. XXXXXXXXXX ("Affiliate2") was incorporated under XXXXXXXXXX and is indirectly controlled by Controlco. It is a subsidiary of the Corporation.

13. Affiliate2 is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act, a XXXXXXXXXX within the meaning of subsection 142.2(1) of the Act and a XXXXXXXXXX within the meaning of subsection 248(1) of the Act. Affiliate2's taxation year-end is XXXXXXXXXX. Affiliate2's Business Number is XXXXXXXXXX.

14. Affiliate2's address is XXXXXXXXXX. Affiliate2 deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

15. The group of companies composed of the Corporation, Affiliate1 and Affiliate2 is herein referred to as "the Group." Individually, the Corporation, Affiliate1 and Affiliate2 may also be referred to as a "Group Member."

Proposed Plan

16. The Group proposes to establish a deferred compensation plan (the "Plan") for eligible employees of the Group Members, to be administered by a committee established by the board of directors of the Corporation (the "Committee"). The Plan will be effective as of the date the advance tax ruling is granted.

17. An employee will be eligible to participate in the Plan for a particular year if the employee is a resident of Canada and his or her cash remuneration for the immediately preceding calendar year exceeded $XXXXXXXXXX or if he or she is otherwise selected by the Committee as being eligible to participate (the "Participant"). An employee must re-qualify each year (i.e., have annual cash remuneration greater than $XXXXXXXXXX to participate in the Plan for the following year).

18. A Participant may elect to defer the receipt of a percentage of his or her annual cash compensation that is derived from salary, commissions or discretionary performance bonuses ("Compensation"). A Participant may choose to defer XXXXXXXXXX% or less of the amount by which the immediately preceding year's total compensation exceeded $XXXXXXXXXX ("Deferred Compensation").

19. In respect of each year, a Participant must elect in writing whether or not to defer any of his or her Compensation and the amount to be deferred. The election must be made within the time limit established by the Plan and filed with the Committee before the Participant would otherwise be entitled to receive the Compensation. A Participant's election must be filed annually except in the initial year of the Plan when this election will be filed quarterly. An election, once made, may not be revoked for the year to which it relates.

20. A company will be incorporated ("Subco"), the shareholders of which will be the Group Members. The articles of incorporation of Subco will authorize the issuance of special classes of non-cumulative redeemable preferred shares ("Special Shares"). Subco will issue series of the Special Shares to its shareholders. Each series of the Special Shares will track the value of different portfolio investments held by Subco and which the Group or its affiliates currently offer directly to its customers or employees, such as mutual funds or other investment vehicles created, managed and distributed by the Group. As well, one of the investments held by Subco could include shares of Controlco. As each series of Special Shares will track the value of specified investments held by Subco, the fair market value of each series of Special Shares held by the shareholders will equal the fair market value of specified investments held by Subco.

21. Under the Plan, a number of different classes of deferred share units ("DSUs") will be established. Each class of DSU will correspond to a series of Special Shares. The value of a DSU will equal the fair market value of a share in the series of Special Share to which it corresponds.

22. Each Participant will be allocated DSUs under the Plan. The number of DSUs allocated to a Participant will be equal to that Participant's Deferred Compensation divided by the value of the DSU at that time. The Deferred Compensation will be converted to DSUs and allocated to a Participant quarterly. As necessary, fractional DSUs will be allocated.

23. To entice eligible employees to participate in the Plan and to encourage Participants to remain in the employ of the Group, where an employee elects to become a Participant, the Group may augment that Participant's Compensation ("Additional Compensation"). The amount of Additional Compensation awarded to a Participant will be a function of the Participant's Compensation in the previous year. A particular Participant's Additional Compensation will equal a specified percentage (as set out in the Plan) of his or her prior year's Compensation. This Additional Compensation will be converted to DSUs, in the same manner as described in 22, above.

24. The Group will never grant any amount or benefit for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of Subco's Special Shares.

25. Up to two notional accounts ("Notional Accounts") will be established for each Participant. The number of DSUs allocated to the Participant and the value of the DSUs will be recorded in these Notional Accounts. The amounts credited to a Participant's Notional Account(s) shall be recorded as an accrued liability of the Group Member with whom the Participant is employed.

26. The first Notional Account will record the value of the DSUs allocated to the Participant as a result of his or her election to defer Compensation pursuant to 18 and 19, above, but excluding those DSUs resulting from Additional Compensation granted pursuant to 23, above. The DSUs in the first Notional Account will vest immediately upon allocation. However, the Participant will not have any right to receive any benefits under the Plan until he or she retires or terminates employment (including death) with the Group and any affiliate.

27. With respect to amounts in the first Notional Account, Participants will be permitted to elect the class or classes of DSUs to which their Deferred Compensation will be allocated. The election, once made, will be irrevocable for that year. Once a year, at such time as determined by the Plan, a Participant (including a Participant who, for a particular year, fails to meet the eligibility criteria set out in the Plan) may elect to convert previous allocations of DSUs in the first Notional Account into another class of DSUs. Where necessary, fractional DSUs will be issued. Once made, the election to convert a previous allocation of DSUs into another class of DSUs is irrevocable for that year.

28. The second Notional Account will record the value of the DSUs allocated to the Participant as a result of the conversion of Additional Compensation pursuant to 23, above. These DSUs will not vest immediately. Rather, they will vest over a period of XXXXXXXXXX years (XXXXXXXXXX% per year) after being credited to the Participant's second Notional Account. Accelerated vesting may occur under special circumstances such as death or retirement. However, should a Participant's retirement or termination of employment from the Group or any affiliate occur after the vesting of the DSUs, their continued vesting and thus the Participant's entitlement thereto is subject to his or her not accepting employment with a competitor of the Group after his or her retirement or termination of employment.

29. With respect to amounts in the second Notional Account, the Group will determine which class or classes of DSUs to which Additional Compensation will be allocated.

30. If a portfolio investment underlying a series of Special Shares distributes income, additional DSUs (including fractional DSUs, if necessary) will be allocated to the Participant and notionally invested in the Plan. The allocation and conversion of DSUs will be based upon the fair market value of the series of Special Shares to which the DSU relates, at the time of the allocation or conversion.

31. A Participant will have no legal ownership of or beneficial interest in the series of Special Shares or the underlying portfolio investments of Subco or the Group by virtue of the allocation of DSUs. For greater certainty, a DSU will not entitle a Participant to any shareholder rights vis à vis Subco or the Group, including without limitation, voting rights, dividend entitlements or rights on liquidation.

32. In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin off or other distribution affecting the fair market value of the Special Shares, the number of DSUs credited to a Participant's Notional Account(s) will be adjusted accordingly.

33. At any time prior to the end of business on the day a Participant retires or is terminated, a Participant must file a distribution election form with the Committee with respect to the timing of receipt of the vested DSUs in his or her first Notional Account, described in paragraph 26 above ("Payment Date"). In this distribution election form, the Participant may elect to receive his or her vested benefits in no more than two instalments payable no later than the end of the first fiscal period ending after the calendar year in which the Participant retires, is terminated or dies, as specified in paragraph 26 above. If no distribution election has been filed by the end of business on the day a Participant retires, is terminated or dies (or if such day is not a business day, by the end of the next business day), these vested benefits will be paid in one lump sum payment on the last business day of the second month immediately following the day the Participant retires, is terminated or dies.

34. Subject to paragraph 35 below, the Payment Date of Vested DSUs in the second Notional Account will be at the discretion of the Group Member that employs the Participant.

35. All vested benefits under the Plan will be distributed to a Participant (or to the Participant's legal representative in the event of death) no later than the end of the fiscal year of the Corporation immediately following the year in which the Participant retires, is terminated or dies and, in any event, no later than the end of the first calendar year commencing after the Participant retires or is terminated (including death) from employment with the Group and any affiliate. The amount payable to a Participant will depend on the value of the vested DSUs in the Participant's Notional Account(s), determined as the average value of the DSUs for five consecutive business days preceding the Payment Date(s) as determined in paragraphs 33 and 34, above. Benefits will be paid in cash. In no event shall assets be distributed to a Participant that consists of treasury shares of any of the Group Members or any affiliate.

36. The Group will pay all costs and expenses associated with establishing and administering the Plan.

37. The Plan may be amended or terminated by the Corporation (through its board of directors or through the Committee) at any time. However, no such amendment or termination will adversely affect the DSUs allocated to the Participants' Notional Account(s) and, furthermore, it will not accelerate payment of benefits to the Participant.

38. The Plan will be unfunded. However, the Group may hedge itself against the increase in the value of the DSUs allocated to Participants. The hedge, if implemented, may continue for the duration of the Plan and be adjusted periodically to match the investment allocations of Participants under the Plan. The hedge mechanisms will ideally mature when the Group expects to make payments to Participants from the Plan. However, the Group may, of its own volition, decide to terminate the hedge mechanism prior to the expected date of the payments to the Participant.

39. If implemented, all proceeds received on settlement of the hedge mechanism, including any assets delivered in-kind, will form part of the general assets of the Group Members and will be accessible to the general creditors of the Group Members. The Participants will have no legal claim or beneficial interest in the hedge mechanism or its proceeds, including any assets delivered in-kind, on settlement of the hedge.

Purpose of the Proposed Plan

40. The purpose of the proposed Plan is to attract, motivate and encourage the retention of employees of the Group who are key to the long-term success of Group Members.

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 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. 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.

C. The Plan will not constitute an investment contract as that term is defined in subsection 12(11) of the Act, and the allocation of DSUs to a Participant's Notional Account(s) will not constitute interest income from an investment contract pursuant to subsection 12(4) of the Act.

D. No amount will be included in the income of a Participant pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) of the Act solely as a result of allocating DSUs to the Participant's Notional Account(s).

E. Except to the extent that Ruling F applies to amounts received by a Participant's legal representative, the amount to be included in the income of a Participant for a year under the Plan by virtue of subsection 5(1) of the Act will include any amount paid by a Group Member to the Participant or to his or her legal representative. The amount paid by the Group Member includes any amounts withheld in respect of taxes or other source deductions.

F. All amounts payable under the Plan to the Participant's estate or to or on behalf of the beneficiary of a Participant, as a result of a Participant's death, as described in 35 above, 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.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments described in the above rulings made under the Plan in the year by a Group Member from the general assets of the Group Member in respect of services provided by a Participant who was an employee of the Group Member, in satisfaction of all or any part of a Participant's interest in the Plan, as well as all costs referred to in paragraph 36, above, incurred in establishing the Plan in respect of a Group Member's employees that are paid for by a Group Member, will be deductible in computing the Group Member's income in the year in which the payments are made or the costs were 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 and provided that the terms of the final Plan document reflect the terms described above.

Comments

Pursuant to 23, above, the Group has the discretion to award Additional Compensation to a Participant. Further, pursuant to 37, above, the Corporation has the discretion to amend the Plan and can therefore adjust the specified percentages used to determine a Participant's Additional Compensation as described in 23, above. The above Rulings will not apply should this discretion be exercised to award Additional Compensation and corresponding DSUs in order to reduce the impact, in whole or in part, of any reduction in the fair market value of the shares of Subco. In such event, the Plan would cease to comply with paragraph 6801(d) of the Regulations.

Yours truly,

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