2003 Ruling 2003-0034053 - DEFERRED SHARE UNIT TREASURY 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.

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 a deferred share unit plan be considered a salary deferral arrangement?

2. Will the issuance of treasury shares in satisfaction of the DSU's result in the application of section 7 of the Act?

Position:

1. No
2. Yes

Reasons:

1. The plan satisfies the conditions of 6801(d).

2. Where treasury shares are issued, section 7 will apply

XXXXXXXXXX 2003-003405

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

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

This is in reply to your letter of XXXXXXXXXX as well as our subsequent conversations (XXXXXXXXXX) in which you request an advance income tax ruling on behalf of the above-named taxpayer.

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.

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

"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.

"Board" means the Board of Directors of the Corporation.

"Broker" means a broker independent from the Corporation or any of its subsidiaries who has been designated by the Corporation as the broker that will purchase Common Shares pursuant to the Plan and who is a member of the principal Canadian stock exchange or other public exchange on which the Common Shares are listed, or, if the Common Shares are not then listed, as selected by the Committee acting in good faith.

"Deferred Share Unit" or "DSU" means a bookkeeping entry equivalent in value to a Common Share credited to a Participant's Account in accordance with 10 and 11, below.

"Dividend Equivalent" means a bookkeeping entry equivalent in value to a dividend paid on a Common Share credited to a Participant's Account in accordance with 17, below.

"Grant" means any DSU credited to the Account of a Participant in accordance with 10 and 11, below.

"Long Term Incentives" means long term incentives that a senior officer of the Corporation is entitled to either (i) pursuant to the written provisions of an employment agreement with the Corporation in respect of employment services performed for the Corporation, or (ii) as determined by the Committee.

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

"Participant" means a director or senior officer of the Corporation who is designated by the Committee as eligible to participate in the Plan.

"Share Price" means the closing price of a Common Share on the Exchange averaged over the five (5) consecutive trading days immediately preceding either (a) the last day of the fiscal quarter preceding the date of Grant in respect of a director, (b) the last day preceding the date of Grant in respect of a senior officer, or (c) the Termination Date, as applicable, or in the event such shares are not traded on the XXXXXXXXXX Stock Exchange, the fair market value of such shares as determined by the Committee acting in good faith.

"Termination Date" means the date upon which a Participant ceases to hold any position as a director or officer of the Corporation and its subsidiaries and is no longer otherwise employed by the Corporation or its subsidiaries, including in the event of the death of the Participant.

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

Facts

1. The Corporation was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX under the name "XXXXXXXXXX". On XXXXXXXXXX, the Corporation changed its name to "XXXXXXXXXX". On XXXXXXXXXX, the Corporation was continued under the laws of the XXXXXXXXXX and changed its name to "XXXXXXXXXX". The Corporation, together with its subsidiaries, is engaged in the XXXXXXXXXX.

2. The Corporation's registered office is located at XXXXXXXXXX. The executive office and mailing address of the Corporation is XXXXXXXXXX. The Corporation files its T2 tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3. The Corporation's business number is XXXXXXXXXX.

4. The Corporation's common shares (the "Common Shares") are listed and traded on the XXXXXXXXXX Stock Exchange.

5. The Corporation currently pays members of its Board of Directors an annual board retainer, fees for services on a committee of the Board of Directors, fees for chairing a committee of the Board of Directors, fees for attending meetings of the Board of Directors or committees of the Board of Directors. The majority of meetings of the Board of Directors and committees of the Board of Directors are held in Canada.

Proposed Plan

6. The Corporation will establish the Deferred Share Unit Plan (the "Plan") for resident and non-resident directors and certain senior officers of the Corporation. A draft of the Plan was submitted with the ruling request. The Plan will be unfunded and will be administered by the Compensation Committee (the "Committee") of the Corporation's Board of Directors. The Corporation will be responsible for all costs relating to the administration of the Plan.

7. The effective date of the Plan will be 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 Income Tax Regulations or such later date as the Corporation may determine.

8. Each Participant who is a director may elect, once each calendar year, to be paid a percentage of his or her annual retainer in the form of DSUs, with the balance being paid in cash. In the case of an existing Participant, the election must be completed, signed and delivered to the Corporation by the end of the fiscal year preceding the fiscal year to which such election is to apply. In the case of a new Participant, the election must be completed, signed and delivered to the Corporation as soon as possible, and, in any event, no later than XXXXXXXXXX days, after the director's appointment, with such election to be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporation's receipt of the election until the final day of the fiscal year of appointment. For the first year of the Plan, Participants must make such election as soon as possible, and, in any event, no later than XXXXXXXXXX days, after adoption of the Plan and the election shall be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporation's receipt of the election until the final day of such fiscal year. If no election is made in respect of a particular fiscal year, the new or existing Participant will receive the annual retainer in cash.

9. Each Participant who is a senior officer may elect to receive DSUs in lieu of Common Shares that they would otherwise be entitled to pursuant to applicable Long Term Incentives. Elections must be made in advance of the time that the Participant would otherwise be entitled to receive the Common Shares. Elections must be made and filed with the Corporation within the time limits established by the Committee.

10. The number of DSUs that a Participant director is entitled to receive in any quarter is based upon the percentage that the Participant has elected to receive in DSUs multiplied by one quarter of such Participant's annual retainer divided by the applicable Share Price.

11. The number of DSUs that a Participant senior officer is entitled to receive at a particular time is based on the number of Common Shares that such Participant was otherwise entitled to receive at such time pursuant to the applicable Long Term Incentives.

12. Each Participant shall be entitled to redeem his or her DSUs during the period commencing on the business day immediately following the Termination Date and ending on the XXXXXXXXXX day following the Termination Date by providing a written Notice of Redemption to the Corporation. The Notice of Redemption must specify an election to receive: (a) a cash payment 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 (b) Common Shares of the Corporation purchased on the Participant's behalf on the open market by a Broker; or (c) a percentage of the DSUs paid out in cash and the remaining percentage of the DSUs paid out as Common Shares of the Corporation purchased on the Participant's behalf on the open market by a Broker.

13. Where the Corporation's Common 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, net of applicable withholding taxes. The Broker will be required (within XXXXXXXXXX business days) to use the amount to purchase Common Shares in the open market on the principal Canadian stock exchange or any other public exchange on which the Common Shares are traded. The number of Common Shares will be computed by taking the number of DSUs that the Participant elected to receive in Common Shares, net of the number of DSUs that would equal the applicable withholding taxes. Any Common 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 forthwith as soon as practicable upon completion of such purchases. The Corporation will pay all brokerage fees arising in connection with the purchase of Common Shares by the Broker in accordance with the Plan.

14. Regardless of which election the Participant makes pursuant to 12, above, the Corporation may, in its absolute discretion, subject to the receipt of any necessary shareholder and regulatory approvals, issue to the Participant such number of Common Shares from treasury as equal the number of DSUs recorded in the Participant's account on the Termination Date. If the Corporation issues Common Shares as aforesaid, such Common Shares will be issued in consideration for the past services of the Participant to the Corporation and the entitlement of the Participant under this Plan shall be satisfied in full by such issuance of Common Shares. The Corporation will also make a cash payment, less any applicable withholding taxes, to the Participant with respect to the value of fractional DSUs standing to the Participant's credit after the maximum whole Common Shares has been issued by the Corporation.

15. The Corporation will make all of the payments described in paragraph 12, 13 or 14 to the Participant or the Broker, as the case may be, 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.

16. In the event of the death of a Participant, provided that a Notice of Redemption is not filed with the Corporation as described in paragraph 12, 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 applicable withholding taxes. If permitted by applicable law, the Participant may appoint a beneficiary of his or her rights under the Plan. For this purpose, the beneficiary must be a dependent, related person, or the estate of the Participant.

17. 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 as if the Participant was a shareholder of record of Common Shares 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 a) the actual amount of dividends that would have been paid if the Participant had held Common Shares under the Plan on the applicable record date divided by b) the closing price for Common Shares on the XXXXXXXXXX Stock Exchange on the date on which the dividends on Common Shares 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.

18. 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 the Committee in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of DSUs outstanding under the Plan. 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.

19. 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 Common Shares, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.

20. 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.

21. Under no circumstances shall DSUs be considered Common Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Common Shares, nor shall any Participant be considered the owner of Common Shares by virtue of the award of DSUs.

22. The Committee may amend the Plan or suspend the awarding of DSUs as deemed necessary or desirable; however, no such amendment or suspension shall, in the opinion of the Committee 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. Nor shall any such amendment or suspension result in an arrangement that is of more than comparable value to the Participants. The Committee 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.

23. Notwithstanding the foregoing, any amendment or suspension of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto.

Purpose of the Proposed Plan

24. 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 senior officers of the Corporation.

25. The Corporation also wishes to promote a greater alignment of interest between Participants and the Corporation's shareholders by affording such directors an opportunity to receive some or all of a Participant's annual retainer for serving as a director of the Corporation in the form of securities of the Corporation.

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 Income Tax 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 an "employee benefit plan", as that term is defined in subsection 248(1) of the Act.

C. 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.

D. Amounts received in cash by a director Participant or senior officer Participant, as described in 12(a) and 12(c) above, before any applicable withholding taxes, will by virtue of paragraph 6(1)(c) or 6(1)(a) of the Act, respectively, be included in the income for a year of a Participant.

E. Amounts received in cash, as described in 12(a) and 12(c) above, received by a director Participant or senior officer Participant and who is not a resident of Canada at the time of receipt, to the extent the amounts are attributable to services performed in Canada, and, if the Participant was resident in Canada at the time he or she performed the services, outside Canada, including any amounts withheld in respect of taxes or other source deductions, will be included in the non-resident Participant's income by virtue of paragraph 6(1)(c) or 6(1)(a) of the Act, respectively and subparagraph 115(1)(a)(i) of the Act,

F. The amount to be included in the income of a director Participant or senior officer Participant for a year under the Plan, pursuant to paragraph 6(1)(c) or 6(1)(a) of the Act, respectively, where the Corporation issues Common Shares from treasury to the Participant in satisfaction of the Participant's DSUs as described in 14 above, will consist of the aggregate of the following amounts:

a. the amount paid by the Corporation to the Participant for the rights related to fractional shares as described in 14 above;

b. the amount determined by paragraph 7(1)(a) of the Act, representing the aggregate Share Price of the Common Shares issued to the Participant as described in 14 above; and

c. the amount of applicable withholding taxes withheld by the Corporation as described in 14 above.

G. The amount to be included in the income of a non-resident director Participant or non-resident senior officer Participant for the year under the Plan, pursuant to paragraph 6(1)(c) or 6(1)(a) of the Act, respectively, and subparagraph 115(1)(a)(i) of the Act, where the Corporation issues Common Shares from treasury to the non-resident Participant in satisfaction of the non-resident Participant's DSUs as described in 14 above, will consist of the aggregate of the following amounts, to the extent each amount is attributable to services rendered in Canada, or if the Participant was a Canadian resident at the time the services were performed, to the extent that each amount is attributable to services performed, outside Canada:

a. the amount paid by the Corporation to the non-resident Participant for the rights related to fractional shares as described in 14 above;

b. the amount determined by paragraph 7(1)(a) of the Act, representing the aggregate Share Price of the Common Shares issued to the non-resident Participant as described in 14 above; and

c. the amount of applicable withholding taxes withheld by the Corporation as described in 14 above.

H. The amount to be included in the income of a director Participant or senior officer Participant, for a year under the Plan, under paragraph 6(1)(c) or 6(1)(a) of the Act, respectively, where the Participant has received Common Shares that were purchased by the Broker on the open market in satisfaction of the Participant's DSUs as described in 13 above, will consist of the aggregate of the following amounts:

a. the amount paid by the Corporation to the Participant for the rights related to the fractional shares as described in 13 above;

b. the amount paid by the Corporation to the Broker (excluding brokerage fees or commission fees) to acquire the particular Common Shares that will be distributed to the Participant as described in 13 above;

c. the amount of applicable withholding taxes withheld by the Corporation as described in 13; and

d. the amount of brokerage fees or commission fees paid by the Corporation to the Broker for the acquisition of the Common Shares distributed by the Broker to the Participant as described in 13 above.

I. The amount to be included in the income of a non-resident director Participant or non-resident senior officer Participant for the year under the Plan, under paragraph 6(1)(c) or 6(1)(a) of the Act, respectively, and subparagraph 115(1)(a)(i) of the Act, where the non-resident Participant has received Common Shares that were purchased by the Broker on the open market in satisfaction of the non-resident Participant's DSUs as described in 13 above, will consist of the aggregate of the following amounts to the extent each amount is attributable to services rendered in Canada, or if the Participant was a Canadian resident at the time the services were performed, to the extent each amount is attributable to services performed outside Canada:

a. the amount paid by the Corporation to the non-resident Participant for the rights related to the fractional shares as described in 13 above;

b. the amount paid by the Corporation to the Broker (excluding brokerage fees or commission fees) to acquire the particular Common Shares that will be distributed to the non-resident Participant as described in 13 above;

c. the amount, of applicable withholding taxes withheld by the Corporation as described in 13 above; and

d. the amount of brokerage fees or commission fees paid by the Corporation to the Broker for the acquisition of the Common Shares distributed by the Broker to the non-resident Participant as described in 13 above.

J. 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, in circumstances described in 16 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.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments described in the above rulings made under the Plan in a year by the Corporation from its general assets in respect of services provided by a Participant in satisfaction of all or any part of a Participant's interest in the Plan, as well as all costs incurred in establishing the Plan, will be deductible in computing the Corporation'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 Canada Customs and Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.

Comments:

1. In our view, the only amounts that 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 are those become payable under the Plan to a Participant's estate or to or on behalf of a Participant's beneficiary as a result of a Participant's death, in the circumstances described in 16, above, where a Notice of Redemption has not been filed with the Corporation.

In situations in which a Notice of Redemption was filed by a Participant prior to death, amounts paid to the Participant's estate or to or on behalf of a beneficiary as a result of the Participant's death, should be included in the income of the Participant in the tax return filed for the year of death by virtue of paragraph 6(1)(c) or 6(1)(a) of the Act for a director or senior officer Participant, respectively. Reference may be made to IT-210R2, "Income of Deceased Persons - Periodic Payments and Investment Tax Credit" for additional commentary.

2. The Plan defines the term Share Price. This term may or may not be equivalent to the fair market value of a Share at the time of the determination of the Share Price and nothing in this ruling should be construed as implying our acceptance of the Share Price as the fair market value of the Shares.

Yours truly,

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