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 deferred bonus plan be excluded from the definition of salary deferral arrangement?
Position: Yes.
Reasons: The plan satisfies the requirements of paragraph 248(1)(k)
XXXXXXXXXX 2003-004714
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation. We also acknowledge receipt of your letters dated XXXXXXXXXX and the information provided in our various telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in the ruling request is:
(i) in an earlier return of the Corporation or a related person;
(ii) 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;
(iii) under objection by the Corporation or a related person;
(iv) before the courts; or,
(v) the subject of a ruling previously issued by the Directorate to the Corporation or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (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 transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Employer") is the retail division of the Corporation, which is a taxable Canadian corporation. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
2. The Corporation is the XXXXXXXXXX subsidiary of the XXXXXXXXXX (the "Parent"). The Corporation is XXXXXXXXXX.
3. The business number of the Corporation is XXXXXXXXXX . The Corporation files its tax returns at the XXXXXXXXXX Tax Services Office and deals with that office. Its fiscal year-end is on XXXXXXXXXX. The head office of the Corporation is XXXXXXXXXX.
4. The Employer earns revenues through XXXXXXXXXX charged for XXXXXXXXXX Products offered by the Employer to the public include XXXXXXXXXX.
5. The Employer has established a comprehensive compensation and benefit program for eligible XXXXXXXXXX It includes a cash compensation program that provides XXXXXXXXXX.
6. The Employer also offers a Recognition Program (the "Program") to eligible employees. The terms of the Program are described below.
7. The current version of the Program has been in effect in substantially the same form since XXXXXXXXXX.
8. All XXXXXXXXXX employed by the Employer are eligible to participate in the Program.
9. At each fiscal year-end of the Corporation, awards are granted to those XXXXXXXXXX who qualify as members of XXXXXXXXXX.
10. An XXXXXXXXXX qualifies as a member of the XXXXXXXXXX for a particular fiscal year if he or she achieves (by the XXXXXXXXXX fiscal year end date) the XXXXXXXXXX level prescribed for the XXXXXXXXXX (determined at the end of XXXXXXXXXX of each fiscal year), adheres to the Employer's standards and policies, is invited by the Employer by the end of the fiscal year (i.e., XXXXXXXXXX) to participate in an Employer sponsored XXXXXXXXXX, and is an employee of the Employer on XXXXXXXXXX . Invitations start being sent to XXXXXXXXXX in XXXXXXXXXX, on a daily basis, as XXXXXXXXXX meet the prescribed XXXXXXXXXX level. An XXXXXXXXXX who has accepted an invitation but is not an employee on XXXXXXXXXX is ineligible for the XXXXXXXXXX award.
11. An XXXXXXXXXX qualifies as a member of the XXXXXXXXXX for a particular fiscal year if he or she achieves by the XXXXXXXXXX fiscal year end date the XXXXXXXXXX level prescribed for the XXXXXXXXXX (determined at the end of XXXXXXXXXX of each fiscal year), adheres to the Employer's standards and policies, is invited by the Employer at the end of the fiscal year (i.e., XXXXXXXXXX) to participate in an Employer sponsored XXXXXXXXXX, and is an employee of the Employer on XXXXXXXXXX. An XXXXXXXXXX who achieves the prescribed XXXXXXXXXX levels for XXXXXXXXXX will qualify as a member of the XXXXXXXXXX only. Invitations start being sent to XXXXXXXXXX in XXXXXXXXXX, on a daily basis, as XXXXXXXXXX meet the prescribed XXXXXXXXXX level. An XXXXXXXXXX who has accepted an invitation but is not an employee on XXXXXXXXXX is ineligible for the XXXXXXXXXX award.
12. In addition, XXXXXXXXXX whose length of service ("LOS") is XXXXXXXXXX years of service or less can qualify as members of the XXXXXXXXXX under an alternative requirement. This alternative requirement is structured such that the tests are applied to XXXXXXXXXX separate groups: XXXXXXXXXX. Within each group, an XXXXXXXXXX qualifies as a member of the XXXXXXXXXX for a particular fiscal year if he or she achieves both the prescribed XXXXXXXXXX level and the 'XXXXXXXXXX' level prescribed for his or her group by the end of the fiscal year.
13. An XXXXXXXXXX who qualifies as a member of the XXXXXXXXXX is awarded a XXXXXXXXXX. As noted in 10 above, such award entitles him or her to participate in an Employer sponsored and arranged XXXXXXXXXX ("XXXXXXXXXX #1") that takes place in the following fiscal year. Alternatively, an XXXXXXXXXX who qualifies for the XXXXXXXXXX may opt for the XXXXXXXXXX offered to members of the XXXXXXXXXX as described in 14, below.
14. An XXXXXXXXXX who qualifies as a member of the XXXXXXXXXX is awarded a XXXXXXXXXX. As noted in 11 above, such award entitles him or her to participate in another Employer sponsored and arranged XXXXXXXXXX ("XXXXXXXXXX #2") that takes place in the following fiscal year.
15. The fair market value of XXXXXXXXXX #2 is significantly less than the fair market value of XXXXXXXXXX #1. For example, the average taxable benefit for XXXXXXXXXX #2 for XXXXXXXXXX was $XXXXXXXXXX. The average taxable benefit for XXXXXXXXXX #1 for XXXXXXXXXX was $XXXXXXXXXX. The value of the XXXXXXXXXX may increase or decrease from year to year, XXXXXXXXXX. The actual value XXXXXXXXXX is reported as a taxable benefit on the T4 slip of any XXXXXXXXXX, in the calendar year in which the XXXXXXXXXX is taken.
16. Currently, there is no alternative award provided in the case of an XXXXXXXXXX who elects not to XXXXXXXXXX either XXXXXXXXXX.
Proposed Transactions
17. The Employer proposes to amend the Program (the "Amended Program") as further described below. The Amended Program will be implemented only after the advance tax ruling is granted.
18. The Amended Program will maintain the XXXXXXXXXX. Under the Amended Program, an XXXXXXXXXX who qualifies as a member of either the XXXXXXXXXX or the XXXXXXXXXX will be given the option of electing to receive the XXXXXXXXXX or XXXXXXXXXX through an alternative form (the "XXXXXXXXXX"), in lieu of participating in XXXXXXXXXX #1 or XXXXXXXXXX #2.
19. The criteria for qualifying as a member of the XXXXXXXXXX will be the same as the current criteria described above in 10. The criteria for qualifying as a member of the XXXXXXXXXX will be the same as the current criteria described above in 11 and 12.
20. Each XXXXXXXXXX will exercise the election to receive the XXXXXXXXXX prior to the date on which his or her qualification for the XXXXXXXXXX or XXXXXXXXXX is determined (that is, prior to the "award date" of XXXXXXXXXX of any particular fiscal year). Specifically, an election form will be sent out with the invitations to XXXXXXXXXX the XXXXXXXXXX as described in 10 and 11 above, which must be returned before XXXXXXXXXX.
21. For members of the XXXXXXXXXX, the XXXXXXXXXX will consist of the allocation of deferred share units ("DSUs"). Each DSU will represent one common share in the Parent. A member of either the XXXXXXXXXX who elects to receive his or her award through the form of a XXXXXXXXXX is hereinafter referred to as a "Participant". The value of the DSUs awarded to Participants will be approximately $XXXXXXXXXX for XXXXXXXXXX members and $XXXXXXXXXX for XXXXXXXXXX members. The actual number of DSUs awarded each year will be determined by dividing $XXXXXXXXXX or $XXXXXXXXXX, as applicable, by the current market value of a XXXXXXXXXX common share, rounded up to a full DSU. For example, if a XXXXXXXXXX common share is trading at $XXXXXXXXXX , the XXXXXXXXXX would be XXXXXXXXXX DSUs. In this case, the Participant would be awarded XXXXXXXXXX DSUs for a value of $XXXXXXXXXX. Similarly, the XXXXXXXXXX would be XXXXXXXXXX DSUs. In this case, the Participant would be awarded XXXXXXXXXX DSUs with a value of $XXXXXXXXXX.
22. In respect of XXXXXXXXXX, the Employer will make a cash contribution from its general assets to an existing trust (the "Trust") that is taxable as an employee benefit plan under the Act. The cash contribution will be an amount equal to the aggregate of the fair market value of each XXXXXXXXXX to which Participant's would have been entitled to had the elections under 20 above not been exercised. The Trust will then purchase Parent common shares on the open market. A notional account will be established by the Employer for each Participant (the "Notional Account"). The number of DSUs allocated to the Participant and the value of those units will be recorded in the Notional Account.
23. 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 Parent's common shares, the number of DSUs credited to a Participant's Notional Account will be adjusted accordingly in order to preserve the benefits allocated under the Amended Program, in such manner as determined by the trustee in consultation with the Employer.
24. The XXXXXXXXXX will have no legal ownership of or beneficial interest in Parent common shares by virtue of the allocation of a DSU. For greater certainty, a DSU will not entitle a Participant to any shareholder rights vis à vis the Parent, including without limitation, voting rights, dividend entitlements or rights on liquidation. The trustee will exercise the voting rights of the shares held in the Trust.
25. All dividends paid by the Parent on shares held by the Trust prior to their vesting and distribution, as described in 26 below, will be paid to the Trust. The Participants will be the income beneficiaries of the Trust. All dividends received by the Trust will be distributed to Participants by the end of the calendar year in which the Trust received the dividends based on the number of DSUs held in the Participant's Notional Account.
26. The DSUs awarded to a Participant will cliff vest XXXXXXXXXX years from the award date of XXXXXXXXXX. Notwithstanding the foregoing, if a Participant dies or terminates employment before vesting, at its sole discretion, the Employer may vest all or part of the DSUs credited to the Participants' Notional Account. Once vested, the Trust will distribute the Parent common shares in satisfaction of the Participants' DSUs and, in any event, no later than the end of the XXXXXXXXXX calendar year following the calendar year that includes the fiscal year in which the Participant rendered the services. For example, an award made for the XXXXXXXXXX fiscal year, ending XXXXXXXXXX, would be distributed by XXXXXXXXXX.
Purpose of the Proposed Transactions
27. The purpose for amending the Program is to enhance the employee retention features of the Employer's reward and recognition program by providing high-performing XXXXXXXXXX with a more meaningful reward program, as, over the years, the perceived value of the XXXXXXXXXX has diminished, and to align the interests of the XXXXXXXXXX with those of the shareholders of the Parent.
Rulings
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, and provided that the proposed transactions are as described above, we rule as follows:
A. The Amended Program will not be a salary deferral arrangement ("SDA") by virtue of paragraph (k) of the definition of SDA in subsection 248(1) of the Act.
B. No amount will be included in the income of a Participant as a result of allocating DSUs to the Participant's Notional Account by virtue of subsection 5(1) or paragraph 6(1)(a) of the Act.
C. All distributions of Parent common shares that are transferred to the Participants by the Trust, pursuant to XXXXXXXXXX granted under the Amended Program, will be taxable to the Participant in the year of the transfer, at the fair market value of Parent common shares on the date Parent common shares are transferred to the Participant, as employment income under section 5 and paragraph 6(1)(g) of the Act.
D. All dividends distributed by the Trust to a Participant will be taxable to the Participant in the year of distribution as employment income under section 5 and paragraph 6(1)(g) of the Act.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, all costs (other than contributions to the Trust) associated with the administration of the Amended Program that are incurred by the Employer will be deductible, in accordance with section 9 of the Act, in computing the Employer's income in the year in which the costs are incurred.
F. Subject to section 67 of the Act, contributions to the Trust under the Amended Program from the general assets of the Employer, as described in 22 above, will be deductible in computing the Employer's income, in accordance with subsection 32.1(1) of the Act, in the year in which the distributions of Parent common shares are made to the Participants.
The above rulings, which are based on the Act in its 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 Canada Customs and Revenue Agency provided that the proposed transactions are completed 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 property referred to herein.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Planning Branch
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