2004 Ruling 2003-0051111R3 - DSU plan, 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.

Principal Issues: 1) Will a deferred share unit plan qualify as a prescribed plan under paragraph 6801(d) of the Regulations? 2) Will the issuance of treasury shares result in the application of section 7?

Position: 1) Yes 2) Yes

Reasons: 1) The plan satisfies the conditions in paragraph 6801(d) 2) prior positions

XXXXXXXXXX 2003-005111

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company")
XXXXXXXXXX ("Subco") (XXXXXXXXXX)
XXXXXXXXXX ("Canada Inc.") (XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the Company, Subco and Canada Inc. (together, the "Taxpayers"). We also acknowledge the information in your subsequent submissions of XXXXXXXXXX and conveyed during our several telephone conversations (XXXXXXXXXX).

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

(i) in an earlier return of the Taxpayers 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 Taxpayers 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 Taxpayers 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 a notional account established and maintained by the Company on behalf of each Participant to record the number of DSUs allocated to such Participant under the Plan. The Account will be solely for record keeping purposes and would represent only an unsecured promise to pay the Participant an amount in the future. No assets would actually be placed or held in the Account in the Participant's name. Once an amount becomes payable under the Plan, the Participant would become a general unsecured creditor of the Company in respect of such amount;

"Annual Incentive Awards" means any incentive award that may become payable to an Officer Participant pursuant to any annual incentive compensation plan of the Company or of an Employer;

"Applicable Canadian Withholding Taxes" means any and all taxes and other source deductions or other amounts that the Employer is required by law to withhold and remit to the Canada Revenue Agency ("CRA") from any amounts to be paid or credited under the Plan to an Officer Participant;

"Applicable XXXXXXXXXX Withholding Taxes" means any and all taxes and other source deductions or other amounts that the Company is required by law to withhold and remit to the XXXXXXXXXX taxing authority from any amounts to be paid or credited under the Plan to a Canadian Director Participant;

"Beneficiary" means any person designated by a Participant by written instrument filed with the Company to receive any amount, securities or property payable under the Plan in the event of the Participant's death. Failing any such effective designation, "Beneficiary" shall mean the Participant's surviving common law partner, as defined in subsection 248(1) of the Act, or if the Participant has no surviving common law partner, the Participant's estate;

"Canadian Director" means a member of the Board of Directors of the Company who is a resident of Canada and who is not otherwise employed by the Company or any of its affiliates;

"Deferred Stock Unit" or "DSU" means a notional unit that is issued under the Plan, the value of which, on a particular date, shall be equal to the Market Value of a Share at that date; and which, upon compliance with all of the conditions specified herein, is redeemable for its equivalent in Shares. Under no circumstances shall DSUs be considered to be Shares nor shall they entitle a Participant to exercise voting rights or any other rights attaching to the ownership of Shares;

"Employer" means one of the two wholly owned incorporated subsidiaries of the Company that participate in the Plan, namely Subco and Canada Inc.;

"Market Value" on a particular day means the average of the high and low prices per share at which Shares are traded on the XXXXXXXXXX (the "Exchange") on the last trading day before the particular day;

"Net Redemption Amount" means the amount payable to a Participant after Applicable Canadian Withholding Taxes (with respect to an Officer Participant) or Applicable XXXXXXXXXX Withholding Taxes (with respect to a Canadian Director Participant) are deducted from the Redemption Amount;

"Participant" means a Canadian resident individual for purposes of the Act who has elected to receive DSUs under the Plan and who is either (i) an officer of an Employer and on the payroll of an Employer ("Officer Participant") or (ii) a Canadian Director of the Company (together referred to as "Executives");

"Plan" means the DSU plan to be established by the Company for the Executives, the terms of which are described below;

"Redemption Amount" means a Participant's entitlement under the Plan on the Participant's Redemption Date which amount shall be calculated by multiplying the number of DSUs in the Participant's Account by the Market Value of a Share on the Redemption Date;

"Redemption Date" means such date as the Company may, in its sole discretion, decide, which date shall in no event be earlier than the date of the Participant's Termination and no later than the end of the first calendar year commencing after the Participant's Termination;

"Shares" means XXXXXXXXXX shares in the capital of the Company and "Share" means one XXXXXXXXXX share in the capital of the Company; and

"Termination" with respect to a Participant means the date upon which a Participant ceases to hold any position as a director or officer of the Company, an Employer or any subsidiary or affiliated company and is no longer otherwise employed by the Company, an Employer or any subsidiary or affiliated company, and includes the date of the death of a Participant.

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

Facts

1. XXXXXXXXXX. The Shares are listed and traded on the Exchange. The Company operates in XXXXXXXXXX and only operates in Canada through directly and indirectly wholly owned subsidiaries.

2. Subco is a Canadian corporation and a private corporation, both as defined in subsection 89(1) of the Act and is a wholly owned subsidiary of the Company. It is served by the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Tax Centre. Subco's mailing address is XXXXXXXXXX.

3. Canada Inc. is a Canadian corporation and a private corporation, both as defined in subsection 89(1) of the Act and is a wholly owned subsidiary of the Company. It is served by the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Tax Centre. Canada Inc.'s mailing address is XXXXXXXXXX.

4. XXXXXXXXXX.

Proposed Plan

5. Having established a deferred compensation plan for certain directors and key executives, the Company will establish an annex to such deferred compensation plan that will apply specifically to the Executives (the "Plan"). The Plan will be established to conform to paragraph 6801(d) of the Income Tax Regulations (the "Regulations").

6. The Company will establish the Plan with an effective date no earlier than the date that an advance income tax ruling is received from the Canada Revenue Agency ("CRA") confirming that the Plan complies with paragraph 6801(d) of the Regulations.

7. Under the Plan, an Officer Participant can elect to defer up to XXXXXXXXXX% of his or her annual base salary, and up to XXXXXXXXXX% of his or her Annual Incentive Awards. A Canadian Director Participant can elect to defer up to XXXXXXXXXX% of his or her annual remuneration, paid in the form of annual retainer and meeting fees.

In both cases the amount to be deferred will be reduced by any withholdings relating to participation in Employer or Company benefit plans or as may be required by law, for example, pursuant to a garnishment order.

Each Participant's election must be made as follows:

(a) The Company will provide Participants with irrevocable deferral election forms that will have to be filed with the Company on or before December 31 of each year for salary and Annual Incentive Awards (for Officer Participants) or for retainer and meeting fees (for Canadian Director Participants), to be earned in the following calendar year. New elections will be required to be made each year.

(b) Notwithstanding anything above, for the 2004 calendar year, Participants will be entitled to make irrevocable elections no later than XXXXXXXXXX, 2004 with respect to their 2004 annual base salary, retainer and meeting fees, earned after the election date and, without proration, their full 2004 Annual Incentive Awards that will be earned in respect of 2004, which will be payable in 2005.

8. The number of DSUs to be credited to a Participant's Account at a particular time is the number resulting when the amount deferred in accordance with the election filed pursuant to 7 above is divided by the Market Value of a Share at the time of crediting.

9. A Participant's Account will be credited with additional DSUs in respect of any cash dividend declared and paid by the Company in respect of its Shares. The number of additional DSUs will be calculated by dividing the amount of dividends that would have been paid to the Participant, if the whole (i.e. non-fractional) DSUs recorded in the Participant's Account on the record date for the cash dividend had been Shares, by the Market Value of a Share on the date on which the dividends are paid on a Share.

10. Subject to 12 below, in the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin off or other distribution (other than ordinary cash dividends) affecting the fair market value of the Shares, the number of DSUs credited to a Participant's Account will be adjusted proportionately to take into account the effects of such event.

11. Upon the allocation of DSUs to a Participant's Account pursuant to 8, 9 or 10 above, such DSUs shall be fully vested in the Participant. The Participant cannot forfeit DSUs in any circumstance.

12. No amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement and no additional DSUs will be granted to such Participant as compensation for a downward fluctuation in the fair market value of the Shares nor will any other form of benefit be conferred upon, or in respect, of a Participant for such purpose.

13. On an Officer Participant's Redemption Date, the Redemption Amount will be calculated and the Officer Participant's Employer will remit the Applicable Canadian Withholding Taxes to the CRA. The Net Redemption Amount will be paid to the Officer Participant in Shares by one of the following methods, to be chosen by the Company in its sole discretion:

(a) The issuance of the number of Shares from treasury equal to the whole number computed when the Net Redemption Amount is divided by the Market Value of a Share on that date. The value of any fractional DSUs standing to the Participant's credit after the maximum number of whole Shares has been issued by the Company will be paid in cash either by the Company or by the Officer Participant's Employer. In the event that the Company makes the foregoing cash payment for fractional shares to the Officer Participant, the Officer Participant's Employer will reimburse the Company for such amount, or

(b) The delivery by the Employer or by the Company of the Net Redemption Amount in cash to a broker to purchase Shares on the open market on behalf of the Participant. 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, net of any brokerage fees. The Shares purchased will be distributed immediately to the Participant together with any cash representing fractional shares. In the event that the Company delivers the Net Redemption Amount to the broker on behalf of an Officer Participant, the Officer Participant's Employer will reimburse the Company for such amount.

14. On a Canadian Director Participant's Redemption Date, the Redemption Amount will be calculated and the Company will remit the Applicable XXXXXXXXXX Withholding Taxes to the XXXXXXXXXX taxing authority. The Net Redemption Amount will be paid to the Canadian Director Participant in Shares by one of the following methods to be chosen by the Company in its sole discretion:

(a) The issuance of the number of Shares from treasury equal to the whole number computed when the Net Redemption Amount is divided by the Market Value of a Share on that date. The value of any fractional DSUs standing to the Participant's credit after the maximum number of whole Shares has been issued by the Company will be paid in cash by the Company, or

(b) The delivery by the Company of the Net Redemption Amount in cash to a broker to purchase Shares on the open market on behalf of the Participant. 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, net of any brokerage fees. The Shares purchased will be distributed immediately to the Participant, together with any cash representing fractional shares.

15. In the event of the death of a Participant prior to the Redemption Date, the Redemption Amount payable in accordance with the method selected by the Company pursuant to 13 or 14 above, as applicable, shall be paid to the Participant's Beneficiary.

16. The Company retains the right to amend or terminate the Plan in whole or in part at any time in its sole discretion provided however that no such amendment or termination shall accelerate the redemption of a Participant's DSUs prior to a Participant's Termination Date and any amendment of the Plan shall be such that it continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto.

Purpose of the Proposed Plan

17. The purpose of the proposed Plan is to advance the interests of the Company by providing a more competitive pay program to attract and retain key employee and director talent and to provide key employee and director talent with the opportunity to effectively invest in the Company on a tax deferred basis as a means of satisfying share ownership requirements.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the 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. 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. Except to the extent that Ruling H applies to amounts received by an Officer Participant's Beneficiary, the amount to be included under paragraph 6(1)(a) of the Act in the income of an Officer Participant in a year under the Plan, where the Company issues Shares from treasury to the Officer Participant as described in 13(a) above, in satisfaction of the Participant's DSUs, will consist of the aggregate of the following amounts:

(a) the cash amount paid to the Officer Participant for the rights related to fractional shares as described in 13(a) above;

(b) the amount of Applicable Canadian Withholding Taxes withheld, as described in 13 above; and

(c) the amount determined by paragraph 7(1)(a) of the Act, representing the fair market value of the Shares issued to the Officer Participant as described in 13(a) above.

E. Except to the extent that Ruling H applies to amounts received by an Officer Participant's Beneficiary, the amount to be included under paragraph 6(1)(a) of the Act in the income of an Officer Participant for a year under the Plan, where the Officer Participant has received Shares that were purchased by a broker on the open market in satisfaction of the Participant's DSUs as described in 13(b) above, will consist of the aggregate of the following amounts:

(a) the amount paid to the broker (including brokerage fees or commission fees) to acquire the Shares that will be distributed to the Participant together with cash for fractional shares as described in 13(b) above; and

(b) the amount of Applicable Canadian Withholding taxes withheld as described in 13 above.

F. Except to the extent that Ruling H applies to amounts received by a Canadian Director Participant's Beneficiary, the amount to be included under paragraph 6(1)(c) of the Act in the income of a Canadian Director Participant for a year under the Plan, where the Company issues Shares from treasury to the Canadian Director Participant as described in 14(a) above, in satisfaction of the Canadian Director Participant's DSUs, will consist of the aggregate of the following amounts:

(a) the cash amount paid to the Canadian Director Participant for the rights related to fractional shares as described in 14(a) above;

(b) the amount of Applicable XXXXXXXXXX Withholding Taxes withheld, as described in 14 above; and

(c) the amount determined by paragraph 7(1)(a) of the Act, representing the fair market value of the Shares issued to the Canadian Director Participant as described in 14(a) above.

G. Except to the extent that Ruling H applies to amounts received by a Canadian Director Participant's Beneficiary, the amount to be included under paragraph 6(1)(c) of the Act in the income of a Canadian Director Participant for a year under the Plan, where the Canadian Director Participant has received Shares that were purchased by a broker on the open market in satisfaction of the Canadian Director Participant's DSUs as described in 14(b) above, will consist of the aggregate of the following amounts:

(a) the amount paid to the broker (including brokerage fees or commission fees) to acquire the Shares that will be distributed to the Canadian Director Participant together with cash for fractional shares, as described in 14(b) above; and

(b) the amount of Applicable XXXXXXXXXX Witholding Taxes withheld as described in 14 above.

H. All amounts payable under the Plan to the Participant's Beneficiary as a result of a Participant's death 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.

I. Subject to paragraph 18(1)(a) and section 67 of the Act, the cash payments described in rulings D(a), D(b) and E made under the Plan in the year by an Employer from the general assets of the Employer in respect of services provided by an Officer Participant who was an employee of that Employer, in satisfaction of all or any part of the Officer Participant's interest in the Plan, as well as all costs incurred in establishing the Plan in respect of the Employer's employees that are paid for by an Employer, will be deductible in computing the Employer'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 Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.

Comments:

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

2. The issuance of treasury shares as described in 13(a) above, will be subject to paragraph 7(3)(b) of the Act.

3. The above rulings are based on the draft of the Plan that was submitted with the request and which is described above. Any substantive difference between this version and the final version of the Plan could 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