2004 Ruling 2003-0051351R3 - ATR - Salary Deferral Arrangement

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: Whether a performance incentive plan is a salary deferral arrangement, as defined in subsection 248(1) of the Act

Position: No.

Reasons: The vesting of rights granted to a participant under the plan is conditional on the company meeting certain performance targets. If the company does not meet the performance targets, any conditional rights granted under the plan are forfeited and the participant does not receive any payment.

XXXXXXXXXX 2003-005135

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request - Performance Stock Unit Plan

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on the above-noted issue in respect of the companies and individuals described below.

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

(i) is in an earlier return of a taxpayer or a related person;

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

(iii) is under objection by a taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

(v) is the subject of a ruling previously issued by the Directorate.

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.

Definitions

1. "Board" is the Board of Directors of the Corporation.

2. "Corporation" is XXXXXXXXXX.

3. "XXXXXXXXXX Committee" is the XXXXXXXXXX Committee.

4. "Plan" is the Performance Stock Unit (hereafter referred to as "PSU") plan, which the Board proposes to implement as part of the Corporation and its Subsidiaries' Executive Compensation Program.

5. "Plan Participant" means an individual employed by the Corporation or its Subsidiaries who participates in the Plan.

6. "Plan Text" is the documents that will govern operation of the Plan and payment of benefits to Plan Participants.

7. "Subject Plan Participants" are those Plan Participants who:

(a) Are residents of Canada for income tax purposes;

(b) Earn employment income in Canada;

(c) File Canadian income tax returns; and

(d) Deal at arm's length with their respective employers.

8. The following additional definitions also apply for purposes of administering the Plan:

(a) "Amount Payable" has the meaning assigned by paragraph 24 below.

(b) "Change of Control" means:

(i) the sale to a person or acquisition by a person not affiliated with the Corporation or its Subsidiaries of net assets of the Corporation or its Subsidiaries having a value greater than 50% of the fair market value of the net assets of the Corporation and its Subsidiaries determined on a consolidated basis prior to such sale, whether such sale or acquisition occurs by way of reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, merger, transfer, sale or otherwise;

(ii) any change in the holding, direct or indirect, of shares of the Corporation by a person not affiliated with the Corporation as a result of which such person, or a group of persons, or persons "acting jointly or in concert", or persons "associated" or "affiliated" with any such person or group (within the meaning of the Securities Act (XXXXXXXXXX)), are in a position to exercise effective control of the Corporation whether such change in the holding of such shares occurs by way of take-over bid, reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, merger, transfer, sale or otherwise, and for the purposes of the Plan, a person or group of persons holding shares or other convertible securities in excess of the number which, directly or following conversion thereof, would entitle the holders thereof to cast 20% or more of the votes attaching to all shares of the Corporation which, directly or following conversion of the convertible securities forming part of the holdings of the person or group of persons noted above, may be cast to elect directors of the Corporation will be deemed, other than a person holding such shares or other securities in the ordinary course of business as an investment manager who is not using such holding to exercise effective control, to be in a position to exercise effective control of the Corporation;

(iii) any reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, merger, transfer, sale or other transaction involving the Corporation where shareholders of the Corporation immediately prior to such reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, merger, transfer, sale or other transaction hold less than 60% of the shares of the Corporation or of the continuing corporation following completion of such reconstruction, reorganization, recapitalization, consolidation, amalgamation, arrangement, transfer, sale or other transaction;

(iv) the Corporation ceases to be a "distributing corporation" as that term is defined in the Canada Business Corporations Act;

(v) any event or transaction which the Board, in its discretion, deems to be a Change of Control; or

(vi) "Incumbent Directors" (as defined in paragraph 8(g) below) ceasing to be a majority of the Board.

(c) "Closing Price" has the meaning assigned in paragraph 24 below.

(d) "Director" means a director of the Corporation.

(e) "Dividend Reinvestment Plan" means the dividend reinvestment and share purchase plan of the Corporation, as described in the XXXXXXXXXX of the Corporation dated XXXXXXXXXX, as amended from time to time, or any successor plan.

(f) "For Cause" means the Plan Participant will have been convicted of a criminal act of dishonesty resulting or intending to result directly or indirectly in gain or personal enrichment of the Plan Participant and will include "just cause" as defined in the common law.

(g) "Incumbent Director" means any member of the Board who was a member of the Board immediately prior to the occurrence of the transaction, elections or appointments giving rise to a Change of Control and any successor to an Incumbent Director who was recommended for election at a meeting of the shareholders of the Corporation, or elected or appointed to succeed any Incumbent Director, by the affirmative vote of the directors, which affirmative vote includes a majority of the Incumbent Directors then on the Board.

(h) "Market Price", as of a particular day, means the closing trading price of one Share on the XXXXXXXXXX Stock Exchange (hereafter referred to as the "XXXXXXXXXX") on such day.

(i) "Market Value", as of a particular day, means the weighted average trading price of one Share on the XXXXXXXXXX for the five Trading Days immediately preceding that day.

(j) "Maturity Date" means the date upon which the Term of a PSU expires, unless the Plan provides otherwise.

(k) "PSU" means a conditional right to payment which has been granted to a Plan Participant to receive an amount of money determined in accordance with the provisions of the Plan, which is based upon the relative "Total Shareholder Return" (hereafter referred to as "TSR" and defined in paragraph 8(u) below) achieved by the Corporation compared to the TSR achieved by members of the "TSR Peer Group" (as described in paragraph 30 below).

(l) "Performance Incentive Compensation" means the targeted compensation to be provided by PSUs determined by the XXXXXXXXXX Committee from time to time pursuant to the XXXXXXXXXX as amended or superceded from time to time.

(m) "Performance Multiplier" has the meaning assigned by paragraph 29 below.

(n) "PSU Account" has the meaning assigned by paragraph 20 below.

(o) "Peer Ranking" has the meaning assigned by paragraph 30 below.

(p) "Pro Ration Factor" has the meaning assigned by paragraphs 24 and 28 below.

(q) "Retirement Plan" means a pension plan of the Corporation established or in effect from time to time which applies when an employee retires from the employment of the Corporation or its Subsidiaries.

(r) "Share" means a common share of the Corporation.

(s) "Subsidiary" means:

(i) any corporation that is a subsidiary of the Corporation (as defined in subsection 2(5) of the Canada Business Corporations Act, as amended, varied or re-enacted from time to time);

(ii) any partnership or limited partnership that is controlled by the Corporation (the Corporation will be deemed to control a partnership or limited partnership if the Corporation possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of such partnership or limited partnership whether through the ownership of voting securities, by contract or otherwise); and

(iii) any corporation, partnership, limited partnership, trust, limited liability company or other form of business entity that the XXXXXXXXXX Committee determines ought to be treated as a subsidiary for purposes of the Plan, provided that the XXXXXXXXXX Committee will have the sole discretion to determine that any such entity has ceased to be a subsidiary for purposes of the Plan.

(t) "Term" has the meaning assigned in paragraph 17 below.

(u) "TSR" for any period of time means the aggregate of:

(i) the change in Market Price of the subject security from the beginning of the Term to the end of the Term expressed as a percentage of the Market Price of the security at the beginning of the Term; and

(ii) the value of all cash and non-cash dividends and distributions paid with respect to the security during the Term (assuming reinvestment thereof in the security) expressed as a percentage of the Market Price of the security at the beginning of the Term, expressed as an annual compounded percentage for the Term.

(v) "TSR Peer Group" has the meaning assigned by paragraph 30 below.

(w) "Trading Blackout" means any period of time when a trading blackout has been instituted and is in effect pursuant to the Corporation's XXXXXXXXXX.

(x) "Trading Day" means any day on which the XXXXXXXXXX is open for trading.

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

Facts

9. The Corporation is a "taxable Canadian corporation" and "public Corporation" as defined under subsection 89(1) of the Act. The Corporation is governed by the Canada Business Corporations Act.

10. The Corporation and its Subsidiaries have operations in Canada and abroad that employ approximately XXXXXXXXXX people.

11. On XXXXXXXXXX, the XXXXXXXXXX Committee approved implementation of the Plan for the Plan Participants, subject to:

(a) Final approval of the Plan Text by the XXXXXXXXXX Committee; and

(b) Issuance of a favourable advance income tax ruling with respect to the income tax status of the Plan and receipt of benefits by the Subject Plan Participants.

12. On XXXXXXXXXX, the XXXXXXXXXX Committee approved the Plan Text, thereby satisfying the condition described in paragraph 11(a) above.

Proposed Transactions

13. The Corporation will implement the Plan upon satisfaction of the condition described in paragraph 11(b) above.

14. The XXXXXXXXXX Committee will administer the Plan in its sole discretion. The XXXXXXXXXX Committee will have the full power and sole discretion to interpret the Plan and to make regulations and formulate administrative provisions for implementation of the Plan, and to make such changes in the regulations and administrative provisions as, from time to time, the XXXXXXXXXX Committee deems proper and in the best interests of the Corporation. Such regulations and provisions may include the delegation to any Director or Directors or any officer or officers of the Corporation of such administrative duties and powers of the XXXXXXXXXX Committee as it may, in its sole discretion, deem fit. The XXXXXXXXXX Committee may amend the Plan to correct, remedy or reconcile any errors, inconsistencies or ambiguities in the Plan. The determinations of the XXXXXXXXXX Committee in the administration of the Plan will be final and conclusive.

15. Subject to the approval of the Board, the XXXXXXXXXX Committee may from time to time, in its sole discretion, designate:

(a) Those full-time employees of the Corporation or its Subsidiaries to whom PSUs will be granted.

(b) The number of PSUs to be granted to any Plan Participant.

16. The number of PSUs to be granted to a Plan Participant will equal the Performance Incentive Compensation expressed as a dollar amount and determined by the XXXXXXXXXX Committee at its sole discretion, divided by the Market Value on the date of grant of the PSUs.

17. Except as otherwise provided by provisions of the Plan, each PSU granted that is described in paragraph 16 above, will have a fixed term (hereafter referred to as the "Term") not to exceed XXXXXXXXXX years from the date of grant.

18. The Corporation has no obligation during the Term to pay or deposit any money into any account for the benefit of a Plan Participant or to issue from treasury or purchase any Shares or other securities, to or for a Plan Participant.

19. In no circumstances will PSUs be granted to a Plan Participant who has ceased to be an employee of the Corporation or its Subsidiaries during any notice period agreed to by the Corporation or its Subsidiaries and the Plan Participant or, in the absence of such agreement, the notice period implied by law.

20. Solely for the purposes of facilitating the calculation of the amounts that may be payable to a Plan Participant under the provisions of the Plan, an account (hereafter referred to as the "PSU Account") will be maintained by the Corporation for each Plan Participant. The PSU Account will record to three decimal places the number of PSUs credited to a Plan Participant. For greater certainty, a Plan Participant's PSU Account will be a notional account maintained for record keeping purposes only. The Corporation will not fund, deposit or allocate any amount of money to a Plan Participant's PSU Account in respect of the PSUs granted to the Plan Participant.

21. In the event that the granting of PSUs to a Plan Participant would occur at a time when a Trading Blackout is in effect, and applies to a Plan Participant, the determination of the Market Value will be deferred until the sixth Trading Day following the termination of the Trading Blackout.

22. Whenever cash dividends are paid on the Shares, additional PSUs will be credited to a Plan Participant's PSU Account. The number of such additional PSUs will be equal to the number of additional Shares that the Plan Participant would have received had the PSUs in the Plan Participant's PSU Account that are described in paragraph 16 above, been treated as Shares that were enrolled in the Dividend Reinvestment Plan.

23. The additional PSUs that are credited to a Plan Participant's PSU Account that are described in paragraph 22 above, will have the same Maturity Date as the underlying PSUs credited to the Plan Participant's PSU Account that are described in paragraph 16 above.

24. Subject to paragraph 28 below, on the Maturity Date of the PSUs that are described in paragraphs 16 and 22 above, the Corporation will pay to a Plan Participant an amount (hereafter referred to as the "Amount Payable") equal to the following equation: Amount Payable = Number of mature PSUs X Closing Price X Performance Multiplier X Pro Ration Factor

Where:

"Closing Price" equals the Market Value of a Share at the Maturity Date;

"Performance Multiplier" equals the number not less than zero (0) and not greater than 2, determined in accordance with paragraph 29 below and subject to paragraph 28 below; and

"Pro Ration Factor" equals 1, unless determined to be a number less than 1 pursuant to paragraph 28 below.

25. Unless otherwise provided in the Plan, the Amount Payable to a Plan Participant will be paid by the Corporation to the Plan Participant within sixty (60) days of the Maturity Date for the PSUs that have matured and are payable.

26. If the time for determination of the Amount Payable occurs at a time when a Trading Blackout is in effect, and applies to a Plan Participant, the calculation of the Amount Payable will be deferred until the sixth Trading Day following the termination of the Trading Blackout.

27. If the number of Shares held by a Plan Participant is less than the number of Shares that must be held pursuant to any share ownership guidelines of the Corporation in effect from time to time, the Plan Participant must utilize any payments made with respect to any PSUs (net of any amounts deducted pursuant to paragraph 32 below) to acquire additional Shares to increase the number of Shares held to meet the requirements of the share ownership guidelines.

28. If during the Term of any PSUs:

(a) A Plan Participant dies then, for the purpose of calculating the Amount Payable:

(i) the Performance Multiplier will be determined in accordance with paragraph 29 below;

(ii) the Pro Ration Factor will be equal to the fraction where the numerator is the difference between the number of months in the Term less the number of months in the Term remaining from the date of death, and the denominator is the number of months in the Term;

and the amount so determined will be paid to the Plan Participant's legal representative in accordance with paragraph 25 above, upon receipt of satisfactory proof of authority from the representative to act on the Plan Participant's behalf.

(b) A Plan Participant retires from his or her employment with the Corporation or its Subsidiaries pursuant to a Retirement Plan, for the purpose of calculating the Amount Payable:

(i) the Performance Multiplier will be determined in accordance with paragraph 29 below;

(ii) the Pro Ration Factor will be equal to the fraction where the numerator is the difference between the number of months in the Term less the number of months in the Term remaining from the date of retirement and the denominator is the number of months in the Term;

and the amount so determined will be paid as provided in paragraph 25 above.

(c) The employment of a Plan Participant is terminated by the Corporation or any of its Subsidiaries For Cause or is terminated by the Plan Participant, for the purpose of calculating the Amount Payable, the Performance Multiplier will be deemed to be zero (0), and all rights with respect to any PSUs credited or to be credited to the PSU Account of the Plan Participant will be terminated and the Plan Participant will receive no payment of any kind in respect of the PSUs.

(d) The employment of a Plan Participant with the Corporation or any of its Subsidiaries is terminated for any reason other than those described in paragraph 28(a), (b), or (c) above, and the notice period agreed to by the Corporation (or its Subsidiaries) and the Plan Participant or, in the absence of such agreement, the notice period implied by law expires prior to the Maturity Date, for the purpose of calculating the Amount Payable, the Performance Multiplier will be deemed to be zero (0), and all rights with respect to any PSUs credited or to be credited to the PSU Account of the Plan Participant will be terminated and the Plan Participant will receive no payment of any kind in respect of the PSUs.

(e) The employment of a Plan Participant with the Corporation or any of its Subsidiaries is terminated for any reason other than those described in paragraph 28 (a), (b), (c) or (d) above, for the purpose of calculating the Amount Payable:

(i) the Performance Multiplier will be determined in accordance with paragraph 29 below;

(ii) the Pro Ration Factor will be equal to the fraction where the numerator is the difference between the number of months in the Term less the number of months in the Term remaining from the date of termination (taking into account any notice period agreed to between the parties or, in the absence of such agreement, the notice period implied by law) and the denominator is the number of months in the Term;

and the amount so determined will be paid to the Plan Participant as provided in paragraph 25 above and upon the execution and delivery of a release that is satisfactory to the Corporation.

(f) A Change of Control occurs, for the purpose of calculating the Amount Payable:

(i) the Performance Multiplier will be determined in accordance with paragraph 29 below and the Maturity Date will be the date of the Change of Control;

(ii) the Pro Ration Factor will be equal to 1;

and the amount so determined will be paid to the Plan Participant within 30 days after the date of the Change of Control.

29. If the Peer Ranking, as described in paragraph 30 below, is:

(a) Less than or equal to XXXXXXXXXX, the Performance Multiplier will equal zero (0) and all rights with respect to any mature PSUs credited to the PSU Account of the Plan Participant will be terminated and the Plan Participant will receive no payment of any kind with respect thereto.

(b) Greater than or equal to XXXXXXXXXX, the Performance Multiplier will equal XXXXXXXXXX.

(c) Between XXXXXXXXXX, the Performance Multiplier will be calculated in accordance with the following equation:

Performance Multiplier = [XXXXXXXXXX x Peer Ranking] - 1
However, if;

(i) the calculation yields a result less than XXXXXXXXXX the Performance Multiplier will be deemed to be zero (0) and all rights with respect to any mature PSUs credited to the PSU Account of the Plan Participant will be terminated and the Plan Participant will receive no payment of any kind with respect thereto; and

(ii) the calculation yields a result that is greater than XXXXXXXXXX, the Performance Multiplier will be deemed to be XXXXXXXXXX.

30. The Peer Ranking will be the percentile ranking at the Maturity Date (rounded to the nearest whole number) of the TSR for the Corporation's Shares when compared to the TSR for the most widely traded voting securities of each of the issuers comprising the TSR Peer Group. The relevant TSR Peer Group for the purpose of the Peer Ranking will be fixed at the time of the grant of the PSU and will be initially comprised of XXXXXXXXXX issuers.

31. In the event that the most widely-traded voting securities of an issuer among the TSR Peer Group is increased or decreased, or changed into, or exchanged for a different number or kind of shares or other securities of that issuer or another, whether through a stock dividend, stock split, consolidation, issuer recapitalization, amalgamation, reorganization, arrangement or other transaction, the XXXXXXXXXX Committee or the Board may make any adjustments it deems necessary or advisable to the calculation of the TSR and the Peer Ranking to reflect the economic impact of such change.

32. Each Plan Participant will be responsible for the payment of all applicable taxes, including, but not limited to, income taxes payable in connection with the payment of the value of the PSUs. The Corporation, its employees and agents will bear no liability in connection with the payment of such taxes. The Corporation will have the right to deduct from all cash payments made to a Plan Participant, any federal or provincial taxes required by law to be withheld with respect to such payments.

33. In the event that the outstanding Shares of the Corporation are increased or decreased, or changed into, or exchanged for a different number or kind of shares or other securities of the Corporation or another corporation, whether through a stock dividend, stock split, consolidation, recapitalization, amalgamation, reorganization, arrangement or other transaction, and such transaction or event is not a Change of Control, the XXXXXXXXXX Committee or the Board may make appropriate adjustment to the number or kind of shares or securities upon which PSUs are based under the Plan, and with respect to PSUs previously granted or to be granted pursuant to the Plan, in the number or kind of shares or securities upon which PSUs are based. The appropriate adjustments in the number of PSUs may be made by the Board in its discretion in order to give effect to the adjustments in the number of Shares of the Corporation resulting from the implementation and operation of the XXXXXXXXXX dated as of XXXXXXXXXX between the Corporation and XXXXXXXXXX, as the same may be amended, replaced or substituted from time to time.

34. Plan Participants whose principal residence is Canada will be paid the Amount Payable in Canadian dollars. Plan Participants whose principal residence is a country other than Canada will be paid the Amount Payable in United States dollars.

35. The Board may at its sole discretion revise, suspend or discontinue the Plan in whole or in part. No such revision, suspension, or discontinuance will alter or impair the rights of a Plan Participant in respect of PSUs previously credited to the PSU Account for the Plan Participant without his or her consent.

36. For greater certainty, conditional rights granted to a Plan Participant and represented by PSUs will not vest with the Plan Participant unless there is an Amount Payable to the Plan Participant. Further, the Board and XXXXXXXXXX Committee will not alter, change or administer the Plan in such a manner that will result in a vesting of PSUs prior to the Maturity Date and determination of the Amount Payable.

37. A Plan Participant's PSUs will not be transferable, other than by will or according to the laws of descent and distribution.

38. In respect of PSUs granted to the Plan Participants under the Plan, the Corporation will pay the Amount Payable.

39. Pursuant to an inter-company service agreement, the Amount Payable paid by the Corporation in respect of a Plan Participant employed by a Subsidiary will be reimbursed by that Subsidiary.

Purpose of the Proposed Transactions

40. The purpose of the Proposed Transactions is to:

(a) Promote a close alignment of the interests of Plan Participants and the shareholders of the Corporation;

(b) Provide a compensation system for Plan Participants that reflects the responsibility, commitment and risk accompanying their management role;

(c) Attract and retain individuals with experience and ability to act as senior management of the Corporation; and

(d) Allow Plan Participants to participate in the long-term success of the Corporation and its Subsidiaries.

Rulings Given

Provided that:

(a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) The proposed transactions are completed in the manner described above; and

(c) There are no other transactions, which may be relevant to the ruling requested.

Our rulings are as follows:

A. The Plan will not be a "salary deferral arrangement", as defined in subsection 248(1) of the Act.

B. The Amount Payable to a Subject Plan Participant that will be paid by the Corporation, will be included in the Subject Plan Participant's employment income in the taxation year in which it is received, pursuant to subsection 5(1) of the Act.

C. The Amount Payable to a Subject Plan Participant who is an employee of the Corporation, will be a deductible expense of the Corporation for purposes of paragraph 18(1)(a) of the Act in the taxation year in which it is paid to the Subject Plan Participant.

D. The Amount Payable to a Subject Plan Participant who is an employee of a Subsidiary, which will be paid by the Corporation and reimbursed to the Corporation by the Subsidiary, will be a deductible expense of the Subsidiary for purposes of paragraph 18(1)(a) of the Act in the taxation year in which it is paid to the Subject Plan Participant.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CCRA on May 17, 2002, and are binding on the CCRA provided that the Plan is implemented on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch