2004 Ruling 2003-0053041R3 - Employee Benefit Plan

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 the proposed trust constitutes an EBP.

Position: Yes.

Reasons: The trust is structured as an EBP. In particular, the shares to be distributed to the employees under the trust will always be acquired on the open market by the trustee. The trust is established in connection with the specific employer's performance incentive plan ("the Program") for its employees as described herein. In order to reach this conclusion, it was necessary to determine that the Program is not a "salary deferral arrangement". As the terms of the Program would exclude it from being a salary deferral arrangement as defined in subsection 248(1) by virtue of paragraph (k) thereof, it was not necessary for us to make a determination as to whether the terms of the Program would result in it otherwise constituting a salary deferral arrangement.

XXXXXXXXXX 						2003-005304

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

You advise that to the best of your knowledge and that of the taxpayer referred to above, 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 tax 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, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

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

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given to such definition unless otherwise indicated.

Our understanding of the relevant definitions, the facts, proposed transactions and their purposes is as follows:

DEFINITIONS

a) "ACO" means XXXXXXXXXX;

b) "BCO" means XXXXXXXXXX;

c) "Board" means the board of directors of BCO;

d) XXXXXXXXXX;

e) "Committee" means the committee designated by the Board to interpret and administer the Plan;

f) "CCRA" means the Canada Customs and Revenue Agency;

g) XXXXXXXXXX;

h) "Employee" means a person who is, at the relevant time, an employee of ACO or any of its subsidiaries or affiliates;

i) "Grant" means an award of P Shares under the Program;

j) "Grantee" means an Employee who receives a Grant;

k) "Group" means the group composed of XXXXXXXXXX, ACO, BCO and the their affiliates as determined by the Committee;

l) "Guidelines" means the XXXXXXXXXX;

m) "P Shares" means the units of an award granted to a Grantee pursuant to the Program that, if certain performance requirements are met, will be paid out to the Grantee;

n) XXXXXXXXXX;

o) "Plan" means the XXXXXXXXXX;

p) "Program" means the Performance Share Plan, which is contained in the Plan;

q) "Shares" means common shares of XXXXXXXXXX;

r) "Trust" means the trust to be established under the Trust Agreement;

s) "Trust Agreement" means the trust agreement to be made between ACO and the Trustee in connection with the Program as it relates to ACO's Employees and former Employees;

t) "Trust Distribution Form" means the form that will accompany the delivery of any instruction to the Trustee to distribute Shares or cash to a designated broker; and

u) "Trustee" means XXXXXXXXXX.

FACTS

1) ACO is a "taxable Canadian corporation" within the meaning of subsection 89(1). Its head office is located in XXXXXXXXXX and its tax services office is in XXXXXXXXXX. ACO has a XXXXXXXXXX year-end for tax purposes.

2) All of the issued and outstanding common shares of ACO are owned by XXXXXXXXXX, the shares of which are ultimately owned by XXXXXXXXXX.

3) BCO is a U.S. resident corporation. All of the shares of BCO are ultimately owned by XXXXXXXXXX. ACO and BCO deal on a non-arm's length basis for Canadian tax purposes.

4) XXXXXXXXXX.

5) XXXXXXXXXX.

6) XXXXXXXXXX.

7) The Plan was established effective as of XXXXXXXXXX as a successor to a number of different types of employee incentive plans. The Plan is intended to provide incentives to employees of the Group in order to increase their efforts on behalf on the Group and their proprietary interests in XXXXXXXXXX, thus further aligning their interests with those of other shareholders of XXXXXXXXXX . The Program is one of the incentive plans under the Plan and the Trust is the subject of this ruling.

8) The relevant terms of the Program can be summarized as follows:

a) The Committee may award P Shares to an Employee upon such terms as the Committee deems appropriate.

b) Each P Share represents the right of the Grantee to receive an amount based on the fair market value of a Share, the appreciation in fair market value of a Share or such other measurement base as the Committee deems appropriate, if the conditions established by the Committee are met.

c) The Committee determines whether P Shares awarded under the Program will be payable in cash, in Shares or in a combination of the two.

9) You advise that the Grant Instrument is a communication to the Grantee at the beginning of the XXXXXXXXXX-year performance period. In particular, it informs the Grantee of the following:

a) the Grantee's award represented by a specific number of P Shares,

b) the award value using the Share prices as of a recent date,

c) where the award is payable in Shares or cash, the ultimate value of the award will be determined based both on the number of Shares that are paid or would be paid as well as the Share price on the date of payout, and

d) actual payouts under the award will range from zero to XXXXXXXXXX% of the target award number of P Shares.

10) The Guidelines apply to Grants made on or after XXXXXXXXXX and incorporate amendments made to the Program effective XXXXXXXXXX. Pursuant to the Guidelines:

a) The Committee has the discretion to modify or deviate from the Guidelines at any time.

b) A key objective of the Program is to provide management with an incentive to build sustained, profitable growth and to provide Employees with an opportunity to have an ownership interest in XXXXXXXXXX. The Program is also designed to reward senior managers for their contribution to the achievement of business objectives and to offer competitive levels of incentive compensation.

c) Any Shares transferred under the Program will be treasury Shares or other Shares acquired on the open market.

d) The Guidelines were amended on XXXXXXXXXX to provide that the payment of any P Shares may be made either in Shares or cash or in a combination of the two at the discretion of the Committee.

e) The Committee will select Employees who will receive P Shares. In order to be eligible for selection, Employees must be actively employed by ACO at XXXXXXXXXX or above on or before XXXXXXXXXX of a Grant year, otherwise the Employee must wait until the next Grant year. You advise that Employees new to ACO that are XXXXXXXXXX or above may receive a Grant.

f) The opportunity to earn an award is contingent upon the achievement of certain top line growth and bottom line performance targets established over a XXXXXXXXXX-year period with payment in the following year. The performance will be measured subsequent to the end of the performance period on the basis of two elements:

i) XXXXXXXXXX; and

ii) XXXXXXXXXX.

Awards are determined by applying the percentage calculation computed with reference to the two performance elements to the Grantees' P Shares in respect of that performance period. ACO's actual XXXXXXXXXX year financial results will be averaged and compared to the XXXXXXXXXX year average targets. The award has no minimum (the payment can be zero if the average results for the XXXXXXXXXX years are below the "minimum" performance) and a maximum of XXXXXXXXXX% of the number of P Shares represented by the target award.

g) In the event of disability, retirement or death, the Grantee or his or her beneficiary will continue to participate fully in any performance period in which the Grantee has outstanding Grants and any award that becomes payable as a result will be paid to the Grantee or beneficiary in the normal course.

h) A Grantee will forfeit any outstanding Grant for any performance period in which he or she participates if the Grantee resigns, is involuntarily terminated for cause or is involuntarily terminated without cause and does not execute a release.

i) The Program is intended to be maintained at all times as an unfunded program. The sole interest of each Grantee under the Program is to receive the benefits provided under the Program as and when they become due and payable. Grantees will have no right, title, or interest in or to any of the assets of the Group and will have only general unsecured creditor status with respect to benefits under the Program.

j) The first XXXXXXXXXX-year Program performance period ended at XXXXXXXXXX. ACO's president will subsequently make a recommendation to the XXXXXXXXXX and XXXXXXXXXX, in regard to the amount to be paid out under the Program. Any payout only occurs after the XXXXXXXXXX approval.

11) The Grant is a bonus and is in addition to and not in lieu of regular compensation received by each Grantee for a particular year.

PROPOSED TRANSACTIONS

12) Subject to the receipt of a favourable ruling, the Plan will be amended in respect of ACO's employees. The effective date of the amendment will be XXXXXXXXXX or such later date as the Committee may determine. The amendment will provide that, notwithstanding anything to the contrary in the Plan or the Guidelines,

a) all Shares that are to be distributed to the Employees of ACO pursuant to the Program will be Shares that have been purchased on the open market by the Trustee and the Trustee will also distribute the Shares so purchased to the Employees.

b) ACO will be responsible for paying the fees of the Trustee and providing sufficient cash to the Trustee to enable the Trustee to purchase the Shares required in connection with the Program and will not be responsible for the delivery of such Shares. In the event of a deficiency in the number of Shares delivered to the Employees by or upon the instructions of the Trustee, ACO will remedy such deficiency by way of the payment of cash to the affected Employees.

13) ACO and the Trustee will enter into the Trust Agreement. The relevant terms of the Trust Agreement will be as follows:

a) ACO will establish the Trust, as settlor of the Trust.

b) ACO will contribute funds to the Trust and the Trustee will use such funds to acquire (or cause to be acquired) Shares and to distribute them (or cause them to be distributed) to Grantees in accordance with the Trust Distribution Form in the year immediately following the XXXXXXXXXX -year performance period.

c) The funds contributed by ACO to the Trustee will be held in trust and used by the Trustee for the benefit of the Grantees and ACO.

d) The Trust Distribution Form will set out the number of Shares to be distributed and the withholding tax to be remitted by the Trustee in respect of each Grantee in satisfaction of such Grantee's entitlements under the Program with respect to the relevant performance period. ACO will complete and submit a Trust Distribution Form for each performance period under the Program in regard to which a payout has been earned.

e) The Trust assets will consist of all contributions made by ACO and the Grantees (see 14 below) and all interest, other income and realized capital gains earned thereon, and will be used for the following purposes:

i) the acquisition of Shares to be distributed to the Grantees (this includes the fees, disbursements and taxes in respect of the designated broker's acquisition and distribution of the Shares),

ii) the payment of all required income tax and any other withholdings or remittances in respect of each payment to a Grantee,

iii) the payment of any fees and disbursements payable to the Trustee to the extent they have not been paid by ACO, and

iv) the payment of taxes and other assessments levied or assessed against the Trust. For greater certainty, the fees, disbursements and taxes in respect of the designated broker's acquisition and distribution of the Shares will be paid by the Trust.

f) In the event that in any calendar year income remains in the Trust after XXXXXXXXXX , then such income will be distributed to ACO prior to the end of the calendar year.

g) Any surplus funds whether resulting from forfeitures or contributions made in error by ACO remaining at the end of any calendar year may, at the discretion of ACO, be paid to ACO prior to the end of the calendar year.

h) The trustee fees will be paid firstly by ACO and in the event ACO fails to pay the trustee fees, such fees may be paid out of any income or surplus funds of the Trust.

14) You advise that in order to satisfy the Trustee's obligation as described in 13(e)(ii) above, the Trustee will apply only a portion of the contribution received from ACO towards the acquisition of Shares. Remaining cash will be used to both fund expenses of the Trust and fund the required remittance of withholding tax. However, ACO may provide Grantees with the option to make an employee contribution to the Trust, equal to but not in excess of the required remittance of withholding tax by the Trustee in respect of the Grantee. It is contemplated that the Trustee would then apply the Grantee contribution towards the acquisition of additional Shares on behalf of the Grantee, with the result that the Grantee will receive Shares which have a fair market value equal to the Grantee's gross entitlement under the Program.

15) Notwithstanding anything else contained herein, a Grant awarded to a Grantee in respect of services rendered by the Grantee in a Grant year will be paid in Shares or cash within XXXXXXXXXX years following the calendar year in which the Grant is made.

OTHER INFORMATION

16) You advise that payouts have not yet been made under the Program to Grantees.

17) Notwithstanding the discretion granted to the Committee to modify or amend the terms of the Program or the Guidelines, you advise that for the purposes of this ruling it should be assumed that the Program and the Trust will continue to be administered as described in this letter.

PURPOSE OF THE PROPOSED TRANSACTIONS

18) The purpose of establishing the Trust is to ensure that the cost of funding the purchase of the Shares on the open market is a deductible expense for ACO.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. The Trust will constitute an "employee benefit plan" as that term is defined in subsection 248(1).

B. In accordance with the provisions of paragraph 6(1)(g), a Grantee must include in the Grantee's income for any year, an amount that is received out of or under the Trust in that year equal to the fair market value of any Shares at the time they are distributed to the Grantee plus the amount remitted by the Trustee as withholding in respect of the bonus earned by the Grantee less the return of amounts contributed to the Trust by the Grantee.

C. No amount will be included in the income of a Grantee under subsection 5(1), paragraph 6(1)(a) or section 7 by virtue of the Grantee's participation in the Trust.

D. Subject to paragraph 18(1)(a) and section 67, ACO's contributions to the Trust will be deductible by ACO to the extent provided in subsection 32.1(1).

E. Subject to paragraph 18(1)(a) and section 67, the Trustee fees referred to in 12(b) and 13(h) above that are paid by ACO directly to the Trustee will be deductible by ACO in accordance with section 9.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CCRA provided that the proposed transactions are completed before XXXXXXXXXX .

Nothing in this letter should be construed as implying that the CCRA has reviewed or is making a determination of the tax status of the Plan other than in respect of the Trust.

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 references thereto are provided solely for the convenience of the reader.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch