2004 Ruling 2004-0064771R3 - Prescribed 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 proposed plan is a prescribed SDA per paragraph 6801(d) of the Income Tax Regulations

Position: Yes.

Reasons: Based on the particular facts and proposed plan.

XXXXXXXXXX 2004-006477

XXXXXXXXXX , 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company")

We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Company. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, and the information provided in various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the Company, none of the issues involved in the ruling request is:

i. in an earlier return of the Company or a related person;

ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Company or a related person;

iii. under objection by the Company 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; and

v. the subject of a ruling previously issued by the Directorate to the Company 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 definitions unless otherwise indicated.

Definitions

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

(a) "Account" means a notional account maintained, or caused to be maintained, by the Company, in respect of a Participant under the Plan, recording at all times the number of DSUs standing to the credit of a Participant.

(b) "Affiliate" means an affiliate of the Company as that term is defined in paragraph 8(b) of the Agency's Interpretation Bulletin IT-337R4, Retiring Allowances.

(c) "Agency" means the Canada Revenue Agency;

(d) "Applicable Withholding Taxes" means any and all taxes and other source deductions or other amounts which the Company is required by law to withhold from any amounts to be paid or credited in respect of DSUs;

(e) "Board" means the Board of Directors of the Company;

(f) "Chairman" means the Chairman of the Board;

(g) "Committee" means the Corporate Governance Committee of the Board responsible for recommending to the Board the appropriate compensation for the Eligible Directors;

(h) "Common Share" means a common share of the Company;

(i) "Deferred Share Unit" or "DSU" means a unit equivalent in value to a Common Share. A DSU will not have any of the rights associated with a Common Share;

(j) "DSU Amount" means the product that results from multiplying the number of DSUs recorded in a Participant's Account on the Redemption Date by the Redemption Value of the Common Share;

(k) "Eligible Director" means the Chairman and any director of the Company who is not otherwise an employee of the Company or an Affiliate, unless the Company in its discretion specifies that this latter requirement may be waived;

(l) "Participant" means an Eligible Director or former Eligible Director who has been credited with DSUs under the Plan;

(m) "Plan" means the plan described in 6 below;

(n) "Redemption Date" in respect of a Participant means the date specified by the Participant, or his or her beneficiary or estate, in an election filed with the Secretary of the Company after the Termination Date. However, the Redemption Date must be after the Termination Date and before December 15 of the first calendar year after the Termination Date. Where the Participant, or his or her beneficiary or estate, fails to make an election within the above-mentioned period, his or her Redemption Date shall be December 15 of the first calendar year after the Participant's Termination Date;

(o) "Redemption Value" means the last sale price of a board lot of Common Shares on the XXXXXXXXXX Stock Exchange on the last trading day prior to the Redemption Date on which there was a trade of a board lot of Common Shares; however, if the Common Shares are no longer traded publicly on this date, the Redemption Value will be determined by the Committee in good faith;

(p) "Regulations" means the Income Tax Regulations; and

(q) "Termination Date" in respect of a Participant means the earliest date on which both of the following conditions are met by a Participant in the Plan: (1) the Participant has ceased to be employed by the Company or an Affiliate for any reason whatsoever; and (2) the Participant is not a member of the Board.

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

Facts

1. The Company was incorporated under the laws of Canada and continued in the Province of XXXXXXXXXX . The Company is a public corporation and a taxable Canadian corporation. Its common shares are listed on the XXXXXXXXXX Stock Exchanges.

2. The Company files its returns with the XXXXXXXXXX Tax Centre and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

3. XXXXXXXXXX.

4. The Company has a Board of Directors made up of resident and/or non-resident directors. As of XXXXXXXXXX, the Company pays its Eligible Directors, other than the Chairman, an annual retainer of U.S. $XXXXXXXXXX payable in XXXXXXXXXX instalments, and the Chairman an annual retainer of U.S. $XXXXXXXXXX, also payable in XXXXXXXXXX instalments. Before XXXXXXXXXX , the Company provided its Eligible Directors with stock options upon being elected to the Board at the annual shareholders' meeting. Each Eligible Director was required to acquire XXXXXXXXXX Common Shares or share equivalents within XXXXXXXXXX years of becoming an Eligible Director of the Company.

Proposed Plan

5. Subject to the receipt of a favourable advance income tax ruling from the Agency, the Company will establish the Plan for its Eligible Directors to replace the former stock option plan. The Eligible Directors and the Company will enter into an agreement in writing with regard to the Eligible Directors participation in the Plan. The effective date of the Plan will be the date of the advance income tax ruling or such later date as the Board may determine. The Company will not contribute any amounts to a third party or otherwise set aside any amounts to fund the benefits that will be provided under the Plan. The DSUs credited to an Eligible Director's Account will qualify towards his or her XXXXXXXXXX Common Share or share equivalent holding requirement.

6. The relevant features of the Plan are as follows:

(a) Each Eligible Director, other than the Chairman, will be entitled receive an annual grant of XXXXXXXXXX DSUs upon election as a director, which will be credited in equal XXXXXXXXXX instalments to his or her Account in respect of the duties performed as a director. The Chairman will be entitled to receive an annual grant of XXXXXXXXXX DSUs upon election as the Chairman, which will be credited in equal XXXXXXXXXX instalments to his or her Account in respect of the duties performed as Chairman. No DSUs will be credited under the Plan until after the commencement of the Plan, and no DSUs will be credited to a Participant's Account other than under this paragraph or under 6(c) below. For greater certainty, no DSUs will be credited in respect of cash dividends paid on the Common Shares.

(b) Under the Plan, a Participant is not entitled to receive any amount prior to his or her Redemption Date. On the Participant's Redemption Date, the Company will pay the Participant the DSU Amount, net of any Applicable Withholding Taxes, in cash. Upon payment in full of the DSU Amount, the DSUs credited to the Participant's Account will be cancelled.

(c) Subject to 6(d) below, in the event of any stock dividend, stock split, combination or exchange of Common Shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of the Company's assets to shareholders, or any other change in the capital of the Company affecting the Common 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 Plans.

(d) No amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement, and no DSUs will be granted to a Participant to compensate for a downward fluctuation in the price of the Common Shares, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.

(e) Notwithstanding the preceding paragraphs, if an Eligible Director becomes an employee of the Company or an Affiliate while participating in the Plan, that Participant will cease to be an Eligible Director unless the Company, in its discretion, specifies otherwise. In such circumstances, other than under 6(c) above, that Participant will not be eligible to be credited with additional DSUs unless the Participant becomes an Eligible Director again.

(f) Where a Participant dies prior to the redemption of the DSUs credited to his or her Account, the beneficiary, or, in the absence of a valid designation of a beneficiary, the estate of such Participant, will be entitled to redeem the DSUs in accordance with 6(b) above.

(g) The Company will pay all costs and expenses associated with establishing and administering the Plan.

(h) Subject to 6(d) above, the Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan. However, any such amendment, suspension, or termination shall not adversely affect a Participant's existing rights under the Plan at the time of such amendment, suspension or termination, without the consent of the affected Participant. If the Board terminates the Plan, no new DSUs will be credited to a Participant' Account, but previously credited DSUs shall remain outstanding and be paid in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Participant receives payment in cash in satisfaction of all DSUs credited to him or her under the Plan.

(i) Notwithstanding the foregoing, any amendment, suspension, or termination 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 Plan

7. The Plan will be established to assist and encourage Participants to work toward and participate in the long-term growth and development of the Company. When granted, DSUs will allow Participants to participate in the long-term success of the Company and will promote a greater alignment of interests between the Participants and the Company's shareholders.

Rulings

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 features 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. No amount will be included in the income of a Participant in respect of his or her participation in the Plan, pursuant to subsection 5(1), section 6, section 7, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act, at any time prior to the receipt by the Participant or his or her beneficiary or estate, as the case may be, of cash under the Plan in respect of the DSU Amount.

E. Except to the extent Ruling G applies, the DSU Amount, before the Applicable Withholding Taxes, received under the Plan by or on behalf of a Participant who is a resident of Canada will be included in the Participant's income pursuant to paragraph 6(1)(c) of the Act in the year of receipt.

F. Except to the extent Ruling G applies, the DSU Amount, before the Applicable Withholding Taxes, received under the Plan by or on behalf of a Participant who is not a resident in Canada, to the extent the amount is attributable to services performed in Canada or, if the Participant was resident in Canada at the time he or she performed the services, outside Canada will be included in the Participant's income pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

G. All amounts payable under the Plan to the Participant's estate or to or on behalf of a Participant's beneficiary, as a result of the 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.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments described in the above rulings in respect of services provided by a Participant, as well as all costs referred to in 6(g) above, will be deductible in computing the Company's income in the year in which the payment is 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 Agency provided the proposed Plan is implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate

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