2004 Ruling 2004-0067521R3 - Amended DSU 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: 1. Will certain amendments to the Plan affect its status as a Plan that complies with paragraph 6801(d)?

2. Does the amendment to the formula for calculating additional DSUs offend the postamble to paragraph 6801(d)?

Position: 1. No.

2.No.

REASONS: 1. The Plan continues to comply with the requirements of 6801(d) of the Regulations.

2.The amendments to the formula, which determines how many units are issued are based on future awarding of units and are based on targets and performance of the corporation.

XXXXXXXXXX 								2004-006752

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Plan")
XXXXXXXXXX (the "Corporation")

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named Corporation. We also acknowledge our telephone conversations (XXXXXXXXXX) and your letters of XXXXXXXXXX, which resulted in amendments to the Plan and to the facts and proposed amendments. We further acknowledge receipt of the Plan showing all proposed amendments as reflected in the draft Plan and Schedules submitted under cover of your letter XXXXXXXXXX, supplemented by your clarification with respect to XXXXXXXXXX as submitted with your fax of XXXXXXXXXX.

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.

DEFINITIONS AND ABBREVIATIONS

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

"CBCA" means the Canada Business Corporations Act;

"Common Shares" means the common shares of the Corporation;

XXXXXXXXXX;

"Participant End Date", in respect of any Participation Right, means the day upon which an Event of Termination occurs in respect of the Participant to whom such Participation Right is granted;

"public corporation" has the meaning assigned by subsection 89(1) ;

"Recent World Events" means XXXXXXXXXX;

"Regulations" means the Income Tax Regulations;

"Subsidiary" means a corporation that is a "subsidiary" of the Corporation as defined under the provisions of the Company Act (XXXXXXXXXX) as in effect on XXXXXXXXXX. Any such Subsidiary is "related" to the Corporation within the meaning of subsection 251(2);

"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

XXXXXXXXXX.

FACTS

1. The Corporation is a corporation XXXXXXXXXX under the CBCA. It is a taxable Canadian corporation and a public corporation and a resident of Canada for purposes of the Act. The taxation year of the Corporation ends on XXXXXXXXXX.

2. The Corporation carries on the business of XXXXXXXXXX. Its XXXXXXXXXX business were affected in an adverse manner by Recent World Events.

3. As at the date of this ruling request, the Common Shares are traded on the XXXXXXXXXX and the XXXXXXXXXX.

4. The Corporation established the Plan on XXXXXXXXXX. The Plan is the subject of advance income tax rulings #3-943146 (the "Ruling") dated XXXXXXXXXX, 1995 and #2000-002980 dated XXXXXXXXXX, 2000 ("the Supplemental Ruling") (collectively, the "Rulings"). As confirmed by the Rulings the Plan is a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and is therefore exempted from the definition of "salary deferral arrangement", as contained in subsection 248(1) and is not a "retirement compensation arrangement" within the meaning of that term in subsection 248(1).

5. Under the Plan, bona fide full-time executive officers of the Corporation and its Subsidiaries are eligible to participate ("Participant") and are granted the right to receive a payment or payments pursuant to the terms of the Plan ("Participation Rights"). A Committee of the Board of Directors of the Corporation (the "Committee") administers the Plan and may from time to time designate those executive officers to whom Participation Rights are to be granted. On XXXXXXXXXX, the Committee designated XXXXXXXXXX senior executive officers of the Corporation as Participants under the Plan and made initial grants of Participation Rights to each of them. No other Participation Rights have been granted.

6. A Participant to whom Participation Rights are granted is entitled to be allocated notional Common Shares in such number as is determined pursuant to the formula in the Plan. Article XXXXXXXXXX of the Plan provides for the payment of the "Aggregate Participation Amount" to a Participant following termination of employment ("Participation End Date") with the Corporation (and its related corporations) by reason of death, retirement or loss of office or employment ("Event of Termination"). XXXXXXXXXX. As at the date of this ruling, no Participant has experienced a Participation End Date and no amount has been paid, or is currently payable, in respect of any Participation Rights granted under the Plan. The relevant dates in respect of these Participation Rights are defined in section XXXXXXXXXX of the Plan under the term "Calculation Period". Provided that no Participant has an Event of Termination, those periods consist of:

Participation Commencement Date XXXXXXXXXX
First Calculation Period XXXXXXXXXX
Second Calculation Period XXXXXXXXXX
Third Calculation Period XXXXXXXXXX
Fourth Calculation Period XXXXXXXXXX

A Calculation Period will be truncated in the case of an Event of Termination occurring within what would otherwise be the Calculation Period, the extent to which the Calculation Period is truncated being dependent on the nature of the Event of Termination. In most cases of an Event of Termination the period would end on the last day of the immediately preceding fiscal quarter of the Corporation.

7. Under the Plan, the number of notional Common Shares in respect of which the payment to a Participant is calculated at the Participation End Date is determined by a formula XXXXXXXXXX:

XXXXXXXXXX.

The PA formula also results in the potential for an enhanced notional allotment of Common Shares for the Calculation Period (referred to in this ruling as the "Enhanced Allotment") if, in general terms, the Corporation's annual compound growth rate in earnings per share, or Annual EPS Growth Rate, for that period exceeds a specified cumulative threshold. The Annual EPS Growth Rate is intended to measure the average annual compound rate of growth in EPS (in general terms, earnings per share) during the relevant EPS Growth Period (or Calculation Period) relative to EPS for a Base Year for that period. The definition, as presently worded, determines the Annual EPS Growth Rate for any EPS Growth Period of more than one year by reference only to the EPS of the last year of the EPS Growth Period. The mechanism for determining whether there is an Enhanced Allotment is based on the EPS Factor, which means the percentage set forth in the table below for the relevant Annual EPS Growth Rate in each EPS Growth Period (as determined in the Supplemental Ruling):

Annual EPS Growth Rate			EPS Factor

XXXXXXXXXX

For the outstanding Participation Rights, the first EPS Growth Period commenced on XXXXXXXXXX and ended on XXXXXXXXXX, at the same time as the Second Calculation Period. The Base Year for this period was the first year of the Calculation Period, that is, XXXXXXXXXX to XXXXXXXXXX. For the Third and Fourth Calculation Periods, the EPS Growth Period will be co-extensive with the Calculation Period and the Base Year will be the 12-month period prior to the commencement of that period, i.e. the last year in the prior Calculation Period.

c) XXXXXXXXXX
d) XXXXXXXXXX

All the definitions and formulas mentioned above are defined in section XXXXXXXXXX of the Plan.

8. The Plan, as proposed to be amended as described herein, will not result in any Participant or person with whom a Participant does not deal at arm's length being entitled, either immediately or in the future, either absolutely or contingently, to receive or obtain any amount or benefit granted or to be granted for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Common Shares.

9. There are no significant transactions that were completed or which are contemplated by the Corporation that may be considered to be part of a series of transactions that include the amendment of the Plan.

PROPOSED AMENDMENTS

The Corporation proposes to amend the Plan, with effect from the date of the issuance of the ruling provided herein, as follows:

10. XXXXXXXXXX On reviewing the operation of the formula, it was determined that it contained inherent ambiguities and would not necessarily produce the intended result. Thus, the formula will be amended to ensure that the reduction operates in the manner in which it was intended to operate and to simplify the calculation.

XXXXXXXXXX.

11. As shown in 7(b) above, the definition of "Annual EPS Growth Rate" is relevant to the computation of the EPS Factor which, as explained above, is relevant to the determination of whether there will be an Enhanced Allotment for a particular Calculation Period. XXXXXXXXXX. Due to the fact that the definition of the Annual EPS Growth Rate refers only to the EPS of the last year of the EPS Growth Period, it was subsequently recognized that the wording would not produce the intended result and could produce unreasonable results in certain circumstances. The proposed amendment to the formula remedies the defect by referring to the average annual rate of growth of EPS, relative to the Base Year, for each year in the EPS Growth Period rather than the EPS for the last year in the EPS Growth Period. This amendment will only be relevant to the calculation of any Enhanced Allotment for the Third and Fourth Calculation Periods.

12. The definition of "Annual EPS Growth Rate" will also be amended to provide that EPS in respect of the Base Year in respect of the EPS Growth Period that is coextensive with the Third Calculation Period will be deemed to be $XXXXXXXXXX (U.S.). The Base Year in respect of that EPS Growth Period is the period from XXXXXXXXXX to XXXXXXXXXX.

13. The definition of "EPS Factor" will be amended as follows:

Annual EPS Growth Rate EPS Factor

XXXXXXXXXX

The revised ranges better reflect the Corporation's projected growth targets taking into account Recent World Events. This change will not affect the calculation of the Enhanced Allotment for the Second Calculation Period, but only for the Third and Fourth Calculation Periods.

14. Minor changes are proposed to clauses (i) and (ii) of the definition of "EPS" to clarify that the "EPS" calculation is on an undiluted basis. The Corporation reports its net income per common share on both an undiluted and diluted basis. This change merely clarifies what was always understood, that is, that the calculation for the purposes of the Plan is on an undiluted basis. The revised definition of EPS will only be relevant to whether there is an Enhanced Allotment for the Third and Fourth Calculation Periods.

15. Section XXXXXXXXXX will be added to the Plan. The effect of these new provisions is to create the possibility of an additional award of notional Common Shares based on certain financial targets being met for the fiscal periods ending XXXXXXXXXX and XXXXXXXXXX, although the mechanism chosen to effect the additional award is through an adjustment to the EPSF applied in determining the number of notional Common Shares allocated for the Second Calculation Period. In particular, the EPSF will be XXXXXXXXXX% plus XXXXXXXXXX% of the XXXXXXXXXX Performance Percentage and XXXXXXXXXX% of the XXXXXXXXXX Cumulative Performance Percentage, all as defined in XXXXXXXXXX. In general terms, the purpose of the calculation is to result in an EPSF that is greater than one where the Participants satisfy the criteria adopted by the Committee with a view to achieving specific corporate targets related to the maximization of the earnings of the Corporation and the reduction of reliance on raising indebtedness of the Corporation over the XXXXXXXXXX year period following the end of the Second Calculation Period.

XXXXXXXXXX also provides certain transitional rules that are relevant in the case where there is an Event of Termination in the period before XXXXXXXXXX, or in the period from XXXXXXXXXX to XXXXXXXXXX.

16. The definition of XXXXXXXXXX will be amended to provide that the XXXXXXXXXX of a Common Share that is no longer listed on a stock exchange is to be the "Market Value" of such share. A definition of "Market Value" is being added pursuant to which that term will be defined as the fair market value of a Common Share determined in accordance with XXXXXXXXXX to the Plan. "Current Market Price" is relevant, among other things, to the calculation of the "Aggregate Participation Amount" (as shown in 7 a) above) of a Participation Right at the Participation End Date.

XXXXXXXXXX to the Plan provides that except where the date on which Current Market Price must be determined is the Participation End Date, Market Value will mean fair market value as determined by the Board of Directors of the Corporation on a reasonable and equitable basis, taking into account any financial statement, report or other data, which the Board may consider reliable. If Current Market Price is being determined as of a Participation End Date, the determination will be made in one of the following ways. In the case where the payment required to be made to the Participant by the Corporation will be made prior to the first anniversary of the day on which the Common Shares ceased to be listed, Market Value will be the Current Market Price of the Common Shares on the date immediately prior to the date on which the Common Shares ceased to be so listed. The Market Value of a Common Share at any time on or after the first anniversary date of delisting will be determined by a Valuator that is an internationally recognized firm of public chartered accountants appointed by agreement between the Corporation and the Participant in respect of whose Participation Right the Market Value is being determined (or failing agreement, by court appointment). The Valuator's determination will not be subject to review, but will be final and binding on the Corporation and the particular Participant and, absent any event or change which would reasonably be expected to have a significant effect on Market Value, will be applicable to any Participant that has a Participation End Date within XXXXXXXXXX days of such determination. The dates mentioned in XXXXXXXXXX are within the time frame required by subparagraph 6801(d)(ii) of the Regulations. The modification will be relevant to the computation of the "Aggregate Participation Amount".

17. The definition of "Reasonable Notice Period" is being amended to provide, in cases where the Event of Termination does not involve a notice period and where the Corporation and the Participant do not agree on what would be a reasonable notice period, this period (for the purposes of the Plan) will be determined by the Board of Directors on a reasonable and equitable basis after obtaining the advice of legal counsel, rather than by arbitration as previously provided.

A related amendment is being made to section XXXXXXXXXX of the Plan to remove the reference to the determination of a reasonable notice period by arbitration and to ensure that where the Market Value on the Participation End Date is being determined by a valuator as contemplated by Section XXXXXXXXXX of XXXXXXXXXX any payment will be made within the period prescribed by subparagraph 6801(d)(i) of the Regulations. Another related amended is being made to section XXXXXXXXXX of the Plan (Arbitration) to remove a determination of the reasonable notice period from the matters which will be determined by arbitration.

PURPOSE OF THE PROPOSED AMENDMENTS

18. The purpose of the proposed amendments to the Plan is (i) to increase the Corporation's flexibility in retaining highly qualified key members of senior management in a highly competitive market by adjusting the part of the formula used to determine the number of notional Common Shares or "deferred share units" to be awarded for the Third and subsequent Calculation Periods to reflect the Corporation's revised growth targets taking into account the general impact on the Corporation's business of Recent World Events, (ii) to provide incentives for senior management to increase profitability and balance sheet strength of the Corporation based on targeted debt reductions over the XXXXXXXXXX and XXXXXXXXXX fiscal periods.

ADDITIONAL INFORMATION

19. We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this 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 tax return previously filed by the Corporation or a related person,

iii) under objection or appeal by the Corporation 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 expired, or

v) the subject of a ruling previously issued by the Directorate to the Corporation or a related person other than as disclosed herein;

20. The mailing address of the Corporation is XXXXXXXXXX. The Corporation files its tax returns with the XXXXXXXXXX Tax Centre and its head office is located within the area served by XXXXXXXXXX Tax Services Office. The Corporation's business number is XXXXXXXXXX.

RULINGS GIVEN

Provided the preceding statements constitute a complete disclosure of all the relevant facts, the proposed amendment to the Plan and the purpose of the proposed amendments to the Plan, and provided the Plan is amended as proposed in the last version of the Plan submitted on XXXXXXXXXX, we confirm that:

A. The amendments to the Plan described in 10 to 17 above, will not disqualify the Plan or any existing or future Participation Right from being a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations.

B. Provided the Plan was implemented prior to the deadlines set out in the Rulings, the rulings issued in the Rulings will continue to be binding on the CRA in accordance with the practice outlined in Information Circular 70-6R5 Advance Income Tax Rulings dated May 17, 2002, and are binding on the CRA provided that the Plan is amended by XXXXXXXXXX.

Yours truly,

For Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch