2004 Ruling 2004-0088331R3 - DSU Plan for Directors and Executives

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: Does the plan qualify as an exception to the SDA rules by meeting the requirements of paragraph 6801(d) of the Regulations and thereby being a prescribed plan or arrangement within paragraph (l) of the definition of SDA?

Position: Yes

Reasons: The plan meets the requirements of paragraph 6801(d)

XXXXXXXXXX 2004-008833

XXXXXXXXXX , 2004

Dear XXXXXXXXXX:

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

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your subsequent submissions of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, 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 taxation 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

(v) the subject of a ruling previously issued by the Directorate to the taxpayer 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 the notional account maintained for record-keeping purposes by the Company in the name of each Participant to record all Units credited to the Participant after the Effective Date;

"Award Date" means, unless otherwise determined by the Committee,

i) in respect of a Director, not later than 10 Business Days following the end of each fiscal quarter;

ii) in respect of an Executive, not later than 10 Business Days following approval of an annual bonus payment to the Executive;

"Beneficiary" means the testamentary beneficiary of a deceased Unitholder or the legal representative of a deceased Unitholder;

"Board" means the board of directors of the Company and "board" may mean the Board or the board of directors of a Subsidiary, as the context requires;

"Business Day" means any day, other than a Saturday or a Sunday, on which the XXXXXXXXXX Stock Exchange (the "Exchange") is open for trading;

"Cash Equivalent" means the amount of money equal to the number of Units in a Unitholder's Account multiplied by the average closing trading price of the Shares on the Exchange on the 10 Business Days immediately preceding Redemption Date;

"Committee" means the XXXXXXXXXX of the Board or such other committee or persons designated by the Board, including the Board itself, for the purpose of administering the Plan;

"Director" means a resident or non-resident member of the Board or a member of the board of directors of a Subsidiary;

"Director Fees" means the retainer payable to a Director for service as a member of the Board (or as a member of the board of a Subsidiary) during a fiscal year of the Company or a Subsidiary, as applicable, as well as board chair fee, committee chair fees, board committee member fees and board meeting fees;

"Effective Date" means the date that is the later of the date that the Board approves the Plan and the date upon which an advance income tax ruling from the Canada Revenue Agency is received in respect of certain income tax matters in respect of the proposed Plan including confirmation that the proposed Plan complies with paragraph 6801(d) of the Income Tax Regulations (the "Regulations");

"Executive" means a selected resident or non-resident officer of the Company or of a Subsidiary;

"Participant" means an Executive or a Director who elects to receive Units under the Plan;

"Plan" means the deferred stock unit plan to be established by the Company for Directors and Executives of the Company and its Subsidiaries, the terms of which are described herein;

"Redemption Date" means the date that is 10 Business Days after the receipt by the Company of a Redemption Notice from a Unitholder or a Beneficiary. If no Redemption Notice is received, "Redemption Date" means the date that is 10 Business Days after the last day of the Unitholder's or Beneficiary's Redemption Period. On the Redemption Date the Cash Equivalent is paid to a Unitholder or a Beneficiary.

"Redemption Notice" means written notice delivered to the Company during the applicable Redemption Period, signed by a Unitholder, a Beneficiary or an authorized representative and by which payment of the Unitholder's Cash Equivalent is requested;

"Redemption Period" means the period of time following a Unitholder's death, Retirement or Termination, as the case may be, as specified in 13, 14 or 15 below, during which the Unitholder or his or her Beneficiary can submit a Redemption Notice;

"Retirement" means,

i) in the case of an Executive, retirement from (including early retirement) and for greater certainty, ceasing to be employed by the Company and any Subsidiary or affiliated entity and

ii) in the case of a Director, ceasing to be a Director of the Company and any Subsidiary or affiliated entity, whether as a result of resignation, not standing for re-election to the Board, or not being elected or re-elected to the Board by the shareholder at a meeting, or for any other reason other than as a result of death;

"Shares" means XXXXXXXXXX shares in the capital of the Company;

"Subsidiary" means an incorporated entity that is a subsidiary of the Company within the meaning of the Canada Business Corporations Act;

"Termination" means, in the case of an Executive, the occurrence of any act or event whether pursuant to an employment agreement or otherwise, including without limitation dismissal for cause, dismissal without cause or resignation, which actually or effectively causes or results in the person's ceasing for whatever reason, to be an employee of the Company and any of its Subsidiaries or affiliated entities, but shall not include Retirement;

"Unit" means a deferred stock unit that is credited to a Participant under the Plan, and which upon the meeting of all of the conditions specified herein, is redeemable for its Cash Equivalent in accordance with the provisions of the Plan;

"Unitholder" means a Participant who has been credited Units under the Plan.

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

Facts

1. The Company's primary business is the XXXXXXXXXX.

2. The Company is incorporated under the Canada Business Corporations Act and its shares are listed and traded on the Exchange. It is a Canadian corporation and a public corporation as those terms are defined in section 89 of the Act.

3. The Company's mailing address is XXXXXXXXXX. It files its tax returns with the XXXXXXXXXX Taxation Centre and is served by the XXXXXXXXXX Tax Services Office.

4. The Company has an XXXXXXXXXX fiscal and taxation year-end.

Proposed Plan

5. The Company will establish the Plan for Directors and Executives on the Effective Date. The Company will pay all costs and expenses associated with establishing the Plan.

6. The Plan will permit Directors to elect to receive all or a portion of their Director Fees earned in respect of a fiscal year of the Company in Units rather than in cash. The Plan will also permit an Executive to elect to receive his or her annual bonus or a portion thereof in Units rather than in cash. The Director or Executive must make such election to receive Units annually and in accordance with the following:

i) In the case of a newly appointed Director, the election must be submitted to the Company within 30 days of the individual's appointment as a Director. The election will relate to Director Fees to be earned in the fiscal year of election and after the date on which such election is made. The election will specify the percentage of the individual's Director Fees to be received in Units.

ii) In the case of a Director who is not newly appointed, the election must be submitted to the Company within the last 90 days of the Company's fiscal year. The election will relate to Director Fees to be earned in the Company's fiscal year next commencing after the date of the election and will specify the percentage of the individual's Director Fees to be received in Units.

iii) In the case of an Executive, the election must be submitted to the Company within the last 90 days of the calendar year. The election will relate to the annual bonus earned in respect of the year and to be paid in the fiscal year following the year of election and will specify the percentage of the individual's bonus to be received in Units.

Notwithstanding the foregoing, for the current fiscal year, a Participant shall give the stipulated notice within 30 days of the Effective Date of the Plan. In the case of a Director, such election shall govern the payment of Director Fees payable at the end of and in respect of XXXXXXXXXX quarters of the Company's fiscal year ending XXXXXXXXXX. In the case of an Executive such election shall govern the payment of annual bonus, if any, in respect of XXXXXXXXXX that shall be payable in XXXXXXXXXX.

7. If an election to receive Units is filed in accordance with 6 above, then within 10 Business Days of an Award Date, the Company will provide written confirmation to a Participant that Units have been credited to the Participant's Account.

8. The number of Units to be credited to a Participant's Account will be determined by multiplying the amount of annual bonus or Director Fees, as the case may be, by the percentage expressed in the Participant's election pursuant to 6 above and subsequently dividing the resulting amount by the average closing trading price of the Shares on the Exchange on the 10 Business Days immediately preceding the Award Date.

9. Where, on the last day of each fiscal quarter or as soon as possible thereafter, the Company determines that dividends have been declared and paid on Shares for such fiscal quarter, each Unitholder's Account will be credited, within 10 Business Days of the applicable fiscal quarter end, with an additional number of Units equal to the number of Units in the Unitholder's Account on the record date for such dividend multiplied by the rate of dividends declared and paid on Shares for the fiscal quarter expressed as a percentage based on the closing Share price on the Exchange on the record date.

10. In order to preserve the intended benefits of the Plan for Unitholders, and subject to any relevant resolutions of the Board, reasonable adjustments may be made by the Committee with respect to Units credited or to be credited to a Unitholder's Account in order to adjust for the effect of subdivision or consolidation of the Shares, payment of dividends in stock (other than dividends in the normal course), reclassification or conversion of the Shares, recapitalization, reorganization, change of control or any other event which, in the judgment of the Committee, necessitates action by way of proportionate adjustment to the Units credited or to be credited.

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

12. A Participant will not receive any amount under the Plan prior to death, Retirement or Termination.

13. In the event of the death of a Unitholder, the Redemption Period will be a period of one year from the Unitholder's death. In the event that the date of death is in December of any particular year, then the Redemption Period shall be from the date of death to XXXXXXXXXX of the year following the year of death. The Company must receive a Redemption Notice pursuant to the death of a Unitholder not later than 10 Business Days prior to the end of the Redemption Period.

14. In the event of the Retirement of a Unitholder, the Redemption Period will be from the date of Retirement XXXXXXXXXX of the calendar year following the year of Retirement.

15. In the event of the Termination of a Unitholder, the Redemption Period shall be 90 days from the date of Termination. The Company must receive a Redemption Notice pursuant to the Termination of a Unitholder not later than 10 Business Days prior to the end of the Redemption Period.

16. On a Unitholder's Redemption Date the Cash Equivalent, net of applicable withholdings, shall be paid by cheque to the Unitholder or the Beneficiary by the Company or the Subsidiary, as the case may be, of which the Director was a Director or by which the Executive was employed.

17. In no event may the Redemption Date be later than the last day of the calendar year following the calendar year in which the Participant's death, Retirement or Termination occurs.

18. The Board may at any time amend, suspend or terminate the Plan provided that such amendment, suspension or termination:

i) does not impair any of the rights or obligations under any Unit previously granted without the consent of the Unitholder thereof;

ii) is only be made with notification to the Unitholders affected;

iii) does not accelerate the payment of the Cash Equivalent to a Unitholder and any payment under the Plan shall continue to be in accordance with 13, 14, 15, 16 and 17, above and

iv) is such that the Plan continuously meets the requirements of paragraph 6801(d) of the Regulations or any successor provision thereto.

Purpose of the Proposed Plan

19. The proposed Plan will allow Executives and Directors to participate in the long-term success of the Company and will promote a greater alignment of interests between Participants and the shareholders of the Company.

Rulings Given

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 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, for the purposes of the Act, an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.

C. Provided 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 any Participant pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act, solely as a result of a grant of Units under the Plan.

E. Except to the extent Ruling I applies, the Cash Equivalent, including any amount withheld in respect of taxes or other source deductions, received under the Plan by or on behalf of an Executive Unitholder who is a resident of Canada will be included in the Executive's income pursuant to paragraph 6(1)(a) of the Act in the year of receipt.

F. Except to the extent Ruling I applies, the Cash Equivalent, including any amount withheld in respect of taxes or other source deductions, received under the Plan by or on behalf of an Executive Unitholder 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 Executive's income pursuant to paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

G. Except to the extent Ruling I applies, the Cash Equivalent, including any amount withheld in respect of taxes or other source deductions, received under the Plan by or on behalf of a Director Unitholder who is a resident of Canada will be included in the Director's income pursuant to paragraph 6(1)(c) of the Act in the year of receipt.

H. Except to the extent Ruling I applies, the Cash Equivalent, including any amount withheld in respect of taxes or other source deductions, received under the Plan by or on behalf of a Director Unitholder 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 Director's income pursuant to paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act in the year of receipt.

I. All amounts payable under the Plan to a Beneficiary, as a result of a Unitholder's death, will constitute a right or thing held by the deceased Unitholder at the time of death for the purposes of subsections 70(2) and 70(3) of the Act.

J. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments under the Plan, in respect of services provided by a Unitholder to the Company, and any costs incurred by the Company in establishing the Plan, will be deductible in the year the payments are made or the costs are incurred, respectively, in computing the Corporation's income in accordance with section 9 of the Act.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments under the Plan, in respect of services provided by a Unitholder to a Subsidiary, will be deductible in the year the payments are made, in computing the Subsidiary's income 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.

Note:

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.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted that the Cash Equivalent, as determined in accordance with the Plan, at any time will represent the fair market value of the Shares at that particular time.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch