2005 Ruling 2004-0096311R3 - Deferred Share Units - Bonus 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 a plan that provides for the payment of a bonus based on the value of restricted stock units credited to a participant is excluded from the SDA definition by virtue of the exception in (k) of that definition?

Position: Yes

Reasons: The terms of the plan meet the conditions in the subsection (k) exception found in the SDA definition. The plan was modified to ensure the granting of the units was at the discretion of the CEO or the Chair of the Board to ensure the grant was a bonus and not regular remuneration.

XXXXXXXXXX 2004-009631

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX ("Pubco")

This is in reply to your letters of XXXXXXXXXX and electronic correspondence of XXXXXXXXXX wherein you request an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge our various phone calls.

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, if a judgement has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued to the taxpayer by the Income Tax Rulings Directorate of Canada Revenue Agency.

Definitions

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

"Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;

"Pubco" means collectively XXXXXXXXXX, operating as XXXXXXXXXX (as described in paragraphs 1 to 6 below), and its subsidiaries and affiliates, or individually any corporate entity included within such group as the context indicates;

"Annual Corporate Goals" means the criteria that are set by the Board for Pubco to determine the vesting of certain Performance Vesting RSUs;

"Annual Individual Goals" means the criteria that are set by:

(i) the Chief Executive Officer ("CEO") of Pubco for individual Participants who report directly to the CEO, and

(ii) the Board for individual Participants who report directly to the Board,

to determine the vesting of certain Performance Vesting RSUs;

"Average Market Price" means, on any date, the weighted average of the trading prices for a board lot of Shares on the TSX for the five trading days immediately preceding the date on which such determination is made on which at least a board lot was traded;

"Base Salary" means the salary paid by Pubco to a Participant excluding amounts for bonuses, health benefits, pension benefits, stock options and perquisites;

"Board" means the Board of Directors of Pubco;

"CBCA" means the Canada Business Corporations Act R.S.C. 1985 c.C-44, as amended;

"Committee" means the XXXXXXXXXX or such other committee of the Board as the Board may from time to time appoint to administer the Plan;

"Entitlement Date" means the date(s) on which RSUs vest under the Plan subject to the Annual Corporate Goals, Annual Individual Goals and Time Vesting Criteria. (The Entitlement Date will ordinarily be on XXXXXXXXXX). The following are Entitlement Dates in the Plan:

a) "First Entitlement Date" means the day before the first anniversary of the Initial Grant;

b) "Second Entitlement Date" means the day before the second anniversary of the Initial Grant; and,

c) "Third Entitlement Date" means the day before the third anniversary of the Initial Grant;

"Grant" means the granting of RSUs to a Participant under the Plan;

"Grant Date" means the date on which a Grant of RSUs shall be effective pursuant to the Plan. (The Grant Date will ordinarily be on XXXXXXXXXX );

"Initial Grant" means each Grant of RSUs to a Participant on a particular Grant Date;

"Participant" means an individual who is designated by the Committee as a participant under the Plan and who has agreed to participate in the Plan;

"Performance Vesting RSUs" means the RSUs that vest in favour of a Participant in accordance with paragraphs 8(d)(ii) to 8(d)(iv) below;

"Plan" means the Pubco Restricted Stock Unit Plan, as may be amended from time to time;

"Pro Rata" means (A) divided by (B) where:

(A) is the number of completed months from the Grant Date to the date that a Participant dies, becomes Totally Disabled, Retires or is Terminated Without Cause; and

(B) is the total number of months from the Grant Date to the Entitlement Date;

"Retirement" means the Participant's cessation of employment with Pubco where the Participant does not become employed in a similar capacity subsequent to the date of Retirement;

"RSU Agreement" means an agreement to be entered into between Pubco and a Participant that sets forth the terms and conditions applicable to a Grant of RSUs to a Participant under the Plan;

"RSUs" means restricted stock units granted to a Participant under the Plan;

"Shares" mean the limited voting common shares of Pubco;

"Tax Withholding" means the amount of income tax withholding, other source deductions and other amounts applicable to a Participant that is to be statutorily withheld and is to be deducted by Pubco in calculating the net funds payable to the Participant under the Plan, which amount is to be remitted by Pubco to the taxing authorities;

"Time Vesting Criteria" means the period of time that a Participant is required to remain in the employment of Pubco to be entitled to the benefit of the Time Vesting RSUs under a Grant;

"Time Vesting RSUs" mean the RSUs that vest in favour of a Participant in accordance with paragraph 8(d)(i) below;

"Termination Without Cause" means the termination of the employment of a Participant by Pubco without just cause;

"Total Disability" means any permanent physical or mental condition of a Participant that renders the Participant incapable of performing his duties as an employee of Pubco in accordance with the policies of Pubco and "Totally Disabled" shall have a corresponding meaning; and,

XXXXXXXXXX.

Facts

1) Pubco's head office is located at XXXXXXXXXX. The district office and taxation centre which are responsible for Pubco are the XXXXXXXXXX District Office and XXXXXXXXXX Taxation Centre. Pubco's business number is XXXXXXXXXX. Pubco's taxation year end is XXXXXXXXXX.

2) Pubco is governed by the XXXXXXXXXX, and is a public corporation and a taxable Canadian corporation within the meanings assigned by subsection 89(1) of the Act.

3) The issued and outstanding share capital of Pubco consists of limited voting common shares and series A convertible preferred shares. The shares of Pubco are listed on the XXXXXXXXXX. While the shares of Pubco are generally widely held, approximately XXXXXXXXXX% of the Shares are owned by XXXXXXXXXX, a wholly-owned Canadian subsidiary of XXXXXXXXXX.

4) XXXXXXXXXX.

5) Pubco was created as a result of the combination of the businesses of XXXXXXXXXX and XXXXXXXXXX pursuant to a plan of arrangement on XXXXXXXXXX. Pursuant to the plan of arrangement:

XXXXXXXXXX.

6) Following the plan of arrangement, the amalgamated entity (XXXXXXXXXX) became a wholly-owned subsidiary of XXXXXXXXXX existing under the CBCA. XXXXXXXXXX was wound up into XXXXXXXXXX on XXXXXXXXXX by way of a subsequent plan of arrangement.

Proposed Plan

7) Pubco will establish the Plan for the benefit of the Participants.

8) The relevant terms of the Plan are as follows:

a) Pubco will Grant RSUs to Participants.

b) On each Grant Date, Participants may be granted RSUs by the CEO or the Chair of the Board (as the case may be). For all Participants except the CEO, the number of RSUs, if any, to be granted to such Participants on a Grant Date will be in the sole and absolute discretion of the CEO. For the CEO, the number of RSUs, if any, to be granted to the CEO on a Grant Date will be in the sole and absolute discretion of the Chair of the Board.

c) RSUs that are granted to a Participant under the Plan will be evidenced by a RSU Agreement which will set forth the terms and conditions applicable to the particular Grant including, among other things, the following:

(i) the number of RSUs granted to the Participant;

(ii) the Grant Date;

(iii) the Entitlement Dates; and

(iv) the Annual Corporate Goals and Annual Individual Goals in respect of the fiscal year in which the Grant occurs.

d) The opportunity for a Participant to receive an amount under the Plan is contingent upon certain criteria being met with respect to a Grant, as set out in the RSU Agreement determined in subparagraph 8(c) above. More specifically, each Initial Grant to a Participant under the Plan will vest in favour of a Participant as follows:

(i) if a Participant is employed by Pubco on the Third Entitlement Date, XXXXXXXXXX% of the total number of RSUs granted will vest in favour of the Participant (the "Time Vesting RSUs");

(ii) if a Participant is employed by Pubco on the First Entitlement Date and the Participant fully attains the Annual Individual Goals and Annual Corporate Goals for that fiscal year, XXXXXXXXXX% of the total number of RSUs granted under the Initial Grant to a Participant will vest in favour of the Participant;

(iii) if a Participant is employed by Pubco on the Second Entitlement Date and the Participant fully attains the Annual Individual Goals and Annual Corporate Goals for that fiscal year, XXXXXXXXXX% of the total number of RSUs granted under the Initial Grant to a Participant will vest in favour of the Participant; and

(iv) if a Participant is employed by Pubco on the Third Entitlement Date and the Participant fully attains the Annual Individual Goals and Annual Corporate Goals for that fiscal year, XXXXXXXXXX% of the total number of RSUs granted under the Initial Grant to a Participant will vest in favour of the Participant.

(RSUs vesting pursuant to subparagraphs 8(d)(ii) to 8(d)(iv) are collectively referred to herein as the "Performance Vesting RSUs".)

The Annual Corporate Goals and Annual Individual Goals for a particular fiscal year will be established at the commencement of that fiscal year. Accordingly, the RSU Agreement will only set out the Annual Corporate Goals and Annual Individual Goals for the first fiscal year following the Grant Date. The Annual Corporate Goals and Annual Individual Goals for the subsequent two fiscal years will be determined at the commencement of each respective fiscal year.

The percentage of Performance Vesting RSUs that vest in favour of a Participant in respect of a given fiscal year based on Annual Individual Goals being attained in a fiscal year and the percentage of Performance Vesting RSUs that vest based on Annual Corporate Goals being attained in a fiscal year will vary depending on each Participant's position with Pubco. This determination will be set out in each RSU Agreement.

If Annual Individual Goals and Annual Corporate Goals are only partially attained, the Participant may be entitled to receive a pro-rata portion of the Performance Vesting RSUs, the number of which will be determined at the discretion of the CEO or the Chair of the Board, as the case may be.

e) No Participant shall be entitled to any benefit in respect of RSUs granted under the Plan to the extent that such RSUs have not vested in favour of the Participant.

f) Subject to subparagraph 8(o) below, any RSUs applicable to a particular Grant to which a Participant does not become entitled under the Time Vesting Criteria, the Annual Corporate Goals or the Annual Individual Goals shall be forfeited immediately upon such determination.

g) Upon the vesting of RSUs under the Plan, Pubco will determine the amount that is payable to a Participant based on the following formula:

(Vested RSUs x Average Market Price on the Entitlement Date) - Tax Withholding = funds payable to the Participant

h) The amount payable to the Participant (based upon the formula in subparagraph (g) above) will be paid to the Participant in cash.

i) Pubco will pay amounts owing under the Plan to the Participant each year in which a Participant's RSUs vest. (For greater certainty, the final payment in respect of an Initial Grant, if any, shall be made by Pubco to a Participant within XXXXXXXXXX years from the end of the calendar year in which the Initial Grant was made.)

j) Pubco will remit the Withholding Tax on behalf of Participants to the appropriate taxing authorities.

k) Any amounts received under the Plan are intended to be received by the Participant in addition to, and not in lieu of, regular compensation received by a Participant for a calendar year.

l) Prior to the RSUs vesting, Pubco will have no obligation to pay any party or deposit any money into any account for the benefit of a Participant.

m) The interest of a Participant under the Plan is to receive an amount under the Plan, as and when RSUs vest. Participants will have no right, title or interest in or to any amount and will have only general unsecured creditor status with respect to benefits under the Plan.

n) The Participant may file with Pubco, on such form as may be prescribed by Pubco, a designation of one or more beneficiaries (each a beneficiary) to who benefits otherwise due to the Participant shall be distributed in the event of the death of the Participant. The Participant shall have the right to change the beneficiary or beneficiaries from time to time provided, however, that any change shall not become effective until received in writing by Pubco. If any designated beneficiary survives the Participant but dies before receiving all of the Participant's benefits hereunder, any remaining benefits due to the Participant shall be distributed to the Participant's estate. If there is no effective beneficiary designation on file with Pubco at the time of the Participant's death, or if the designated beneficiary or beneficiaries have all predeceased the Participant, the payment of any remaining benefits shall be made to the Participant's estate.

o) In the event of the death, Total Disability, Termination Without Cause or Retirement of a Participant while in the employment of Pubco but prior to the Entitlement Date in respect of a Grant, the Participant or the Participant's designated beneficiary or estate, as the case may be, shall be entitled to receive on the relevant Entitlement Date, subject to and in accordance with the provisions of the Plan, the Pro Rata portion of the amount that would have been paid to the Participant pursuant to the Grant had he or she continued in the employment of Pubco until such Entitlement Date.

p) Unless otherwise determined by the Committee, in the event a Participant's employment with Pubco terminates for any other cause, other than Death, Total Disability, Termination Without Cause or Retirement, prior to a relevant Entitlement Date, the RSUs allocated to such Participant shall be forfeited as of the date of the Participant's resignation from Pubco or the notice of termination of employment with Pubco. The Participant shall not be entitled to any amount in respect of such Grant or any compensation for loss of any benefit under the Plan. No cash or other compensation shall at any time be paid in lieu of any RSUs which are forfeited under the Plan.

q) Pubco shall maintain an RSU account in respect of each Participant which shall include records showing:

(i) the number of RSUs granted to a Participant,

(ii) the number of RSUs vested in the name of a Participant, and

(iii) the number of RSUs, if any, forfeited by the Participant,

all in accordance with the Plan.

r) The interest of any Participant under the Plan shall not be transferable or assignable otherwise then by testamentary disposition or in accordance with the laws governing the devolution of property in the event of death.

s) RSUs granted under the Plan shall under no circumstances be considered Shares nor entitle any Participant to the exercise of voting rights, the receipt of dividends or the exercise of any other rights attaching to ownership of Shares.

t) In the event:

(i) a stock dividend is declared upon the Shares of Pubco;

(ii) the outstanding Shares are increased or decreased, or changed into or exchanged for a different number or kind of shares or other securities of Pubco or of another corporation, whether through an arrangement, plan of arrangement, amalgamation or other similar statutory procedure or share recapitalization, subdivision or consolidation;

(iii) any change other than those specified in (i) or (ii) above in the number or kind of outstanding shares or of any other shares or securities in which such Shares shall have been changed or for which they shall have been exchanged; or

(iv) there shall be a distribution of assets or shares to shareholders out of the ordinary course of business,

then the Committee shall (subject to any required regulatory and other approvals) make any adjustments to the terms and/or conditions of the RSUs which have been allocated under the Plan including, without limiting the generality of the foregoing, the number of RSUs with respect to which Grants have been made pursuant to the Plan, the Entitlement Dates, or the amount to be received by a Participant in settlement of a RSU. No such adjustments shall entitle a Participant to be allocated a fractional RSU or any payment in lieu thereof, and the total adjustment with respect to each RSU will be limited accordingly.

u) The Plan shall remain in effect for a minimum of XXXXXXXXXX years and after the initial three-year period, the Committee may suspend or terminate the Plan at any time in its sole discretion. Any termination of the Plan will not affect any Grant of RSUs that becomes effective under the Plan prior to the date of termination.

v) The Committee may not amend the Plan for a three-year period commencing from the date of inception of the Plan. After the initial three-year period, the Committee may from time to time amend the Plan in whole or in part. Amendments to the Plan shall become effective upon their adoption by the Committee.

w) The granting or vesting of RSUs and the receipt of any amounts under the Plan are not to be construed as giving a Participant any right to continue in the employment of Pubco.

9. The Committee may adopt and apply rules that in its opinion will ensure that Pubco will be able to comply with applicable provisions of any federal, provincial or local law relating to the withholding of tax, including on the amount, if any, included in income of a Participant. Pubco may withhold from any amount payable to a Participant, either under the Plan, or otherwise, such amount as may be necessary so as to ensure that Pubco will be able to comply with applicable provisions of any federal or provincial law relating to withholding of tax or other required deductions, including on the amount, if any, includable in income of a Participant.

10. The Plan will be construed in accordance with and governed by the laws of the Province of XXXXXXXXXX and the federal laws of Canada.

11. The Plan will be administered by the Committee in accordance with its provisions. The Committee may, subject to the terms of the Plan, delegate to third parties the whole or any part of the administration of the Plan and the Committee shall determine the scope of such delegation.

12. Pubco will be responsible for all costs relating to the Plan including any administration fees.

Other Information

13. Included as a term of the employment agreement for certain employees of Pubco is the obligation to meet his or her minimum share ownership level. Pubco intends to amend the terms of the employment agreement with those employees who are potential Participants under the Plan such that if any amounts are received under the Plan at a time when the Participant's minimum share ownership level is not being met, the Participant shall be obligated, within a period of XXXXXXXXXX months from the date of receiving an amount under the Plan, to use all or such portion of such after-tax amount as necessary to acquire Shares on the open market until the minimum share ownership level is met. This arrangement will be an amended term of the employment agreement and will not be a term of the Plan. Participants will be obligated to take the necessary steps to acquire any additional Shares required in order to meet his or her minimum share ownership level. Pubco will agree to reimburse the Participant for any brokerage fees or commissions incurred by the employee to acquire Shares to meet their minimum share ownership level to the extent such Shares are acquired by the employee utilizing amounts paid under the Plan.

Purpose of the Proposed Plan

14. The Purpose of Pubco establishing the Plan is to:

(a) align the interests of Participants with those of Pubco's public shareholders;

(b) encourage Participants to further the development of Pubco and its subsidiaries and affiliates; and

(c) furnish Participants with the ability to receive a form of incentive compensation in addition to their Base Salary for contributing to the success of Pubco.

Rulings Given

Providing that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed Plan and the purpose of the proposed Plan, we rule as follows:

A. The Plan will not be considered a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act by reason of the exception under paragraph (k) of that definition.

B. 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.

C. Provided the Plan remains unfunded, the Plan will not constitute an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.

D. No amount will be included in a Participant's income pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) of the Act solely as a result of a Grant of RSUs under the Plan.

E. Except to the extent that Ruling F applies to amounts received by a Participant's legal representative, the amount to be included in the income of the Participant for the year under the Plan by virtue of subsection 5(1) of the Act will include any amount paid by Pubco in cash to the Participant or to his or her legal representative in satisfaction of the Participant's RSUs. The amount paid by Pubco includes any amounts withheld in respect of taxes or other source deductions.

F. All amounts payable under the Plan, as a result of a Participant's death, to the Participant's estate or to the Participant's designated beneficiary, 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.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any fees paid by Pubco to administer the Plan as well as costs incurred to establish the Plan in respect of Pubco's employees, will be deductible in computing Pubco's income in the year in which the costs are incurred in accordance with section 9 of the Act.

Opinion

Paragraph 13 does not form part of the Plan, however, in our opinion, when Pubco reimburses the Participant for any brokerage fees or commissions incurred by the Participant, this amount paid by Pubco to the Participant will be included in the income of the Participant pursuant to paragraph 6(1)(a) of the Act.

The above income tax rulings and opinion, which are based on the Act in its present form and do not take into account any proposed amendments thereto or changes as noted in subparagraphs 8(u) and (v) above, 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 the proposed Plan is implemented before XXXXXXXXXX.

This letter is based solely on the facts and proposed Plan described above. The documentation submitted with your request does not form part of the facts and proposed Plan.

Nothing in this letter should be construed as implying that the Canada Revenue Agency has confirmed, reviewed or has made any determination in respect of any tax consequences relating to the facts, proposed Plan or any transaction or event taking place either prior to the implementation of the proposed Plan or subsequent to the implementation of the proposed Plan, including the facts described in paragraph 13 above, whether described in this letter or not, other than those specifically described in the rulings and opinion given above.

Yours truly,

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