2004 Ruling 2004-0101501R3 - Deferred Share Units

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 deferred share units credited to participants 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.

XXXXXXXXXX 								2004-010150

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your emails sent on XXXXXXXXXX and our various telephone conversations (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 if a judgment has been issued, the time limit for appeal to a higher court has expired, and

(v) the subject of a ruling previously issued to the taxpayer or a related person by this Directorate.

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.

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

Definitions and Abbreviations

"Applicable Withholding Taxes" means any and all taxes and other source deductions or other amounts which Pubco is required by law to withhold and remit to any taxing authority from any amounts to be paid or credited under the Plan;

"Award" means a bonus in the form of Units awarded in accordance with the Plan and the terms of the Award Acknowledgement relating to such Award;

"Award Acknowledgement" means a written acknowledgment evidencing the terms and conditions under which each Award has been granted;

"Pubco" means XXXXXXXXXX;

"Pubco TSR" means, in respect of an Entitlement Period, the Total Shareholder Return of Pubco calculated with reference to its Common Shares as traded on the XXXXXXXXXX;

"Board" means the board of directors of Pubco;

"Committee" means the Human Resources Committee of the Board or such other committee of the Board designated from time to time by the Board to review and report to the Board on compensation matters;

"Common Share" means a common share without nominal or par value of Pubco or any other security of Pubco or successor entity resulting from an exchange, reclassification or conversion of the Common Shares as a result of a capital reorganization of Pubco or merger, consolidation, amalgamation or other reorganization with another entity;

"Deadline", means in respect of an Award, December 30 of the third calendar year following the end of the calendar year in which the Grant Date for such Award occurred;

"Disability", in respect of a particular Participant, has the meaning assigned thereto in the long-term disability insurance program sponsored by the Participating Employer under which the Participant is entitled to receive benefits;

"Entitlement Date" means, in respect of an Award, the day that is stipulated as such in a Participant's Award Acknowledgement which in no event will be later than the Deadline;

"Entitlement Period" means, in respect of an Award, the period beginning on the Grant Date and ending on the Entitlement Date;

"Grant Date" means, in respect of an Award, the date on which the Award is granted to the Participant as stipulated in a Participant's Award Acknowledgement.

"Lump Sum Payment" means, a lump sum payment in lieu of all or any portion of a Notice Period;

"Lump Sum Payment Date" means, the date the Participating Employer makes the Lump Sum Payment;

"Notice Period" means the period of time, if any, following termination of a Participant's employment with a Participating Employer for which the Participating Employer has agreed to remunerate such Participant (either on a periodic basis or in the form of a lump sum) regardless of whether the Participant is entitled to greater notice or payment in lieu of notice at common law or under any employment contract and regardless of whether such termination is lawful, provided that in no circumstance will such period of time be less than the minimum notice period prescribed by applicable statutory employment standards legislation;

"Notice End Date" means the last day of the Notice Period;

"Participant" means an employee of Pubco or a Subsidiary to whom an Award has been made under the Plan;

"Participating Employer" means, in respect of a Participant, the Participant's employer, being Pubco or a Subsidiary;

"Participant's Record" means a personal record established by the Record Keeper for each Participant;

"Peer Group" means a group of Canadian and U.S. XXXXXXXXXX comparable on a financial basis to Pubco and designated by the Committee as the Peer Group for the purposes of the Plan from time to time;

"Peer Group TSR" means, in respect of an Entitlement Period, the average of the Total Shareholder Return for each XXXXXXXXXX in the Peer Group for the Entitlement Period;

"Performance Units" means Units designated as Performance Units in an Award Acknowledgement;

"Plan" means Pubco's XXXXXXXXXX Deferred Share Unit Program (Canada);

"Record Keeper" means the individual or entity designated by the Committee to establish and maintain each Participant's Record;

"Regular Units" means Units designated as Regular Units in an Award Acknowledgement;

"Retirement" means a Participant's termination of employment with a Participating Employer on or after attaining such retirement age and service thresholds as may be determined from time to time by such Participating Employer;

"Subsidiary" means a body corporate if its securities to which are attached more than 50% of the votes that may be cast to elect directors of the body corporate are held directly or indirectly by or for the benefit of Pubco;

"Total Shareholder Return", in respect of Pubco or a member of the Peer Group, means the percentage change in the market value of equity securities of such XXXXXXXXXX (including deemed reinvestment of dividends) over an Entitlement Period, such change to be determined by the Corporate Finance Department of Pubco calculated as the average of the difference between the five day average closing price of such securities on the primary stock exchange on which such securities trade (including deemed reinvestment of dividends) for the first five consecutive trading days and last five consecutive trading days in each of the 12 calendar quarters of the Entitlement Period commencing with the calendar quarter in which the day immediately preceding the Grant Date for the relevant Entitlement Period falls;

XXXXXXXXXX;

"Unit Value", means on any date, the average of the closing prices of Common Shares on the XXXXXXXXXX on the five consecutive trading days ending immediately prior to such date; and

"Units" means Regular Units and Performance Units allocated to a Participant pursuant to an Award and includes Units allocated to a Participant pursuant to 5(e), as recorded in a Participant's Record.

Facts

1. Pubco is a taxable Canadian corporation and a public corporation within the meaning of subsection 89(1). XXXXXXXXXX. Pubco's fiscal year end is XXXXXXXXXX.

2. Pubco's executive offices are situated at XXXXXXXXXX. It is serviced by the XXXXXXXXXX Tax Services Office and files its income tax returns at the XXXXXXXXXX Taxation Centre.

3. Pubco's authorized capital includes common shares, which are widely held and are traded on the XXXXXXXXXX.

Proposed Plan

4. Subject, inter alia, to the receipt of a favourable advance income tax ruling, Pubco proposes to adopt and create the Plan. The effective date of the Plan is anticipated to be XXXXXXXXXX or such later date as the Board may determine. It is anticipated that grants of Awards under the Plan will commence to be made on XXXXXXXXXX.

5. The relevant terms of the Plan are as follows:

a) The Committee may award Units to such Participants as the Committee, in its discretion, determines, as a bonus in recognition of the contributions by such Participants during the fiscal year of Pubco ending in the calendar year in which the Award is made. For greater certainty, no Award of Units will be made in lieu of or in satisfaction of salary or wages to which a Participant is otherwise entitled. The Committee will determine the criteria and procedures for determining the eligibility of employees for the grant of Awards under the Plan.

b) The terms of each Award will be determined by the Committee and will be set forth in an Award Acknowledgment delivered to the Participant. Those terms will include the number of Units granted pursuant to the Award that are designated as Regular Units and those that are designated as Performance Units, and the criteria for calculating the amount to which a Participant is entitled in respect of Performance Units including any adjustments to such amount. Upon receipt of an Award Acknowledgement, the Participant must sign and deliver the Award Acknowledgement to the Participating Employer within the time period specified in the Award Acknowledgement and failure to do so will result in a forfeiture of the Award.

c) The criteria for calculating any adjustments to the amount to which a Participant is entitled in respect of Performance Units, will be determined with reference to the Pubco TSR as compared to the Peer Group TSR for the Entitlement Period in respect of the Award granted. Depending on the TSR of Pubco, an amount up to XXXXXXXXXX% of the aggregate of Unit Value of the Participant's Performance Units will be added or deducted as adjustment. For example, the Performance Units may be adjusted based on Pubco TSR relative to the Peer Group TSR at the end of the Entitlement Period as follows:

(i) If Pubco TSR is in the top quartile of the Peer Group TSR, an amount equal to XXXXXXXXXX% of the aggregate Unit Value of the Participant's Performance Units will be added as an adjustment;

(ii) If Pubco TSR is in the second quartile of the Peer Group TSR, an amount equal to XXXXXXXXXX% of the aggregate Unit Value of the Participant's Performance Units will be added as an adjustment;

(iii) If Pubco TSR is in the third quartile of the Peer Group TSR, an amount equal to XXXXXXXXXX% of the aggregate Unit Value of the Participant's Performance Units will be deducted as an adjustment;

(iv) If Pubco TSR is in the bottom quartile of the Peer Group TSR, an amount equal to XXXXXXXXXX% of the aggregate Unit Value of the Participant's Performance Units will be deducted as an adjustment;

(v) If Pubco TSR is equal to the Peer Group TSR, no adjustment will be made.

d) The Record Keeper will record in the Participant's Record the number of Regular Units and Performance Units allocated to the Participant pursuant to an Award. The Record Keeper will make the necessary entries to the Participant's Record to reflect any forfeiture of Units resulting from termination of Awards, the addition of Units credited pursuant to (e) below and any other adjustments to a Participant's Award granted hereunder.

e) In respect of each outstanding Award under the Plan, upon the payment of any dividends on Common Shares during the Entitlement Period, the Record Keeper will add to the number of Units allocated to a Participant pursuant to an Award a further number of Units to reflect the dollar value of the dividends each Participant would have received on Units allocated to such Participant pursuant to an Award as if the Participant had held one Common Share for every one Unit recorded in the Participant's Record. The number of additional Units to be added to the Participant's Record in respect of an Award in such circumstances will be determined by dividing the dollar value of the dividends by the average of the closing prices of the Common Shares on the XXXXXXXXXX on the five consecutive trading days ending immediately prior to the date on which the relevant dividends on Common Shares are paid. Such additional Units will be designated as Regular Units and as Performance Units on a pro rata basis using the ratio of Regular Units to Performance Units as recorded in the Participant's Record on the date that the relevant dividends are paid.

f) Subject to (h) to (n) below, on the Entitlement Date in respect of an Award a Participant will be entitled to receive:

(i) an amount in cash equal to the number of Regular Units recorded in the Participant's Record in respect of such Award multiplied by the Unit Value calculated as at the Entitlement Date; and

(ii) an amount in cash equal to the number of Performance Units recorded in the Participant's Record in respect of such Award multiplied by the Unit Value calculated as at the Entitlement Date, subject to adjustment in accordance with the criteria set out in the Award Acknowledgement relating to the Award referred to in (b) and (c) above.

As soon as administratively practicable after the Entitlement Date, but in any event not later than the end of the Deadline, Pubco will pay to the Participant the relevant amount by direct deposit to the Participant's payroll account.

g) Pubco will deduct and withhold from any payment of cash to a Participant under the Plan all Applicable Withholding Taxes. Such Applicable Withholding Taxes will be treated for all purposes as having been paid to the Participant.

h) If a Participant's employment with a Participating Employer ceases as a result of Disability prior to the Entitlement Date, the Participant's entitlement to receive an amount on the Entitlement Date in accordance with (f) above will, subject to (i) to (n) below, continue unaffected.

i) If a Participant dies during the Entitlement Period, Pubco will, as soon as administratively practicable, pay to the Participant's estate an amount in cash equal to the number of Units recorded in the Participant's Record as at the date of death multiplied by the Unit Value calculated as at the date of death.

j) In the event of a Participant's Retirement during the Entitlement Period, the Participant's entitlement to receive an amount on the Entitlement Date in accordance with (f) above will, subject to (i), continue unaffected unless the Participant commences employment with a XXXXXXXXXX that competes with Pubco (as determined by the Committee) during the Entitlement Period, in which case, the Participant's Award will immediately terminate and all Units granted under such Award will be deemed to have been forfeited as at the date of Retirement.

k) If a Participant's employment with a Participating Employer is terminated because the Participant resigns or is terminated for cause prior to the Entitlement Date, the Participant's Award will terminate and all Units granted under such Award will be forfeited as of the date of such resignation or termination.

l) If a Participant's employment with a Participating Employer is terminated without cause and the Participating Employer agrees to remunerate such Participant on a periodic basis during a Notice Period, then the Participant will be entitled to:

(i) a pro rata number of the Regular Units recorded in the Participant's record as at the Notice End Date; plus

(ii) XXXXXXXXXX% of a pro rata number of the Performance Units recorded in the Participant's Record as at the Notice End Date,

based on the portion of the Entitlement Period that has been completed as at the Notice End Date and all other Units recorded in the Participant's Record will be forfeited as at the Notice End Date.

However, if the Participating Employer determines for whatever reason at any time to pay the Participant a Lump Sum Payment, then effective as at the Lump Sum Payment Date the Participant will be entitled to:

(i) XXXXXXXXXX % of a pro rata number of the Regular Units recorded in the Participant's Record as at the Lump Sum Payment Date; plus

(ii) XXXXXXXXXX % of a pro rata number of the Performance Units recorded in the Participant's Record as at the Lump Sum Payment Date,

based on the portion of the Entitlement Period that has been completed as at the Lump Sum Payment Date and all other Units recorded in the Participant's Record will be forfeited as at the Lump Sum Payment Date.

Notwithstanding (f), a Participant who has been terminated without cause will be entitled to receive an amount in cash equal to the aggregate number of Units recorded in such Participant's Record on the earliest of (A) the Entitlement Date, (B) the day immediately following the Notice End Date, or (C) the day immediately following the Lump Sum Payment Date, as the case may be, multiplied by the Unit Value calculated as at such date. As soon as administratively practicable after such date but in any event not later than the Deadline, Pubco will pay to the Participant the relevant amount net of the Applicable Withholding Taxes by direct deposit to the Participant's payroll account.

m) If a Participant is transferred from a Participating Employer to Pubco or a Subsidiary, Awards granted to such Participant will continue unaffected despite such transfer.

n) In any particular situation referred to in (h) to (m), the Senior Executive Vice-President, Human Resources of Pubco or such other officer of Pubco as may be designated by the Committee for this purpose, may exercise full discretion in circumstances he or she considers appropriate to modify the provisions of the Plan relating to a Participant's Award.

o) The Committee will administer, and will have full and complete authority to (i) interpret the Plan, (ii) determine the form and content of Award Acknowledgements, (iii) prescribe such rules and regulations and delegate such responsibilities in respect of the Plan, and (iv) make such other determinations as it deems necessary or desirable for the administration of the Plan. All actions and decisions of the Committee will be final, conclusive and binding on all parties concerned, including, but not limited to, the Participants and their beneficiaries and legal representatives, Pubco and its Subsidiaries and their shareholders.

p) All expenses of administration of the Plan incurred by or on behalf of a Participating Employer will be borne by such employer. The allocation of such expenses among Participating Employers will be determined by the Committee. All costs associated with the grant and payment of Awards will be borne by the Participating Employer that employed the Participant on the Grant Date.

q) The Committee may at any time amend, suspend, or terminate the Plan, in whole or in part, provided that such amendment, suspension or termination will not reduce the value of any payment to be made in respect of any existing Award that has been granted prior to the time of such amendment, suspension or termination without the Participant's consent, and provided further that any such amendment does not cause the Plan to cease to be a plan or arrangement described in paragraph (k) of the definition of "Salary Deferral Arrangement" in subsection 248(1).

r) Participants will not have any rights as a shareholder of Pubco with respect to any Units awarded under the Plan. The rights and privileges granted under the Plan are non-assignable and non-transferable, except by will or under the laws of succession.

s) This Plan will be an unfunded bonus Plan. Neither Pubco nor any Participating Employer will make any contributions to a third party, i.e., trustee, custodian or otherwise, set aside any property or otherwise make any of its property unavailable to its general creditors, in connection with or as a result of its obligations under the Plan.

t) The participation of any person in the Plan is entirely voluntary. Neither the Plan nor any Award granted will be construed as conveying to a Participant any right to be retained as an employee of Pubco or any Subsidiary or any claim or right to any future grant of Awards. Neither the Plan nor any action taken there under will interfere with the right of a Participating Employer to terminate the employment of such Participant at any time.

Purpose of the Proposed Plan

6. The Plan will be established by Pubco and certain Subsidiaries to compensate eligible employees of Pubco and such Subsidiaries for their contribution to the long-term performance of Pubco and such Subsidiaries. The Plan is intended to:

(a) provide an incentive to key employees of Pubco and such Subsidiaries to further the development, growth and profitability of Pubco and such Subsidiaries,

(b) reward key employees for the absolute and relative performance of Pubco in relation to Total Shareholder Return,

(c) contribute to providing eligible employees with a total target compensation package that is comparable to industry practice, and

(d) assist Pubco and such Subsidiaries in attracting and retaining senior management with experience and ability to contribute to the Pubco's shareholder value.

Rulings Given

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

A) The Plan will not constitute an "employee benefit plan" as that term is defined in subsection 248(1).

B) Provided the Plan remains unfunded, the Plan will not constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1).

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

D) No amount will be included in a Participant's income pursuant to section 3, subsection 5(1), section 6 or paragraph 56(1)(a) or subparagraph 115(1)(a)(i), solely as a result of the implementation of the Plan, an Award under the Plan or the allocation of Units pursuant to 5(e).

E) Except to the extent ruling (G) applies to amounts received by a Participant's estate, amounts received under the Plan by a Participant who is a resident of Canada, including Applicable Withholding Taxes, will be included in the income of the Participant pursuant to subsection 5(1) in the year the amount is received.

F) Except to the extent ruling (G) applies to amounts received by a Participant's estate, amounts received under the Plan by a Participant who is not a resident of Canada at the time of the receipt, to the extent the amount is attributable to services performed in Canada and, if the Participant was resident in Canada at the time he or she performed the services, outside Canada, including Applicable Withholding Taxes, will be included the income of the Participant pursuant to subsection 5(1) and subparagraph 115(1)(a)(i) in the year the amount is received.

G) All amounts payable under the Plan to a Participant's estate as a result of a 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).

H) Subject to paragraph 18(1)(a) and section 67, where Pubco makes a payment of an amount described in the above rulings to a Participant that was employed by Pubco on the Grant Date, Pubco will be entitled to deduct the amount paid, including any Applicable Withholding Taxes, in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

I) Subject to paragraph 18(1)(a) and section 67, where a Subsidiary has a legal obligation to reimburse Pubco for the payment of an amount described in the above rulings to a Participant that was employed by the Subsidiary on the Grant Date, the Subsidiary, provided it is a resident of Canada or carries on business in Canada, will be entitled to deduct the amount of the required reimbursement, including any Applicable Withholding Taxes, in calculating its income for the year in which the payment is made in accordance with section 9 of the Act.

The above advance income tax rulings, which are based on the Act in its 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 the proposed Plan is implemented before XXXXXXXXXX.

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 other 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, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

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