2005 Ruling 2005-0118901R3 - SAR-type plan tied to XXXXXXXXXX appreciation.

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 in which the payout is based on the appreciation of the value of units from the grant date to the payment date will be excluded from the definition of a salary deferral arrangement as defined in subsection 248(1) of the Income Tax Act. Unlike a typical SAR, wherein appreciation is measured using the company's stock, the appreciation in this case is measured using the consolidated income of the parent before deducting certain items (including consolidated interest expenses, income and capital taxes, and depreciation and amortization of assets and other deductions as may be determined by Parentco from time to time) applied for accounting purposes and not including any consolidated interest income.

Position: Yes.

Reasons: Like a SAR, this plan may be considered a payment for future services since the eventual payout is based on the future performance of the Parentco group of companies.

XXXXXXXXXX 2005-011890

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

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

We are writing in response your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Corporation and Parentco (collectively the "Taxpayers"). We also acknowledge the information provided in your letter of XXXXXXXXXX, as well as in various telephone conversations (XXXXXXXXXX).

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

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

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

iii. under objection by one of the Taxpayers 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 one of the Taxpayers 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.

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

Definitions

(a) "Accrued Value" means the amount that a Participant is entitled to receive in respect of particular Incentive Units and is determined by XXXXXXXXXX.

(b) "Award Cycle" in respect of particular Incentive Units means the XXXXXXXXXX year period ending on the XXXXXXXXXX anniversary of the Grant Date of such units;

(c) "Change of Control" means the sale, assignment, transfer or other disposition (other than pursuant to an IPO), directly or indirectly, in one transaction or a series of related transactions of a majority of the outstanding common stock of Parentco to any person or persons other than a person that does not deal at arm's length with Parentco, or a sale of all or substantially all of the assets of Parentco to a person or persons that do not deal at arm's length with Parentco (without the written consent of the Plan Administrator);

(d) "Corporation" means XXXXXXXXXX and its successors and assigns;

(e) XXXXXXXXXX;

(f) "Grant Date" in respect of Incentive Units means XXXXXXXXXX of the particular calendar in which Incentive Units have been granted;

(g) "Grant Date Value" means the XXXXXXXXXX of a Unit on the Grant Date calculated XXXXXXXXXX;

(h) "Incentive Units" means units in the Plan that entitle a Participant to receive a cash payment based on the Unit Appreciation Value at the date of payment;

(i) "IPO" means the direct or indirect sale of the shares of Parentco or the Corporation to the public pursuant to an offering document that has been filed with a securities regulator;

(j) "Parentco" means XXXXXXXXXX and its successors and assigns;

(k) "Participant" means a Canadian employee of the Corporation who is invited to participate in the Plan;

(l) "Payment Date" means the date that a Participant is entitled to receive the Accrued Value in respect of his or her Incentive Units; in the normal course of events, the Payment Date will be after the end of the Award Cycle, on a date that is no later than XXXXXXXXXX days following the determination of the Accrued Value by the Audit Committee of the Board of Parentco, which determination is to be made on or before XXXXXXXXXX of each year;

(m) "Payment Date Value" means the U.S. dollar value of a Unit on the Payment Date calculated by XXXXXXXXXX for the fiscal period immediately preceding the Payment Date by XXXXXXXXXX;

(n) "Plan" means the XXXXXXXXXX (the "Plan");

(o) "Unit Appreciation Value" is the difference, if any, between the Payment Date Value and the Grant Date Value;

Facts

1. The Corporation is a wholly owned subsidiary of Parentco, a corporation resident in the United States (the "U.S."). The Corporation provides XXXXXXXXXX. Parentco is a XXXXXXXXXX firm offering XXXXXXXXXX.

2. The Corporation is a taxable Canadian corporation as defined in subsection 89(1) of the Act. Neither the Corporation nor Parentco have listed shares for trading on a public stock exchange.

3. The Corporation files its tax returns at the XXXXXXXXXX Tax Services Office and deals with that office. Its fiscal year-end is XXXXXXXXXX. The head office of the Corporation is XXXXXXXXXX. The fiscal year-end of Parentco is XXXXXXXXXX .

4. The Corporation has established a comprehensive compensation and benefit program for eligible employees including a comprehensive benefits plan, pension plan, restricted stock plan, under which certain employees could have acquired shares of Parentco, and an equity program XXXXXXXXXX. However, no further awards will be made under either plan, no additional units will be acquired under the XXXXXXXXXX, and it is unlikely that any additional stock will be acquired under the restricted stock plan.

5. The Plan was established by Parentco for the benefit of certain employees of Parentco in the U.S., as well as employees of subsidiaries and related companies located both inside and outside the U.S.

Proposed Plan

6. Parentco is proposing to extend participation in the Plan to the Canadian employees of the Corporation. It is important to Parentco to offer the same plan throughout its global organization in order to ensure that all employees are motivated to achieve the same objectives in the same period of time. Further, by offering identical plans, Parentco hopes to reduce the barriers to employee mobility.

7. Under the Plan, Participants will be granted Incentive Units that, subject to certain vesting conditions being met, entitle the Participant to receive a cash payment equal to the amount by which the value of the Units have appreciated between the Grant Date and the Payment Date.

8. Under the terms of the Plan, Incentive Units will vest in equal increments over the Award Cycle, i.e., XXXXXXXXXX% of the units will "vest" on each anniversary of the Grant Date so that at the end of the Award Cycle, XXXXXXXXXX% of the Incentive Units will have vested.

9. Notwithstanding the fact that the Incentive Units have vested, no amount in respect of the Accrued Value will be payable before the end of the Award Cycle unless one of the specific events that are described in paragraphs 11 through 13 below occur. The vesting schedule merely affects the risk that a participant will forfeit his or her entitlement under the Plan.

10. In the event that the Participant is terminated for cause prior to the fourth anniversary date, all outstanding Incentive Units (whether vested or unvested) will be forfeited and cancelled (without any compensation for such cancellation).

11. In the event that a Participant's employment with the Company ends for reasons other than cause, the unvested Incentive Units will be forfeited and any vested Incentive Units will be cancelled for cash consideration equal to the Accrued Value which will be paid no later than 45 days following the termination of employment or, where the employment ends before April 15 of the particular year, no later than May 31 of the particular year.

12. In the event of a Change of Control or an IPO of Parentco, all outstanding vested and unvested Incentive Units will be cancelled for cash consideration equal to the Accrued Value, which will be paid no later than 5 business days following such Change of Control or IPO unless otherwise required by the applicable law.

13. A Participant can designate a beneficiary or beneficiaries to whom the Accrued Value in respect of the Participant's vested but unpaid Incentive Units payable under the Plan shall be paid in case of the Participant's death.

14. Upon obtaining a favourable advance tax ruling, Parentco proposes to grant an award of Incentive Units to employees which will have a Grant Date of XXXXXXXXXX. In addition, after obtaining a favourable advance tax ruling, Parentco proposes to retain the ability to grant future awards for future Award Cycles.

15. At all times, the Plan will remain unfunded.

16. Parentco and the Corporation will enter into the Intercompany Recharge Agreement (the "Agreement) whereby the Corporation will be required to reimburse Parentco for any payments made by Parentco to Participants who are employed by the Corporation, as well as for the portion of the costs that Parentco incurs for designing, implementing, and administering the Plan, that relates to such Participants.

Purpose of the Proposed Plan

The proposed Plan is intended to motivate Participants to focus on activities that will increase Parentco's global consolidated earnings and are linked directly to increasing certain key financial results of Parentco within a fixed period and providing a long-term incentive program that will attract and retain the services of outstanding employees who will be permitted to participate in this Plan. The proposed Plan is being extended to Canadian participants to ensure that all employees in the global organization are motivated over the same time period to achieve similar results. Further, by establishing a similar plan in a number of countries, the transfer of key employees between countries will be facilitated.

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 a salary deferral arrangement as defined in subsection 248(1) of the Act.

B. No amount will be included in the income of a Participant under subsection 5(1), paragraph 6(1)(a), or paragraph 56(1)(x) of the Acts solely as a result of an award of Incentive Units to the Participant.

C. All payments in respect of the Accrued Value under the Plan to Participants will be taxable to the recipient in the year the payment is received as employment income under section 5 of the Act. For greater certainty, where a Participant moves to another country to work for another subsidiary of Parentco, or for a related corporation, that participates in the Plan, section 5 and subparagraph 115(1)(a)(i) of the Act will apply to the portion of the Accrued Value attributable to the services rendered in Canada.

D. All payments in respect of the Accrued Value to the Participant's estate or to or on behalf of the beneficiary of a Participant, 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 subsection 70(2) of the Act.

E. All payments made by the Corporation to Parentco pursuant to the Agreement will not constitute a shareholder benefit in the hands of Parentco within the meaning of subsection 15(1) of the Act and will thus not be deemed to be a dividend taxable under paragraph 214(3)(a) of the Act.

F. Subject to paragraph 18(1)(a) and section 67 of the Act, all payments made pursuant to the Agreement will be deductible in computing the Corporation's income (in accordance with section 9 and paragraph 18(1)(a) of the Act) in the year in which the payments are made.

The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch

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