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: Is the arrangement an SDA?
Position: No
Reasons: Amounts are payable to Canadian residents are payable within 3 years.
XXXXXXXXXX 2005-014454
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
Restricted Share Unit Plan
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling on behalf of the above-noted corporation.
This letter is based solely on the facts and proposed transactions described below. 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.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(b) "Affiliate" means: any corporation that is related to, or associated with, the Company as those terms are defined in the Act;
(c) "Committee" means: the XXXXXXXXXX Committee of the Company's board of directors;
(d) "Company" means: XXXXXXXXXX
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Tax Centre;
(e) "CRA" means: the Canada Revenue Agency or its predecessors the Canada Customs and Revenue Agency or Revenue Canada, as the case may be;
(f) "DSU" means: a termination deferred share awarded under the ESOP in the form of units where one DSU unit entitles the DSU Participant to receive cash equal to the Market Value of one Share as of the settlement date for DSUs as specified under the ESOP;
(g) "DSU Award" means: an award of termination deferred share units under the ESOP to a DSU Participant;
(h) "DSU Participant" means: an individual who satisfies the eligibility conditions set out in the ESOP, who has been awarded a DSU Award and deals at arm's length with the Company and its Affiliates;
(i) "ESOP" means: the XXXXXXXXXX Executive Stock Option Plan;
(j) "Exchange" means: XXXXXXXXXX Stock Exchange.
(k) "Market Value" means: on a particular date, the closing price of Shares on that particular date as reported on the Exchange, or, if the Exchange is not open on that date, the immediately preceding date on which the Exchange is open, or, if the Shares are not listed or traded on the Exchange, the closing price of the Shares as reported on a securities exchange on which the Shares are listed and had the greatest volume of trading, or, if the Shares are not listed or traded, the value established by the Committee acting in good faith;
(l) "Participant" means: either a DSU Participant or a RSU Participant as the case may be;
(m) "Regulations" means: The Income Tax Regulations;
(n) "RSU" means: a restricted share unit awarded under the RSU Plan;
(o) "RSU Account" means: the bookkeeping account maintained for each RSU Participant to which RSUs are credited;
(p) "RSU Award" means: an award of restricted share units under the RSU Plan made to an RSU Participant;
(q) "RSU Participant" means: an individual who satisfies the eligibility conditions set out in the RSU Plan, who has been awarded an RSU Award and deals at arm's length with the Company and its Affiliates;
(r) "RSU Plan" means: the new restricted share unit plan proposed to be established by the Company;
(s) "Ruling" means: this advance income tax ruling; and,
(t) "Share" means common shares of the Company.
In addition, in this letter
(u) the terms "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Act, the terms "employee" and "salary deferral arrangement" have the meanings assigned by subsection 248(1) of the Act, the term "arm's length" has the meaning assigned by subsection 251(1) of the Act, the term "related person" has the meaning assigned by subsection 251(2) of the Act, and the term "associated" has the meaning ascribed by subsection 256(1) of the Act.
Facts
1. The Company is a taxable Canadian corporation and a public corporation and has a fiscal year end of XXXXXXXXXX. Its Shares are traded on the Exchange.
2. The ESOP governs the grant of DSU Awards to DSU Participants and the settlement of such Awards following the cessation of employment of the DSU Participants.
3. The Company does not contribute any amounts to a third party or otherwise set aside any amounts to fund the DSU Awards. No previous advance income tax ruling has ever been obtained in respect of the award of DSUs under the ESOP.
4. A DSU Award is evidenced by, and is subject to the terms of, an agreement (a "DSU Award Agreement") that becomes effective upon its execution by the DSU Participant.
5. Subject to the election described in 6(c) below, the DSU Award Agreement read in combination with the terms and conditions of the ESOP that apply to the award of DSUs, (hereinafter referred to as the "DSU Plan") constitutes a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations.
6. The relevant terms of the DSU Plan are as follows:
(a) The Committee has the authority to:
(i) grant an award of DSUs under the ESOP at any time to an individual who satisfies the eligibility conditions set out in the ESOP and deals at arm's length with the Company and its Affiliates,
(ii) determine the number of DSUs to be awarded to any DSU Participant, and
(iii) determine any other terms and conditions of a DSU Award, provided the terms and conditions do not conflict with the provisions of the ESOP.
(b) The value of the DSU Award is payable to the DSU Participant (or, where the DSU Participant is deceased, the Participant's estate) on a date (the "Settlement Date") following the date that the DSU Participant's employment with the Company or an Affiliate terminates (the "Termination Date"). The Settlement Date shall be:
(i) XXXXXXXXXX of the calendar year that immediately follows the Termination Date, or
(ii) if earlier, the date specified in a written notice provided to the Company by the DSU Participant (or the Participant's estate).
For greater certainty, the Settlement Date shall be after the Termination Date and on or before XXXXXXXXXX of the first calendar year that immediately follows the Termination Date.
The amount of the DSU Award payable to the DSU Participant shall be equal to the Market Value of a Share on the Settlement Date multiplied by the number of DSUs granted or credited to the DSU Participant.
(c) The Company or Affiliate, as applicable, may elect to pay the value of the DSU Award to the DSU Participant in cash, Shares, or a combination of cash and Shares on a date following the Termination Date that is no later than XXXXXXXXXX days after the Settlement Date. Payments made by the Company or Affiliate, as applicable, are net of any applicable withholdings.
(d) Subject to the provisions of the ESOP and a DSU Award Agreement, DSUs granted under a DSU Award may not be sold, assigned, margined, transferred, encumbered, conveyed, gifted, alienated, hypothecated, pledged, or otherwise disposed of.
(e) Unless otherwise determined by the Committee, whenever cash dividends are paid on the Shares, the Company will credit each DSU Participant with additional DSUs. The number of additional DSUs to be credited will be calculated by dividing the aggregate amount of dividends that would have been paid if DSUs credited to the DSU Participant had been Shares, by the Market Value of a Share on the date on which dividends were paid on the Shares. Any cash dividends declared on Shares where the ex-dividend date (as determined pursuant to applicable stock exchange rules) is prior to the Settlement Date and the dividend payment date is following the Settlement Date, shall be payable to a DSU Participant on the Settlement Date as if the DSUs were Shares.
For greater certainty, where a determination by the Committee is otherwise made as provided above, the determination is subject to the provisions of 6(f) below.
(f) The ESOP and the DSU Agreement does not provide any guarantee against loss or profit which may result from fluctuations in the Market Value of the Shares and the Company makes no representation or warranty as to the future value of DSUs.
Proposed Transactions and Proposed RSU Plan
7. Upon receipt of this Ruling, the Company proposes to establish the RSU Plan to award bonuses to certain employees of the Company and its Affiliates, for services rendered to the Company or an Affiliate, by the employees in the Company or the Affiliate's XXXXXXXXXX and subsequent fiscal years.
8. Subject to the receipt of this Ruling, the Company proposes to make the first RSU Awards under the new RSU Plan within XXXXXXXXXX to RSU Participants who are employees of the Company or its Affiliates at that time.
9. The RSU Plan will replace the Company's existing Restricted Share Unit Plan dated XXXXXXXXXX (the "Old Plan") which contains the same terms and conditions as the RSU Plan, except for the exchange provisions described in paragraphs 12(h) and 12(i) below. Once the RSU Plan is implemented, the Old Plan will be terminated, except that the provisions of the Old Plan will continue to apply to awards under the Old Plan that are outstanding at the date of such termination.
10. An RSU Award granted to a particular RSU Participant in a calendar year is a bonus for services rendered by the RSU Participant to the Company or an Affiliate, as the case may be, in the Company's or Affiliate's fiscal year ending in the year. An RSU Award to a particular RSU Participant will be made in accordance with the terms of the RSU Plan and will be evidenced by, and subject to the terms of, an agreement (an "RSU Award Agreement"). Each RSU Award Agreement will be effective upon its execution by the Company and the RSU Participant.
11. The Company will not contribute any amounts to a third party or otherwise set aside any amounts to fund the benefits that will be provided under the RSU Plan.
12. The relevant terms of the RSU Plan will be as follows:
(a) An RSU Award granted to an RSU Participant for services rendered will entitle the RSU Participant, subject to the RSU Participant's satisfaction of any conditions (including performance conditions), restrictions or limitations imposed under the RSU Plan or an RSU Award Agreement, to receive a payment in cash (the "Payment") from the Company or an Affiliate, as applicable, on the date when the RSU Award is fully vested, which shall be no later than December 31 of the third calendar year following the calendar year in which the services were rendered (the "Vesting Date").
(b) The Payment of an RSU Award to an RSU Participant or the RSU Participant's estate, will be made net of applicable withholdings, on or before December 31 of the third calendar year following the calendar year in which the services (for which the RSU award was made) were rendered by the RSU Participant.
(c) Whenever cash dividends are paid on the Shares, the Company will credit each RSU Participant with additional RSUs. The number of additional RSUs will be equal to:
(i) the aggregate amount of dividends that would have been paid to the RSU Participant if the RSUs in the Participant's RSU Account had been Shares
divided by:
(ii) the Market Value of a Share on the date on which dividends were paid by the Company.
The additional RSUs will vest on the Vesting Date of the particular RSU Award to which the additional RSUs relate.
(d) In the event of a stock dividend, a distribution of the Company's assets to shareholders other than by way of normal cash dividends, a stock split, a combination or exchange of shares, a merger, consolidation or spin-off, or any other change affecting the Shares, proportionate adjustments to reflect such change or changes will be made, as determined by the Committee, with respect to RSUs outstanding under the RSU Plan.
(e) If, prior to the Vesting Date, the employment of an RSU Participant is terminated for any reason other than death or disability, including but not limited to voluntary termination of employment (other than for retirement), termination for cause or for any performance-related reason, then, except as provided in an RSU Award Agreement or as determined by the Committee, all RSUs will be forfeited by the RSU Participant as of the termination date.
(f) The assignment or transfer of RSUs granted under an RSU Award is not permitted other than by a legal will, pursuant to a beneficiary designation, or the laws of succession.
(g) The Committee may at any time amend or terminate the RSU Plan. However, no such amendment or termination will impair an RSU Participant's rights under an RSU Award previously granted under the RSU Plan except with the RSU Participant's written consent or to comply with applicable laws.
(h) Selected RSU Participants will be provided with the right to exchange their RSUs for an equal number of DSUs. Such Participants will be permitted to irrevocably elect to exchange some or all of the RSUs in the Participant's RSU Account that would otherwise vest on the Vesting Date for DSUs to be granted under the DSU Plan. The election in respect of an RSU Award will be required to be made in writing no later than two months prior to the Vesting Date of that RSU Award. RSUs for which an election is made will be cancelled, with the result that the RSU Participant will not be entitled to a cash payment under the RSU Plan in respect of those RSUs.
(i) If a Participant has made an election under 12(h) above, a number of DSUs equal to the number of RSUs that are cancelled as a result of the election will be granted by the Committee on or after the Vesting Date of the RSU Award covering the cancelled RSUs (provided that the RSUs would otherwise have vested on that Vesting Date). The DSU Award will be granted under, and will be subject to, the terms and conditions of, a DSU Award Agreement between the Company and the DSU Participant.
(k) For greater certainty, no amount will be paid to, or in respect of, an RSU Participant under the RSU Plan or pursuant to any other arrangement, and no additional RSUs will be granted to an RSU Participant to compensate the RSU Participant for any downward fluctuations in the price of a Share nor will any other form of benefit be conferred upon, or in respect of, an RSU Participant for such a purpose.
Purpose of the Proposed Transactions
13. The purposes of the proposed transactions is to replace the Old Plan on a going forward basis with the RSU Plan which permits the exchange provisions described in paragraphs 12(h) and 12(i) above.
14. To the best of the Company's and your knowledge, none of the issues involved in this Ruling are:
(i) in an earlier tax return of the Company, a Participant or any person related to the Company or a Participant;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company, a Participant or any person related to the Company or a Participant;
(iii) under objection by the Company, a Participant or any person related to the Company or a Participant;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; nor
(v) the subject of a ruling previously issued by the Directorate to the Company, a Participant or any person related to the Company or a Participant.
Rulings
Provided that:
(i) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, definitions, the proposed RSU Plan and the purpose of the proposed Transactions and the proposed RSU Plan, and
(ii) the wording of the provisions of the RSU Plan are and continue to be substantially as described above,
we rule as follows:
A. An RSU Award Agreement that provides for payment no later than December 31 of the third calendar year following the year in which services were rendered will not constitute a "salary deferral arrangement", as defined in subsection 248(1) of the Act, by reason of the exception in paragraph (k) of that definition.
B. An RSU Award Agreement will not constitute an "employee benefit plan" as defined in subsection 248(1) of the Act.
C. No amount will be included in the income of an RSU 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 the grant of RSUs awarded under the RSU Plan that comply with paragraph (k) of the definition of "salary deferral arrangement" in subsection 248(1) of the Act.
D. Provided that, at the time of an exchange described in 12(h) and 12(i) above, the RSU award granted under the RSU Plan complies with paragraph (k) of the definition of "salary deferral arrangement" in subsection 248(1) of the Act and the DSU Plan is a plan or arrangement described in paragraph 6801(d) of the Regulations, no amount will be included in the income of an RSU 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 the grant of DSUs to the Participant in accordance with 12(i) above where the grant is made pursuant to the Participant's irrevocable election as described under 12(h) above.
E. All amounts payable under the RSU Plan to the RSU 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 subsections 70(2) and 70(3) of the Act.
The above 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 dated May 17, 2002, and are binding on the CRA provided that the Proposed Plan is implemented by XXXXXXXXXX.
The fair market value of a Share, at any particular time, is a question of fact and nothing in this ruling should be construed as implying our acceptance of any method for the determination of the fair market value of a Share for the purposes of the RSU Plan, the DSU Plan or the ESOP.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content