2006 Ruling 2005-0154911R3 - Stock 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: 1. Whether a Corporation's stock bonus plan (the "Plan)", which is funded through a trust (the "Trust"), is an SDA? 2. Whether the Plan is an RCA? 3. Whether the Plan is an EBP? XXXXXXXXXX

Position: 1. No. 2. No. 3. Yes. XXXXXXXXXX

Reasons: 1. Payments are made from the plan within three years of the calendar year in which the services for which the bonus is paid are rendered. 2. It is our established position that plans that are set up to provide bonuses to be paid out in the timeframe specified in paragraph (k) of the definition of SDAs are not RCAs. 3. The Plan otherwise meets the definition of an EBP and is not an excluded plan. XXXXXXXXXX

XXXXXXXXXX 									2005-015491

XXXXXXXXXX , 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") BN XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Taxpayer. We also acknowledge the information provided in your emails, including attachments thereto, dated XXXXXXXXXX, as well the information provided in our various telephone conversations (XXXXXXXXXX).

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 a tax centre in connection with a tax return already filed by 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 not expired; and

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 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 transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) "Account" means an account to be maintained by the Trustees in respect of each Participant;

(b) "Applicable Law" means any applicable provision of law, domestic or foreign, including, without limitation, the Securities Act (XXXXXXXXXX) as amended, together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder and any applicable Stock Exchange Rules;

(c) "Beneficiary" means any person designated by a Participant by written instrument filed with the Corporation to receive any amount, securities or property payable under the Plan in the event of a Participant's death or, failing any such effective designation, the Participant's estate;

(d) "Board" means the Board of Directors of the Corporation;

(e) "Committee" means the XXXXXXXXXX or any other committee of the Board, as constituted from time to time, which may be appointed by the Board to, inter alia, interpret, administer and implement the Plan;

(f) "Contribution" means any contributions which may be made by the Corporation to the Trust pursuant to the terms of the Plan;

(g) "Corporation" means the Taxpayer and its successors and assigns;

(h) "CRA" means the Canada Revenue Agency;

(i) "FMV" means fair market value, being that amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act, as would be determined in accordance with the basic principles of valuation endorsed by the Canadian Institute of Chartered Business Valuators;

(j) "Incentive Bonus" means any incentive bonus which is declared by the Corporation in respect of a Participant pursuant to the provisions of the Plan, as described in paragraph 10 below;

(k) "Independent Broker" means the independent broker appointed by the Trustees to advise on and execute purchases of Shares for the Plan, on the basis described in paragraph 13 below;

(l) "Notice of Award" means a signed, written agreement between a Participant and the Corporation evidencing the terms and conditions under which an Incentive Bonus has been declared under the Plan;

(m) "Parent" means the XXXXXXXXXX and its successors and assigns, which corporation owns indirectly XXXXXXXXXX% of the issued and outstanding shares of the Corporation;

(n) "Participant" means a permanent employee of the Corporation who has been designated by the Corporation for participation in the Plan and who has agreed to participate in the Plan;

(o) "Plan" means the Corporation's proposed bonus plan which is the subject of this ruling request;

(p) "Shares" means the common shares in the capital of the Parent as presently constituted or any shares in the capital of the Parent into which such shares are changed, reclassified, subdivided, consolidated or converted or which is substituted for such shares, or as such shares may further be changed, reclassified, subdivided, consolidated, converted or substituted, which shares are currently listed on the XXXXXXXXXX Stock Exchange and trade under the symbol XXXXXXXXXX;

(q) "Share Unit" means a unit credited by means of an entry to a Participant's Account pursuant to the Plan, which represents the right of the Participant to receive an equivalent number of fully paid Shares, at the time, in the manner, and subject to the terms, set forth in the Plan; and
(r) "Stock Exchange Rules" means the applicable rules of any stock exchange upon which Shares of the Parent are listed, as amended;

(s) "Termination Date" means the date on which a Participant ceases, for any reason, to be an employee of the Corporation or an affiliate thereof, provided that a termination of employment shall be deemed not to occur by reason of a transfer of the Participant between the Corporation to an affiliate thereof, and further provided that the Participant's employment shall not be considered terminated while the Participant is on short-term or long-term disability or a leave of absence from the Corporation or an affiliate which is approved by the Corporation;

(t) "Trust" means the XXXXXXXXXX Employee Benefit Plan Trust proposed to be settled by the Corporation in connection with the Plan;

(u) "Trustees" means the individuals appointed to be Trustees of the Trust; and the following terms from the Act are also used:

(v) "ACB" or "adjusted cost base" as defined by section 54 of the Act;

(w) "arm's length" as defined by subsection 251(1) of the Act;

(x) "employee benefit plan" as defined in subsection 248(1) of the Act;

(y) "salary deferral arrangement" as defined in subsection 248(1) of the Act;

(x) "taxable Canadian corporation" as defined by subsection 89(1) of the Act;

Facts

1. The Parent is a corporation formed under the laws of XXXXXXXXXX. The Parent is not a resident of, and does not carry on business in, Canada for the purposes of the Act. The Shares of Parent are widely held by members of the public.

2. The Corporation is a corporation continued under the Companies Act (XXXXXXXXXX). The Corporation is a resident of Canada and is a taxable Canadian corporation. The Corporation has a taxation year-end of XXXXXXXXXX . The Corporation's head office and principal place of business is located at XXXXXXXXXX. The Corporation files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.

3. Since all of the issued and outstanding shares of the Corporation are owned, directly or indirectly, by the Parent, the Corporation and the Parent do not deal at arm's length.

Proposed Transactions

4. Subject to the receipt of a favourable advance income tax ruling from the CRA, the Corporation will settle the Trust and establish the Plan. The terms and provisions of the Plan will be incorporated by reference into the terms of the Trust. The Plan and the Trust will operate as described below.

5. The capital and income beneficiaries of the Trust will be the Corporation and the Participants.

6. At all times, each of the Trustees of the Trust will be a resident of Canada for the purposes of the Act. The Trustees of the Trust will initially be XXXXXXXXXX individuals.

7. The assets of the Trust at any time will consist of Contributions and Shares held by the Trust at the particular time, as well as all earnings, profits, increments and accruals arising therefrom. The Trustees are to hold, invest, reinvest, administer, and distribute the assets of the Trust in accordance with the provisions of the Plan.

8. The Trustees are prohibited from making an election pursuant to paragraph (c) of the definition of "employee trust" in subsection 248(1) of the Act to qualify the Trust as an "employee trust" within the meaning of that definition.

9. From time to time, the Corporation may designate employees eligible to become Participants of the Plan as of a specified date. The Corporation intends to initially make the benefits of the Plan available to a number of management employees but anticipates that participation in the Plan may be extended to a broader group of employees.

10. In December of each fiscal year of the Corporation, or at such other times as the Board may in its sole discretion determine, the Corporation may declare an Incentive Bonus in respect of each Participant in the Plan on the basis of the satisfaction of performance criteria established by the Board from time to time. Such Incentive Bonus will be declared to be the FMV of a specified number of Shares and shall be expressed as such specified number of Shares. The Plan provides that an Incentive Bonus which may be declared in respect of any particular Participant under the Plan in December of a calendar year will be awarded solely in respect of the services rendered by such Participant in that calendar year whereas a declaration of an Incentive Bonus in January or February of a calendar year will be awarded solely in respect of the services rendered by such Participant in the immediately preceding calendar year. In this regard, a reference in the Plan to the year in which the Incentive Bonus was earned refers to the calendar year in which the services for which the Bonus was awarded were rendered. In all cases, the Incentive Bonus will be in addition to, and not in substitution for or in lieu of, ordinary salary and wages received by such Participant in respect of services rendered to the Corporation.

11. As soon as practicable after the declaration of an Incentive Bonus, the Corporation will make a Contribution to the Trustees, in cash, of an amount which is equal to the estimated cost to acquire the specified number of Shares which are the subject of the Incentive Bonus. To the extent that such a Contribution is greater than the amount required by the Trustees to acquire the specified number of Shares, such excess amount will be retained by the Trustees and used to reduce the amount of future Contributions to be made by the Corporation. To the extent that a Contribution is insufficient to permit the Trustees to acquire the specified number of shares which are the subject of the Incentive Bonus, the Corporation will make an additional Contribution equal to the amount of the deficiency.

12. The Trustees will use Contributions exclusively to purchase Shares on the open market in satisfaction of the benefits to be provided under the Plan and to pay the expenses incurred by the Trustees in discharging their obligations under the Plan. The Trustees will have no discretion to use the funds contributed to the Plan for any other purposes.

13. Within XXXXXXXXXX days of receiving a Contribution from the Corporation, the Trustees will acquire, on the open market, using the facilities of the Independent Broker, the specified number of Shares required to satisfy the Incentive Bonus in respect of each Participant. The Trustees shall pay any brokerage fees or ancillary expenses relating to the purchase of Shares. All Shares purchased shall be registered in the name of the Trustees or their nominee.

14. An Account will be maintained by the Trustees for each Participant, which Account will be used to track all Contributions made by the Corporation to the Trust in respect of such Participants and the Shares purchased with such Contributions. Upon completion of the purchases of Shares, the Trustees shall immediately notionally allocate Shares to the particular Participant's Account in proportion to the Contributions received in respect of each Participant in the immediately preceding month and shall ensure that the number of Shares so allocated is equal to the number of Shares specified in the Incentive Bonus in respect of which such Contributions were made.

15. Within XXXXXXXXXX days of allocating the Shares to Participants' Accounts, the Trustees will grant to each such Participant a number of Share Units, each of which represents one Share which has been allocated to the Participant's Account and shall inform the Corporation. The Corporation will issue a Notice of Award to each Participant, which Notice of Award will set out, inter alia, the number of Shares subject to the Incentive Bonus and the vesting conditions applicable to such award.

16. Unless otherwise determined by the Corporation, the Share Units will vest with a Participant as follows:

(a) XXXXXXXXXX of the year following the year in respect of which the Participant earned the Incentive Bonus;

(b) XXXXXXXXXX of the second year following the year in respect of which the Participant earned the Incentive Bonus;

(c) XXXXXXXXXX of the third year following the year in respect of which the Participant earned the Incentive Bonus.

17. Contributions to the Trust by the Participants are not permitted.

18. The Corporation may make additional Contributions to the Trust in respect of the expenses incurred by the Trustees to operate the Plan. All expenses reasonably incurred by the Trustees in connection with the operation and administration of the Plan which are not otherwise funded from Contributions shall be paid by the Corporation, if a request to do so is made by the Trustees.

19. The Trustees will hold the Shares acquired in trust until such time as the Share Units granted to Participants are vested or the Share Units are forfeited. Prior to the satisfaction of vesting conditions, a Participant will have no interest or entitlement in the Shares or in any other assets of the Plan or the Trust. Share Units will not entitle a Participant to any rights as a shareholder with respect to the Shares notionally allocated to such Participant's Account, including without limitation, any voting rights, dividend entitlements or rights on liquidation. Title and all incidents of beneficial ownership will remain with the Trustees. Prior to vesting, the Trustees will exercise the voting rights in respect of the Shares held in the Trust, although such voting rights can only be exercised upon instruction by the Corporation.

20. Prior to the satisfaction of vesting conditions, all dividends earned on the Shares in a Participant's Account will be paid to the Trust. The Trustees will be required to allocate and distribute all such dividends, as well as any other income received by the Trust, to the Corporation as income beneficiary of the Trust, in the same year as such income is earned. In this regard, at no time will a designation under subsection 104(19) of the Act be made by the Trust in respect of any such dividends. The Corporation will not be required to re-contribute to the Trust any income that was previously paid to it by the Trust.

21. On the Termination Date of a Participant, other than in the circumstances described in paragraph 23 below, any Share Units which have not vested will terminate and be forfeited. However, in the sole discretion of the Corporation, the Notice of Award in respect of a particular Participant may provide for certain circumstances in which the Share Units may vest on an accelerated basis. No cash or other compensation shall at any time be paid in lieu of any Share Units which are forfeited under the Plan.

22. At the Corporation's option, the Corporation can instruct the Trustees to sell the Shares in a Participant's Account which have been forfeited and use the proceeds to pay the expenses of the Plan or to distribute such amount to the Corporation in its capacity as capital and income beneficiary of the Trust or can require the Trustees to re-allocate the Shares amongst other Participants' Accounts. In this regard, at no time will a designation under subsection 104(21) of the Act be made by the Trust in respect of any net taxable capital gains that it may earn in a year.

23. Where specified in the Notice of Award in respect of a particular Participant, all of the Share Units in that Participant's Account shall become vested immediately on the death, termination of employment without cause or by reason of the disability of the Participant. In addition, all unvested Share Units shall automatically become vested immediately before the occurrence of a "change of control event," as defined in the Parent's XXXXXXXXXX Long-Term Incentive Plan;

24. If the number of Shares of the Parent is increased or decreased as a result of a subdivision, consolidation, reclassification or recapitalization, such proportionate adjustments to reflect such change or changes shall be made with respect to the number of Share Units outstanding under the Plan.

25. Upon the satisfaction of the vesting conditions by a Participant in respect of particular Share Units, the Trustees will, as soon practicable, distribute the vested Shares in the Participant's Account to such Participant or his or her Beneficiary, as the case may be, and, at the same time, cancel the particular Share Units. For greater certainty, in no event will the provisions of the Plan allow an Incentive Bonus to vest or be paid after the end of the third year following the taxation year in respect of which the Incentive Bonus was earned
26. The Corporation and the Trustees will withhold from any amount payable to a Participant or a Beneficiary, as the case may be, any amounts necessary to enable compliance with the provisions of the Act relating to source withholdings.

27. The issuance of Share Units under the Plan and the obligation to make any payments in accordance with the terms of the Plan will be subject to compliance with Applicable Law. As a condition of participation in the Plan, each Participant will agree to comply with all Applicable Law and to furnish to the Corporation and the Trustees all information and undertakings as may be required to permit compliance with the Applicable Law.

28. The interest of any Participant under the Plan or in any Share Units shall not be transferable or alienable by him or her either by pledge, assignment or in any other manner whatever, otherwise than by testamentary disposition or in accordance with the laws governing the devolution of property in the event of death.

29. The Plan shall be administered by the Committee and the Trustees in accordance with its provisions. From time to time the Corporation may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or terminate the Plan or amend any of the terms of the Share Units granted under the Plan, provided however that:

(a) any approvals required under Applicable Law or Stock Exchange Rules are obtained;

(b) no such amendment or termination shall be made at any time which has the effect of adversely affecting the existing rights of a Participant under the Plan without the Participant's consent in writing; and

(c) no such amendment shall cause the Plan or the Trust governed by the Plan not be an employee benefit plan or a trust governed by an employee benefit plan respectively or to cause the Plan or any particular terms of the Plan to be a salary deferral arrangement.

30. The Corporation will settle the Trust and implement the Plan in its XXXXXXXXXX fiscal year. In order to provide employees of the Corporation with comparable incentive compensations schemes as those made available to the employees of the Parent, the Corporation will make its first Contributions to the Trustees in XXXXXXXXXX for Incentive Bonuses to be awarded to Participants for services provided by them in XXXXXXXXXX.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to advance the interests of the Corporation and the Parent by: (i) increasing the proprietary interests of Participants in the Corporation and the Parent, (ii) aligning the interests of Participants with the interests of the Parent's shareholders generally, (iii) encouraging Participants to remain associated with the Corporation, and (iv) furnishing Participants with an additional incentive in their efforts on behalf of the Corporation.

Rulings Provided

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the features of the Plan are as described above, we rule as follows:

A. The Plan will not constitute a "salary deferral arrangement" by virtue of paragraph (k) of the definition of that term in subsection 248(1) of the Act.

B. The Plan will not constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act.

C. The Plan will constitute an "employee benefit plan", as that term is defined in subsection 248(1) of the Act, and the Trust will constitute a trust governed by an EBP.

D. The Plan will not be subject to, or governed by, section 7 of the Act.

E. Except as provided in Ruling F and G below, no amount will be included in the income of a Participant pursuant to subsection 5(1) or section 6 of the Act solely as a result of the implementation of the Plan, the participation of the Participant in the Plan, the making of Contributions to the Trust by the Corporation, the allocation of Share Units to a Participant's Account, or the payment by the Corporation of the costs relating to the administration of the Plan.

F. An amount equal to the fair market value of the Shares distributed by the Trust to a Participant or his or her Beneficiary, as described in paragraph 25 above, will be included in the income of such Participant or Beneficiary under paragraph 6(1)(g) of the Act in the year in which the Share Units vest and Shares are distributed. The fair market value of the Shares will be determined as of the day on which the Shares are distributed.

G. Subsection 115(1) of the Act or subsection 114 of the Act, as the case may be, will apply to include in the income for a year of a Participant or a Beneficiary, as the case may be, who is not a resident of Canada, or is a resident of Canada for only part of a year, as the case may be, the aggregate of the fair market value of any Shares that are distributed by the Trust in accordance with paragraph 25 above in the year in which the Shares are received.

H. The amount payable by the Corporation to a Beneficiary as a result of the death of the Participant, on the basis described in paragraph 23 above, will constitute a right or thing held by the deceased Participant at the time of death for purposes of subsection 70(2) of the Act.

I. Subject to section 67 of the Act, any Contribution made to the Trust by the Corporation in a particular year, on the basis described in paragraph 11 above, will be deductible by the Corporation in computing its income, in accordance with section 32.1 of the Act. For the purposes of subsection 32.1(2) of the Act, payments out of or under the Plan in a particular year will be equal to the fair market value of the Shares distributed by the Trust to Participants or Beneficiaries in that year under the Plan.

J. Subject to paragraph 18(1)(a) and section 67 of the Act, all costs (other than Contributions to the Trust) associated with the administration of the Plan, including Trustee fees, that are incurred by the Corporation, on the basis described in paragraph 18 above, will be deductible, in accordance with section 9 of the Act, in computing the Corporation's income in the year in which the costs are incurred.

K. Such part of the amount that would, but for subsection 104(6) of the Act, be the income of the Trust for the year, as was paid in the year to the Corporation as income beneficiary of the Trust, as described in paragraphs 20 and 22 above, will be deductible from the income of the Trust pursuant to paragraph 104(6)(a.1) of the Act.

L. The amounts paid to the Corporation as described in Ruling K above will be included in the Corporation's income pursuant to paragraphs 12(1)(m) and 104(13)(b) of the Act.

M At the time the Trust distributes Shares to Participants in satisfaction of all or any part of their interest therein, as described in paragraph 25 above, the Trust shall be deemed to have disposed of the Shares for proceeds of disposition equal to their cost amount, immediately before that time, in accordance with subparagraph 107.1(b)(i) of the Act.

N. At the time described in Ruling M above, a Participant will be deemed to have disposed of his or her interest or part thereof, as the case may be, for proceeds of disposition equal to the ACB to the Participant of that interest or part thereof immediately before that time, in accordance with subparagraph 107.1(c) of the Act.

O. At the time described in Ruling M above, a Participant will be deemed to have acquired the Shares at a cost equal to the greater of their fair market value at that time and the ACB to the Participant of that interest or part thereof , as the case may be, immediately before that time, in accordance with subparagraph 107.1(b)(ii) 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 IC 70-6R5, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transactions are implemented before XXXXXXXXXX.

Comments

i. The above income tax rulings are based solely on the facts and proposed transactions described above and do not depend on any other information made available to CRA, whether such information was provided by way of additional documentation submitted with the ruling request or otherwise. Any reference in this letter to such other information is made solely for the convenience of the reader.

ii. The fair market value of a Share at any time is a question of fact and nothing in this letter should be construed as implying CRA's acceptance of any method for the determination of the fair market value of a Share for purposes of the Plan.

iii. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed transactions described above other than those specifically described in the rulings.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch