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) Where a corporation spins out part of its operations, can the board of directors adjust the number of DSUs credited to member accounts to reflect the effects of the reorganization? 2) Could the adjustment reflect the post-reorganization increase in value resulting from the disappearance of the consolidated discount?
Position: 1) Yes.
Reasons: 1) Most plans contain a provision allowing for the adjustment in order to ensure that members are not adversely affected by reorganizations. 2) Our long-standing position has been that the fair market value of the DSUs after the reorganization must be equal to the fair market value of the DSUs before the reorganization in order to meet paragraph 6801(d) of the Regulations.
XXXXXXXXXX 2006-018550
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") BN XXXXXXXXXX
XXXXXXXXXX ("Subco") BN XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We acknowledge the information provided in our telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the above-referenced taxpayers, none of the issues involved in the ruling request is:
(i) in an earlier return of the Corporation or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation or a related person;
(iii) under objection by the Corporation 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, or
(v) the subject of a ruling previously issued to the Corporation or a related person by this Directorate.
In this ruling, the "Act" means the Income Tax Act, RSC 1985 (5th Supp.) c. 1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act.
Facts
1. The Corporation is governed by the Canada Business Corporations Act and is a public corporation and a taxable Canadian corporation. The Corporation's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed with the XXXXXXXXXX Taxation Centre.
2. The Corporation's common shares (the "Common Shares") are listed on the XXXXXXXXXX.
3. Like many other large corporations, the Corporation and many of its subsidiaries, including Subco, have mandatory share ownership levels that must be maintained by their non-employee directors and executive officers.
4. The Corporation has a deferred share unit plan entitled "XXXXXXXXXX" (the "Executive DSU Plan") for the benefit of its officers and key employees and officers and key employees of subsidiary corporations (collectively, the "Eligible Executives). The Canada Revenue Agency ("CRA") has issued advance income tax rulings (XXXXXXXXXX [hereinafter referred to as the "Rulings"]) in respect of the original Executive DSU Plan and the subsequent amendments to the Executive DSU Plan.
5. The Corporation also has a deferred share unit plan entitled "XXXXXXXXXX" (the "Director DSU Plan") for the benefit of non-employee members of the board of directors of the Corporation or of subsidiary corporations, including Subco, (collectively the "Eligible Directors"). The CRA has issued advance income tax rulings (XXXXXXXXXX [hereinafter also included in the reference to "Rulings"]) in respect of the original Director DSU Plan and the subsequent amendments to the Director DSU Plan.
6. The terms of the Executive DSU Plan and the Director DSU Plan provide for adjustments to the number of deferred share units ("DSUs") credited to each participant's notional account in the event that, among other things, the Common Shares are subdivided or consolidated into a different number of Common Shares, or that a dividend is declared on the Common Shares which dividend is payable in Common Shares (other than a dividend that may be paid in cash or in shares at the option of the shareholder).
7. Awards in the form of DSUs credited to an Eligible Director's notional account or an Eligible Executive's notional account can be used as a means to achieve the mandatory share ownership levels required by the Corporation and its subsidiaries for its non-employee directors and executive officers.
8. On XXXXXXXXXX, the Corporation and XXXXXXXXXX ("Relatedco"), an entity in which the Corporation held an approximate XXXXXXXXXX% interest, publicly announced their intention to enter into certain transactions.
9. In very general terms, the transactions involved a butterfly spin-off transaction of certain assets held by Subco to the Corporation. Thereafter, certain of the Corporation's and Subco's assets would be combined with Relatedco's consolidated business in return for a promissory note, certain assets of consolidated Relatedco and an interest in the combined business. The combination of assets was followed by Relatedco converting into the XXXXXXXXXX (the "Fund"). The Corporation and Subco received partnership units that are exchangeable for units of the Fund.
10. On XXXXXXXXXX the Corporation (i) distributed to holders of Common Shares, by way of a return of capital, XXXXXXXXXX (the "Return of Capital"), and (ii) consolidated the number of its outstanding Common Shares XXXXXXXXXX.
Proposed Transaction
11. The Corporation has determined that, in accordance with the terms of the Executive DSU Plan and the Director DSU Plan, it is appropriate to adjust the number of DSUs held in the notional accounts of the Executive DSU Plan and Director DSU Plan participants to reflect the Return of Capital and the subsequent Consolidation. In accordance with the terms of each of the plans, the members of the plans will be credited with additional DSUs to reflect the Return of Capital and the Consolidation. In all cases, the fair market value of the DSUs credited to a plan member's notional account after the Return of Capital and Consolidation will be equal to the fair market value of the DSUs credited to the particular plan member's notional account prior to the Return of Capital and Consolidation. Under the terms of the plans, the fair market value of the DSUs is computed based on the average closing prices for a board lot of the Corporation's Common Shares on the day. Consequently, the fair market value of the DSUs credited to a member's notional account after the Return of Capital and Consolidation will be equal to the fair market value (based on the closing price of the Corporation's Common Shares on the day following the Return of Capital and Consolidation) of the DSUs on the day of the Return of Capital and Consolidation (based on the closing price of the Corporation's Common Shares on that day).
12. The following example is designed to illustrate our understanding of how the proposed adjustment will work. A member has 1000 DSUs credited to his notional account at the end of the business day when the Corporation's Common Shares have a fair market value of $10 immediately before the Return of Capital and Consolidation take place after the close of business. At the end of the following business day, the Common Shares have a fair market value of $9.00. Under the proposal, the member's notional account will be credited with an additional 111.11 DSUs to reflect the effects of the Return of Capital and Consolidation. Consequently, the value of the DSUs before and after will be equal to $10,000 [1,000 x $10 = 1,111.11 x $9.00].
Purpose of the Proposed Transaction
13. The purpose of the Proposed Transaction is to provide an equitable adjustment to the value of members' interest in the Executive DSU Plan or Director DSU Plan in order to ensure that they are not adversely affected by the Return of Capital and Consolidation carried out by the Corporation. Such adjustments XXXXXXXXXX were approved by the Corporation's Board of Directors on XXXXXXXXXX, subject to the receipt of a favourable ruling from the CRA.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is as described above, we rule as follows:
The above Proposed Transaction will not, in and of itself, cause the rulings given in the Rulings to cease to be binding on the CRA, in accordance with the practice outlined in Information Circular 70-6R5 dated May 17,2002 (the "Circular").
The above 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 the Circular, and is binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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