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 amendments to an existing RSU plan that is exempt from the definition of "salary deferral arrangement" can be made to allow participant to elect to convert outstanding units to DSUs? 2) Whether the conversion of RSUs into DSUs results in an income inclusion in the hands of a participant?
Position: 1) Yes. 2) No.
Reasons: 1) Meets the requirements under paragraph 248(1)(l) and 6801(d). 2) No amount is received by the participant.
XXXXXXXXXX 2006-021017
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX - Business Number 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. We also acknowledge additional documents provided on XXXXXXXXXX, and additional information provided during our various telephone conversations (XXXXXXXXXX) in connection with your ruling request.
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 and, unless otherwise indicated, all statutory references are to the Act;
(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 unit awarded under the ESOP or credited under the DSU Plan where one DSU is equivalent to one Share;
(g) "DSU Award" means: an award of termination deferred share units under the ESOP to a DSU Participant;
(h) "DSU Award Agreement" means: the agreement entered into pursuant to the ESOP in respect of a DSU Award to a DSU Participant;
(i) "DSU Plan" means: the DSU Award Agreement read in combination with the terms and conditions of the ESOP that apply to the award of DSUs;
(j) "ESOP" means: the XXXXXXXXXX Executive Stock Option Plan;
(k) "Exchange" means: the XXXXXXXXXX Stock Exchange;
(l) "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;
(m) "Participant" means: either a DSU Participant or an RSU Participant as the case may be;
(n) "Regulations" means: the Income Tax Regulations;
(o) "RSU" means: A restricted share unit awarded or credited under the RSU Plan;
(p) "RSU Account" means: the bookkeeping account maintained under the RSU Plan for each RSU Participant to which RSUs are credited;
(q) "RSU Award" means: an award of restricted share units under the RSU Plan made to an RSU Participant;
(r) "RSU Award Agreement" means: an agreement entered into pursuant to the RSU Plan by which an RSU Award is granted to an RSU Participant;
(s) "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;
(t) "RSU Plan" means: the Company's "Restricted Share Unit Plan" dated XXXXXXXXXX;
(u) "Ruling" means: this advance income tax ruling ; and
(v) "Share" means: one common share of the Company.
In addition, in this letter,
(w) the terms "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1), the terms "employee" and "salary deferral arrangement" have the meanings assigned by subsection 248(1), the term "arm's length" has the meaning assigned by subsection 251(1), the term "related person" has the meaning assigned by subsection 251(2) and the term "associated" has the meaning ascribed by subsection 256(1).
FACTS
1. The Company is a taxable Canadian corporation and a public corporation and has a fiscal year that ends on XXXXXXXXXX. Its Shares are traded on the Exchange.
The DSU Plan and DSU Awards
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. Except as disclosed in paragraph 18, no previous advance income tax ruling has ever been obtained in respect of DSU Awards under the ESOP.
4. A DSU Award is evidenced by, and is subject to the terms of, a DSU Award Agreement that becomes effective upon execution by the DSU Participant.
5. Subject to the election described in paragraph 6(c) below, 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 has died, the DSU 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 is (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 DSU Participant's estate). For greater certainty, the Settlement Date will be after the Termination Date and on or before XXXXXXXXXX of the calendar year that immediately follows the Termination Date.
The amount of the DSU Award payable to the DSU Participant is 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) 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
(i) the aggregate amount of dividends that would have been paid if DSUs credited to the DSU Participant had been Shares
by
(ii) 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, will be payable to a DSU Participant on the Settlement Date as if the DSUs were Shares.
(f) The ESOP 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.
The RSU Plan and RSU Awards
7. The RSU Plan was closed with respect to new RSU Awards upon the establishment of a new restricted stock unit plan (dated XXXXXXXXXX) which contains the same terms and conditions as the RSU Plan except that the new restricted stock unit plan includes the exchange provisions proposed to be added to the RSU Plan as described in the Proposed Transactions below once the Ruling is issued. Except as disclosed in paragraph 18, no previous advance income tax ruling has ever been obtained in respect of RSU Awards made under the RSU Plan.
8. Although the RSU Plan was closed with respect to new awards, the provisions of the RSU Plan continue to apply to awards made under the RSU Plan that were outstanding at the date of such termination.
9. Each outstanding RSU Award granted to a particular RSU Participant in a calendar year was a bonus for services rendered by the RSU Participant to the Company or an Affiliate in the Company's (or Affiliate's) fiscal year ending in the calendar year. Each outstanding RSU Award to a particular RSU Participant was made in accordance with the terms of the RSU Plan and was evidenced by, and is and will be subject to the terms of, an RSU Award Agreement. Each RSU Award Agreement became effective upon execution by the Company and the RSU Participant.
10. The RSU Plan constitutes a plan or arrangement described in paragraph (k) of the definition "salary deferral arrangement" in subsection 248(1).
11. Neither the Company nor any Affiliate has, nor will the Company or any Affiliate, contribute any amounts to a third party or otherwise set aside any amounts to fund the benefits that are to be provided under any outstanding RSU Awards.
12. The relevant provisions of the RSU Plan that continue to apply to outstanding RSU Awards are as follows:
(a) An RSU Award granted to an RSU Participant for services rendered entitles 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 from the Company or an Affiliate, as applicable, (the "Payment") on the date when the RSU Award is fully vested, which date is 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 outstanding 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 credited will be equal to the number obtained when
(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,
is 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) For greater certainty, no amount has been, and no amount will be, paid to, or in respect of, an RSU Participant under the Plan or pursuant to any other arrangement, and no additional RSUs have been, 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 has (nor will) any other form of benefit be conferred upon or in respect of, an RSU Participant for such a purpose.
PROPOSED TRANSACTIONS
13. Upon receipt of the Ruling, each RSU Participant who holds the position of Vice President or higher will be permitted to irrevocably elect to exchange some or all of the RSUs that would otherwise vest on the Vesting Date for an equal number of DSUs to be granted under the DSU Plan on the Vesting Date of the RSUs. The outstanding RSUs to which the Ruling will apply are RSUs in respect of the following RSU Awards under the RSU Plan:
(a) RSU Awards made in XXXXXXXXXX which have a Vesting Date of XXXXXXXXXX;
(b) RSU Awards made in XXXXXXXXXX which have a Vesting Date of XXXXXXXXXX; and
(c) RSU Awards made in XXXXXXXXXX which have a Vesting Date of XXXXXXXXXX.
14. The election in respect of an RSU Award will be required to be made by an RSU Participant in writing no later than XXXXXXXXXX months prior to the Vesting Date of that RSU Award except that, where the Vesting Date of an RSU Award is on or before XXXXXXXXXX, the election will be required to be made in writing no later than XXXXXXXXXX (provided that any such election that is made prior to the Ruling being issued will only take effect if the Ruling is issued on or before XXXXXXXXXX). RSUs for which an election is made (and takes effect) will be cancelled on the Vesting Date (provided that the RSUs would otherwise have vested on that Vesting Date), with the result that the RSU Participant will not be entitled to a cash payment under the RSU Plan in respect of those RSUs.
15. If an RSU Participant has made such an election in respect of some or all of the RSUs granted under an RSU Award, the Committee will grant to the Participant a number of DSUs equal to the number of RSUs that are cancelled on the Vesting Date of the RSU Award (provided that the cancelled RSUs would otherwise have vested on that Vesting Date) as a result of the election by the RSU Participant. The DSU Award will be evidenced by, and will be subject to the terms and conditions of, a DSU Award Agreement between the Company and the DSU Participant.
THE PURPOSE OF THE PROPOSED TRANSACTIONS
16. The purpose of the proposed transactions is to conform the outstanding RSU Awards made under the RSU Plan to senior employees of the Company and its Affiliates on a going forward basis with awards of restricted stock units made under the new restricted stock unit plan referred to in paragraph 7 above.
17. To the best of the Company's and your knowledge, none of the issues involved in this Ruling are:
(a) in an earlier tax return of the Company, a Participant or any person related to the Company or a Participant;
(b) 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;
(c) under objection by the Company, a Participant or any person related to the Company or a Participant;
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(a) (e) except as noted in the next paragraph, the subject of an advance income tax ruling previously issued by the Directorate to the company, a Participant, or any person related to the Company or a Participant.
18. On XXXXXXXXXX, the CRA issued the advance income tax ruling 2005-014454 in respect of the new restricted stock unit plan referred to in paragraph 7 above.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, definitions, the proposed transactions and the purpose of the proposed transactions, we confirm that:
A. Provided that, at the time of an exchange described in paragraphs 13 to 15,
i. neither the RSU Plan nor an RSU Award Agreement is a "salary deferral arrangement", as defined in subsection 248(1), by reason of the exception in paragraph (k) of that definition,
ii.neither the RSU Plan nor an RSU Award Agreement is an "employee benefit plan", as defined in subsection 248(1),
iii.neither the DSU Plan nor a DSU Award Agreement is a "salary deferral arrangement", as defined in subsection 248(1), by reason of the exception in paragraph (l) of that definition and paragraph 6801(d) of the Regulations, and
iv.neither the DSU Plan nor a DSU Award Agreement is a "retirement compensation arrangement" or an "employee benefit plan", in each case, as defined in subsection 248(1),
no amount will be included in the income of a Participant pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) solely as a result of
v.the Participant being permitted to make, or making, the irrevocable election as described in paragraph 13 above in respect of some or all of the outstanding RSUs granted under an RSU Award made under the RSU Plan to the Participant,
vi.outstanding RSUs for which an irrevocable election is made by the Participant being cancelled on the Vesting Date as described in paragraph 14 above, and
vii.DSUs being granted to the Participant (where the grant is made as a result of the Participant's irrevocable election) as described in paragraph 15 above).
The above ruling, which is based on the Act in its present form and do not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA provided that the proposed transactions are implemented on or before XXXXXXXXXX.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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