2007 Ruling 2007-0223531R3 - Deferred Stock Unit 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: Is the proposed plan a prescribed 6801(d) plan?

Position: Yes.

Reasons: Complies with the regulations.

XXXXXXXXXX 								2007-022353

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
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-taxpayer. We also acknowledge the information provided in our electronic correspondence.

This letter is based solely on the facts, the proposed Plan and the proposed transaction described below. The documentation submitted in respect of your request does not form part of the facts and proposed transaction and any references thereto are provided solely for the convenience of the reader.

Definitions

1. All terms used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

2. Unless otherwise stated the following terms and expressions have the meanings specified below:

(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Account" means: the notional account maintained by the Company to record the Units granted to a Participant as described in 5(e) and 5(g) below;

(c) "Affiliate" means: a corporation that is related to or associated with the Company within the meaning of the Act;

(d) "Associate" means: an individual who is employed by the Company;

(e) "Board" means: the Board of Directors of the Company;

(f) "Committee" means: the committee appointed by the Board to administer the Plan;

(g) "Company" means: XXXXXXXXXX. which has the business Number XXXXXXXXXX and files its tax returns through the XXXXXXXXXX Tax Services office and the XXXXXXXXXX Taxation Centre. The Company's address is XXXXXXXXXX;

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

(i) "Market Value" means: with respect to a Share on a particular date, the value of a Share then in effect for purchases and sales by the XXXXXXXXXX, an Employee Stock Ownership Plan operated under and in accord with the laws of the United States, through the use of a report by a qualified independent professional appraiser of the value of the shares of privately held enterprises, prepared in accordance with the Uniform Standards of Professional Appraisal Practice and the principles of United States Internal Revenue Service Ruling 59-60;

(j) "Net Cash Wages" means: for the purposes of 5(d) and 5(e) below, the sum of all regular compensation paid by the Company to an Associate, including overtime pay, profit sharing distributions and all other sums which the Associate is required to report as income to the CRA, but does not include any benefit in kind, reimbursement for expenses, housing or other allowances, or employer contributions to the Canada/Quebec Pension Plan;

(k) "Parent" means: XXXXXXXXXX. a corporation incorporated under the laws of XXXXXXXXXX. Parent's address is XXXXXXXXXX;

(l) "Participant" means: an individual who has been granted Units as described in 5(e) or 5(h) below who was an Associate for at least XXXXXXXXXX consecutive months and was still employed by the Company at the time the Units were granted to the individual. However, unless otherwise determined by the Committee, no person who is a United States citizen or who participates in the XXXXXXXXXX may be a Participant;

(m) "Plan" means: the XXXXXXXXXX as described in 5 below;

(n) "Plan Year" means: the period from XXXXXXXXXX of one calendar year through XXXXXXXXXX of the next calendar year;

(o) "Settlement Date" means in respect of a Participant, a day chosen by the Company, which day must be after the Termination Date of the Participant but no later than the last business day in December of the first calendar year commencing after the Termination Date of the Participant;

(p) "Share" means: a share of common stock of the Parent as constituted at the date of the Plan or any shares of other securities into which such Shares have been changed, reclassified, subdivided, consolidated, or converted;

(q) "Termination Date" means: the earliest date on which an Associate:

(i) ceases to be actively and actually employed by the Company for any reason other than transfer to the employment of an Affiliate, whether with or without notice and whether unilaterally or by agreement, or

(ii) ceases to be a member of the Board or of the board of directors of an Affiliate,

provided, however, that there will be a cessation of employment with respect to an Associate who has previously been transferred to an Affiliate where such Affiliate ceases to be an Affiliate;

For greater certainty, no period of notice that is or ought to be given under applicable law will be considered for purposes of determining entitlement under the Plan; and

(r) "Unit" means: a bookkeeping entry credited to the Account of a Participant that will entitle the Participant to receive a cash payment in the amount of the Market Value of one Share as determined in respect of the Settlement Date, reduced to reflect the amount of any applicable taxes and other source deductions required to be withheld by the Company or any Affiliate.

Facts

3. The Company was incorporated under the laws of Canada, is a resident of Canada and is a "taxable Canadian corporation". The Company is a wholly owned subsidiary of the Parent.

Proposed Transaction

4. The Company will establish the Plan for the benefit of Participants effective after the receipt of this advance income tax ruling.

Proposed Plan

5. The salient features of the Plan are as follows:

(a) The Plan will be unfunded and the Company's obligations will constitute general, unsecured obligations, payable solely out of the Company's general assets. No Participant or other person will have any right to any specific assets of the Company or any Affiliate. Neither the Company nor an Affiliate shall segregate any assets for the purpose of funding their obligations with respect to any Units credited to a Participant's Account. Neither the Company nor an Affiliate nor the Committee will be deemed to be a trustee of any amounts to be distributed or paid pursuant to the Plan. No liability or obligation of the Company pursuant to the Plan will be secured or deemed to be secured by any pledge of, or encumbrance on, any property of the Company or any Affiliate;

(b) The Committee or such other committee of the Board as may from time to time be responsible for matters relating to executive compensation will administer the Plan;

(c) A number of Units, if any, will be granted to a Participant in a year at the sole discretion of the Board. However, any such grant of Units will be in respect of the Participant's provision of services as an Associate and will not be made merely to defer income;

(d) To determine the number of Units to be granted to a Participant at the end of a Plan Year and in respect of that Plan Year, the Board may, in its sole and absolute discretion, determine for the benefit of all Participants, a factor, in the nature of a percentage, to be applied to each Participant's Net Cash Wages paid by the Company for that part of the Plan Year in which the Associate was a Participant. The Company may vary this factor from time to time. Furthermore, in the absence of any resolution fixing a different figure by the Board, the factor will be XXXXXXXXXX;

(e) The amount determined by multiplying the percentage determined as described in 5(d) above by each participant's Net Cash Wages paid for that part of the Plan Year in which the Associate was a Participant, will be divided by the then current Market Value of the Shares, to yield the number of Units to be granted to each Participant for that Plan Year;

(f) The Units granted as described in 5(e) above, will be credited to the Participant's Account at the time they are granted;

(g) A Participant's Account will be credited with additional Units on each dividend payment date in respect of any dividends paid on Shares. The number of additional Units so credited on the dividend payment date will be equal to the amount determined by dividing:

(i) the product obtained by multiplying:

(A) the amount of each dividend declared and paid by the Parent on a Share (excluding stock dividends, but including dividends which may be paid in cash or in shares at the option of the shareholder)

by

(B) the number of Units recorded in the Participant's account on the record date for the payment of the dividend;

by

(ii) the Market Value of one Share on the dividend payment date for the dividend;

(h) In the event of:

(i) a stock dividend on the Shares of the Parent (other than a dividend which may be paid in cash or in shares at the option of the shareholder),

(ii) a stock split, combination or exchange of shares,

(iii) a merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization or spin-off,

(iv) a distribution (other than normal cash dividends) of the Parent's or Company's assets to shareholders or

(v) any other change affecting the Shares,

such adjustments as are required to reflect such change will be made with respect to the number of Units outstanding under the Plan provided that any such adjustment shall generally require that the aggregate dollar value of the Units recorded in the Participant's account after the adjustment will be proportionately and appropriately varied so that it will be equal to the aggregate dollar value prior to the adjustment.

(i) A Participant will not be entitled to require payment of any amount on account of Units credited to the Participant's Account prior to the Participant's Termination Date;

(j) On the Settlement Date of each Participant, the Company shall pay to the Participant or, where a transfer or assignment described in 5(k) occurs, to the Participant's legal representative, dependent or relation, as the case may be, an amount in cash, net of any applicable withholdings, where the amount is equal to the number of Units credited to the Participant's Account as of that date multiplied by the Market Value of a Share on the Termination Date;

(k) The rights and interests of a Participant in respect of the Units held in the Participant's Account will not be transferable or assignable other than by will or the laws of succession, to the legal representative of the Participant or, subject to applicable law, to a dependant or relation, as that term is used in paragraph 6801(d) of the Income Tax Regulations, including, without limitation, a spouse of the Participant;

(l) At no time will:

(i) an amount be paid to or in respect of a Participant under the Plan or pursuant to any other arrangement,

(ii) Units be granted to a Participant, or

(iii) any form of benefit be conferred upon or in respect of the Participant;

to compensate for any decrease in the value of the Shares;

(m) Subject to 5(p) below, the Board may, in its sole discretion and without the consent of any Associate, amend the Plan at any time; provided that:

(i) no amendment will reduce the number of Units credited to any Participant prior to such amendment, and

(ii) no amendment will be effective until all applicable approvals, if any, of regulatory authorities and stock exchanges have been obtained;

(n) Subject to 5(p) below, the Board may, in its sole discretion and without the consent of any Participant, terminate the Plan at any time. Following termination of the Plan, no Units will be credited to the accounts of Participants except as described in 5(g) above. Notwithstanding a termination of the Plan, all amounts distributable under the Plan shall be paid to the persons entitled thereto on the date on which distributions would have been made had the Plan not been terminated;

(o) Subject to 5(p) below, the Committee is authorized to interpret, construe and administer the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations and perform all other acts that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable; and

(p) Notwithstanding 5(m), 5(n) and 5(o) above, all actions of the Board and the Committee shall be such that the Plan will continuously meet the conditions of paragraph 6801(d) of the Income Tax Regulations.

Purpose of Proposed Plan

16. The Plan is intended to enhance the Company's ability to attract and retain talented individuals to serve as Associates of the Company and to promote a greater alignment of interests between such Associates and the shareholders of the Parent and the Company.

Additional Information

17. To the best of your knowledge and that of the parties identified above, none of the issues raised in this ruling are:

(a) in an earlier return of any of the parties or a related person,

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the parties or a related person,

(c) under objection by any of the parties or a related person,

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or

(e) the subject of a ruling previously issued to any of the parties or a related person by the Income Tax Rulings Directorate of CRA.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transaction, the proposed Plan and purpose of the proposed transaction, that the transaction is legally effective and that the transaction is completed as proposed, we rule as follows:

A. Provided the Plan remains unfunded, the Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.

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

C. No amount will be included in a Participant's income pursuant to subsection 5(1), section 6, or paragraph 56(1)(a) and subparagraph 115(1)(a)(i) of the Act solely as a result of the implementation of the Plan, or the award of a Unit under the Plan as described in 5(e) or 5(g) above.

D. Except to the extent ruling F applies, amounts received under the Plan, by a Participant who is a resident of Canada at the time of the receipt, including any amounts withheld therefrom, will be included in the income of the Participant pursuant to subsection 5(1) of the Act in the year the amount is received.

E. Except to the extent ruling F applies, amounts received under the Plan, by a Participant who is not a resident of Canada at the time of the receipt, to the extent the amount is attributable to services performed in Canada and, if the Participant was resident in Canada at the time he or she performed the services, outside Canada, including any amounts withheld, will be included in the income of the Participant pursuant to subsection 5(1) and subparagraph 115(1)(a)(i) of the Act in the year the amount is received.

F. All amounts payable under the Plan as a result of a Participant's death as described in 5(j) above pursuant to an event described in 5(k) above 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.

G. Provided the Market Value used in 5(j) above is the fair market value of a Share on the Termination Date, the Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act, by virtue of the Plan qualifying as a prescribed plan or arrangement pursuant to paragraph 6801(d) of the Regulations.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, where the Company makes a payment described in D, E, or F above, to or in respect of a Participant, the Company will be entitled to deduct the amount paid, including any amounts withheld, in calculating its income for the year in which the payment is made in accordance with section 9 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.

Comments

1. Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any other tax consequences relating to the facts, the proposed transaction or the proposed Plan or any transaction or event taking place either prior to the implementation of the proposed transaction or the Plan or subsequent to the implementation of the proposed transaction or Plan, whether described in this letter or not, other than those specifically described in the rulings given above.

2. 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 proposed transaction.

Yours truly,

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