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 plan in accordance with paragraph 6801(d) of the Regulations?
Position: Yes.
Reasons: Complies with the Regulations.
XXXXXXXXXX
2010-035312
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") - XXXXXXXXXX
This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation, your telephone conversation of XXXXXXXXXX , your letters dated XXXXXXXXXX and your emails of XXXXXXXXXX .
We understand that, to the best of your knowledge and that of the above-referenced Corporation, 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; nor,
(v) the subject of a ruling previously issued by the Directorate.
Definitions
Unless otherwise stated, the following terms and expressions have the meanings specified below:
a) "Act" means the Income Tax Act (Canada), as amended from time to time.
b) "Affiliate" means an affiliate of the Corporation as that term is defined in paragraph 8 of the Canada Revenue Agency's Interpretation Bulletin IT-337R4, Retiring Allowances.
c) "Beneficiary" means a dependant or relation of an Executive who, on the date of the Executive's death, is the individual who has been designated as the Executive's beneficiary under the Plan in accordance with applicable law, or where no such individual has been validly designated, or where the individual designated does not survive the Executive, the Executive's legal representative.
d) "Board" means the board of directors of the Corporation.
e) "Business Day" means a day on which the Shares trade on the XXXXXXXXXX Stock Exchange.
f) "Committee" means the XXXXXXXXXX of the Board or such other committee of the Board which may be appointed by the Board to, among other things, interpret administer and implement the Plan.
g) "CRA" means the Canada Revenue Agency.
h) "Deferred Share Unit" or "DSU" means a bookkeeping entry on the books of the Corporation, equivalent in value to a Share.
i) "DSU Account" means the account maintained, or caused to be maintained, by the Corporation in respect of the Plan, recording at all times the number of DSUs standing to the credit of an Executive.
j) "Executive" means any employee of the Corporation who holds the office of senior vice-president and above, other than the Chief Executive Officer of the Corporation, and any employee of a Related Corporation who is designated, or who is a member of a class of employee that is designated, by the Committee as eligible to participate in the Plan.
k) "Final Settlement Date" has the meaning ascribed thereto in 15, below.
l) "Fiscal Year" means a fiscal year of the Corporation, which, until changed by the Corporation, is the approximate 12 month period ending on XXXXXXXXXX in each year XXXXXXXXXX .
m) "Market Value" means, on a particular date, the volume weighted average price at which the Shares traded on the XXXXXXXXXX Stock Exchange for the five Business Days immediately prior to such date.
n) "Plan" means the XXXXXXXXXX described in more detail in 5 to 19 below, as amended from time to time.
o) "Regulation 6801(d)" means paragraph 6801(d) of the Income Tax Regulations.
p) "Related Corporation" means a corporation related to the Corporation for purposes of the Act.
q) "Settlement Date" has the meaning ascribed thereto in 15, below.
r) "Share" means a XXXXXXXXXX Share in the capital of the Corporation.
s) "STIP" means the Corporation's short term incentive plan, as amended or replaced from time to time.
t) "STIP Compensation" means the amount of compensation payable in respect of a Fiscal Year to an Executive pursuant to the STIP.
u) "Termination Date" means the date on which an Executive ceases to hold any position with the Corporation or any Affiliate as a director, officer or employee, and, for greater certainty, shall not be before the date on which the Executive's employment with the Company or any Affiliate ceases under applicable law.
Facts
1. The Corporation is incorporated under the laws of XXXXXXXXXX . It is a public corporation and a taxable Canadian corporation as those terms are defined in subsection 89(1) of the Act. The Shares are traded on the XXXXXXXXXX Stock Exchange. The Corporation is engaged in the XXXXXXXXXX . Through its subsidiaries, the Corporation also provides XXXXXXXXXX services.
2. The Corporation files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
3. The Corporation has, for a number of years maintained the STIP. The STIP is a cash-based annual incentive plan pursuant to which an employee of the Corporation or a subsidiary of the Corporation may receive a cash award based on business objectives over the course of a Fiscal Year as soon as practicable following the end of the applicable Fiscal Year. The current Fiscal Year will end on XXXXXXXXXX .
4. The Corporation will establish the Plan subject to the receipt of an advance income tax ruling from the CRA that the Plan is a prescribed plan or arrangement as described in Regulation 6801(d), as a new incentive plan for Executives. The salient features of the Plan are as described below.
5. The Plan will be administered by the Committee.
6. Under the Plan, Executives may elect to receive all or a portion of their STIP Compensation for any Fiscal Year commencing after XXXXXXXXXX in the form of DSUs. An election as described herein will apply to STIP Compensation that may become payable to the Executive in respect of Fiscal Years commencing after the date on which such election is made and, except as provided in 8 and 10, below, will be irrevocable by the Executive.
7. In order to elect to participate in the Plan with respect to Fiscal Years after the Fiscal Year commencing XXXXXXXXXX an Executive must complete and deliver to the secretary or assistant secretary of the Corporation a written notice by the last day of the Fiscal Year immediately preceding the first Fiscal Year to which the election is to apply.
8. In order to elect to participate in the Plan with respect to STIP Compensation for the Fiscal Year commencing XXXXXXXXXX (being the first Fiscal Year in respect of which DSUs may be credited under the Plan) an Executive must complete and deliver to the secretary or assistant secretary of the Corporation an initial written election no later than XXXXXXXXXX , which is the last day of the immediately preceding Fiscal Year. Such election will expressly provide that it is subject to receipt by the Corporation of an advance income tax ruling from the CRA that the Plan is a "prescribed plan or arrangement" as described in Regulation 6801(d). In the event that such a ruling is not received prior to the end of the Fiscal Year commencing XXXXXXXXXX , no DSUs will be credited to any Executive's DSU Account with respect to STIP Compensation for such Fiscal Year, notwithstanding any election to participate in the Plan.
9. An Executive who elects to participate in the Plan with respect to a particular Fiscal Year may choose to receive a fixed dollar amount or a percentage (up to 100%) of such Executive's potential STIP Compensation in the form of DSUs, provided that, notwithstanding any election by an Executive, the Committee will have discretion to decline to award DSUs to an Executive in respect of a particular Fiscal Year. Where the Committee declines to award DSUs to an Executive for a Fiscal Year notwithstanding his or her election, the Executive will be eligible to receive STIP Compensation in cash as if he or she had not elected to participate in the Plan for such Fiscal Year.
10. An Executive who has filed an election to participate in the Plan may change or revoke such election by filing a written notice to that effect with the secretary or assistant secretary of the Corporation. In the case of a notice of change, it will specify the new dollar amount or percentage of the Executive's STIP Compensation which he or she wishes to receive in the form of DSUs under the Plan. A notice of change or revocation in respect of a previously filed election under the Plan will be effective with respect to STIP Compensation for Fiscal Years commencing after the notice is filed with the Corporation.
11. For the purpose of determining the number of DSUs to be awarded to an Executive who has elected to participate in the Plan for a Fiscal Year, the Committee will initially compute the amount of STIP Compensation that would have been awarded to the Executive had such employee not elected to participate in the Plan for the particular Fiscal Year. The Committee will then credit a number of DSUs (including fractional DSUs) to the Executive's DSU Account equal to: (1) where the Executive has elected to receive a fixed dollar amount of his or her STIP Compensation in the form of DSUs, the amount determined by dividing such fixed dollar amount (or the full of amount of the Executive's STIP Compensation for the particular Fiscal Year if less), by the Market Value as at the 10th Business Day following the release of the Corporation's financial statements for the particular Fiscal Year; (2) where the Executive has elected to receive a percentage of his or her STIP Compensation in the form of DSUs, the amount determined by dividing: (a) the product of the percentage amount elected by the Executive multiplied by the Executive's STIP Compensation for the particular Fiscal Year by (b) the Market Value as at the 10th Business Day following the release of the Corporation's financial statements for the particular Fiscal Year.
12. The Corporation will maintain in its books a DSU Account for each Executive under the Plan recording the number of DSUs standing to the credit of the Executive. DSUs awarded to an Executive in respect of STIP Compensation for a Fiscal Year will be credited to such Executive's DSU Account on the date on which such STIP Compensation would otherwise be payable to the Executive in accordance with the terms of the STIP and the Corporation's administrative practices with respect to the STIP.
13. In the event that any cash dividend or other cash distribution is paid by the Corporation on Shares, an Executive's DSU Account will be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the dividends or other cash distribution that would have been paid to an Executive if the DSUs recorded in his or her DSU Account as at the date of payment for the cash dividend or other distribution had been Shares, by the Market Value on such payment date.
14. In the event of any alteration in the number or class of, or change in, the Shares of the Corporation resulting from any subdivision, consolidation or reclassification of, or other change in, the Shares or the amalgamation, consolidation or merger of the Corporation, or other relevant changes in the capital of the Corporation, such proportionate adjustments, if any, as are appropriate to reflect such change, will be made with respect to the number of DSUs outstanding under the Plan, provided that any such adjustment shall generally require that the aggregate dollar value of the DSUs recorded in the Executive's DSU 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.
15. No amount is payable to an Executive under the Plan prior to his or her Termination Date. An Executive may elect the date as of which the DSUs credited to his or her DSU Account will be redeemed (such date is referred to herein as the "Settlement Date") by providing the Corporation with not less than XXXXXXXXXX calendar days notice. No Settlement Date elected by an Executive may be earlier than the Executive's Termination Date or later than the last Business Day of the calendar year commencing immediately after the Termination Date (the "Final Settlement Date"). Where an Executive does not elect a particular date within the permissible period set out above as his or her Settlement Date, he or she will be deemed to have elected to have the DSUs credited to his or her DSU Account redeemed on the Final Settlement Date. The Market Value of the DSUs credited to the Executive's DSU Account as at the Settlement Date will be paid to the Executive as a lump sum in cash, after deduction of any applicable taxes and other source deductions required to be withheld, as soon as practicable after the Settlement Date or on the Final Settlement Date, as applicable.
16. In the event of an Executive's death prior to the payment to the Executive of the Market Value of his or her DSUs in accordance with 15, above, the Executive's Beneficiary may elect a Settlement Date for the DSUs credited to the deceased Executive's DSU Account by providing the Corporation with not less than XXXXXXXXXX calendar days notice. No Settlement Date elected by an Executive's Beneficiary may be earlier than the Executive's Termination Date or later than the Final Settlement Date in respect of the Executive. Where an Executive's Beneficiary does not elect a particular date within the permissible period set out above as the Settlement Date the Executive's Beneficiary will be deemed to have elected to have the DSUs credited to the Executive's DSU Account redeemed on the Final Settlement Date. The Market Value of the DSUs credited to the deceased Executive's DSU Account as at the Settlement Date or Final Settlement Date, as applicable, will be paid to the Executive's Beneficiary as a lump sum in cash, after deduction of any applicable taxes and other source deductions required to be withheld, as soon as practicable after the Settlement Date or on the Final Settlement Date, as applicable.
17. Notwithstanding any other provision of the Plan, all amounts payable to, or in respect of, an Executive will be paid on or before XXXXXXXXXX of the calendar year commencing immediately after the Executive's Termination Date.
18. The Plan may be amended or terminated at any time by the Board, but no amendment of the Plan will, without the consent of the Executive, affect the rights of an Executive with respect to DSUs which were credited to his or her DSU Account prior to the date of such Plan amendment and no termination of the Plan will affect the entitlement of any Executive to payment in respect of DSUs credited to his or her Account prior to the date of such Plan termination. Notwithstanding the foregoing, any amendment or termination of the Plan will be such that the Plan continuously meets the requirements of Regulation 6801(d) or any successor provision thereto. In the event the Plan is terminated, the Plan will continue to exist until such time as the last remaining Executive in the Plan receives a payment in satisfaction of all DSUs credited to the Executive's DSU Account on the Executive's Termination Date, and further, no amendment or termination will accelerate the payment of amounts under the Plan to Executives.
19. Notwithstanding any other provision of the Plan, the value of a DSU will always depend on the fair market value of Shares of the Corporation and no additional DSUs, other benefit, or amount will be granted to an Executive, or to a person not dealing at arm's length with the Executive, to compensate for a downward fluctuation in the price of any such Shares.
Proposed Transaction
20. The Corporation will establish the Plan and credit DSUs to DSU Accounts for the benefit of Executives who have elected to participate in the Plan to the extent that such Executives become entitled to STIP Compensation for Fiscal Years commencing after XXXXXXXXXX .
21. Subject to the issuance of a favourable income tax ruling, the Plan is to be effective as of XXXXXXXXXX .
Purpose of the Proposed Transaction
22. The purpose of establishing the Plan and crediting DSUs to the DSU Accounts for the benefit of Executives who elect to participate in the Plan is to align the interests of the Executives with those of the shareholders of the Corporation, demonstrate that the Executives are financially committed to the Corporation through a personal investment in DSUs and promote the Corporation's long-standing commitment to sound corporate governance.
Rulings
Provided 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:
A. 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.
B. Provided that 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 the income of any Executive 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 crediting of DSUs to an Executive's Account under the Plan, as described in 11, 12 and 13 above.
D. Amounts received under the Plan by an Executive who is a resident of Canada at the time of receipt, including any amount withheld in respect of taxes and other source deductions, will be included in the income of the Executive pursuant to subsection 5(1) of the Act in the year of receipt.
E. Amounts received under the Plan, by an Executive 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 Executive was resident in Canada at the time he or she performed the services, outside Canada, including any amounts withheld in respect of taxes and other source deductions, will be included in the income of the Executive 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 to the Beneficiary of an Executive, as described in 16 above, will constitute a right or thing held by the deceased Executive at the time of death for purposes of subsections 70(2) and 70(3) of the Act.
G. Subject to paragraph 18(1)(a) and section 67 of the Act, payments by the Corporation or an Affiliate, in respect of services provided by an Executive to the Corporation or the Affiliate, as applicable, to the Executive or if the Executive has died, the Executive's Beneficiary, of amounts described in D, E, or F above, including any amount withheld in respect of taxes and other source deductions, will be deductible by the Corporation or the Affiliate, as applicable, 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 transaction is completed by XXXXXXXXXX .
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or the proposed Plan or any transaction or event taking place either prior or subsequent to the implementation of the proposed Plan, whether described in this letter or not, other than those specifically described in the rulings given above.
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
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