2010 Ruling 2010-0376531R3 - Plan with DSUs and 3-year bonus deferral PSUs

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: Will a plan that includes both a deferred share unit component and a separate 3-year bonus component be considered a salary deferral arrangement?

Position: No.

Reasons: The DSU portion of the plan satisfies paragraph 6801(d) of the Income Tax Regulations. The PSU portion of the plan satisfies the exception in paragraph (k) of the definition "salary deferral arrangement".

XXXXXXXXXX
									2010-037653
									XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX (hereinafter individually referred to as a "Participating Corporation" and collectively referred to as the "Participating Corporations"). We also acknowledge our telephone conversations of XXXXXXXXXX and your emails of XXXXXXXXXX regarding this matter.

We understand that, to the best of your knowledge and that of the above-referenced Participating Corporations, none of the issues involved in the ruling request are:

(i) in an earlier return of the Participating Corporations 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 Participating Corporations or a related person;

(iii) under objection by the Participating Corporations 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 by the Income Tax Rulings Directorate.

Definitions

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

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

b) "Affiliate" means an affiliate of a Participating Corporation as that term is defined in paragraph 8(b) of the Agency's Interpretation Bulletin IT-337R4, Retiring Allowances;

c) "Award" means an award of DSUs and/or PSUs granted by a Committee to a Participant in accordance with the Plan;

d) "Award Date" means the effective date of the grant of an Award;

e) "Award Notice" means the notice, in such form as may be prescribed by the applicable Committee from time to time, evidencing an Award and setting out the Vesting Conditions applicable to such Award;

f) "Beneficiary" means a dependant or relation of a Participant who, on the date of the Participant's death, is the individual who has been designated as the Participant's beneficiary under the Plan in accordance with applicable law, or where no such individual has been validly designated by the Participant, or where the individual does not survive the Participant, the Participant's legal representative;

g) "Board" means the Board of Directors of XXXXXXXXXX ;

h) "Bonus" means the annual XXXXXXXXXX cash bonus of a Senior Executive;

i) "Bonus Award Value" means a notional value determined for a Participant by the applicable Committee equal to the amount of a Participant's Bonus to be used to determine the number of DSUs to be granted to such Participant as an Award in respect of such Bonus;

j) "Committee" means the Compensation Committee of the applicable Board of Directors of each of the Participating Corporations;

k)	"Disability" means a mental or physical impairment which renders a Participant unable to perform the duties of employment that the Participant was engaged to perform before the commencement of the impairment and which qualifies as a 	long term disability under the applicable group insurance plan of the Participating 	Corporation under which the Participant is covered;

l) "Dividend Equivalents" means additional DSUs and/or PSUs credited as set out in 5(i) below;

m) "DSU" means a notional unit granted to a Participant that is represented by a bookkeeping entry, the value of which on any particular date shall be equal to the Market Value;

n) "DSU Account" means a notional account maintained, or caused to be maintained, by a Participating Corporation for each Participant employed by that Participating Corporation, recording at all times the number of DSUs and Dividend Equivalents standing to the credit of a particular Participant;

o) "DSU Plan" means the portion of the Plan under which DSUs will be granted to a Participant;

p) "DSU Termination Date" has the meaning ascribed thereto in 5(o) below;

q) "Initial Award Value" means a notional value determined for a Participant by the applicable Committee equal to the amount of a Participant's Performance Award in respect of a particular calendar year to be used to determine the number of DSUs and/or PSUs to be granted to such Participant as an Award in respect of such Performance Award;

r) "XXXXXXXXXX " means XXXXXXXXXX and any successor corporation, whether by amalgamation, merger or otherwise;

s) "Market Value" means, with respect to any particular date, the average closing price per Share on the Stock Exchange during the immediately preceding twenty Trading Days;

t) "Participant" means a Senior Executive who has received an Award;

u) "Performance Award" has the meaning ascribed thereto in 4 below;

v) "Performance Period" means, with respect to a Performance Award, the 3-year period that begins on XXXXXXXXXX of the year that includes the Award Date of such Award and ends on XXXXXXXXXX of the second calendar year commencing after such Award Date;

w) "Plan" means the XXXXXXXXXX , including any schedules and appendices thereto, as amended from time to time;

x) "PSU" means a notional unit granted to a Participant that is represented by a bookkeeping entry, the value of which on any particular date shall be equal to the Market Value;

y) "PSU Account" means a notional account maintained, or caused to be maintained, by a Participating Corporation for each Participant employed by that Participating Corporation, recording at all times the number of PSUs and Dividend Equivalents standing to the credit of a particular Participant;

z) "PSU Plan" means the portion of the Plan under which PSUs will be granted to a Participant;

aa) "Regulation 6801(d)" means paragraph 6801(d) of the Income Tax Regulations;

bb) "Senior Executive" means any person employed by a Participating Corporation who holds the office of Chief Executive Officer, President, Executive Vice President, Senior Vice President or Vice President of a Participating Corporation or is otherwise ranked in job grade XXXXXXXXXX or above, and any other employee of a Participating Corporation who is designated, or is a member of a class of employee that is designated, by a Committee as a "Senior Executive" eligible to participate in the Plan;

cc) "Share" means a common share of XXXXXXXXXX and such other share as may be substituted for it as a result of amendments to the articles of XXXXXXXXXX , reorganization or otherwise;

dd) "Stock Exchange" means the XXXXXXXXXX Stock Exchange, or if the Shares are not listed on The XXXXXXXXXX Stock Exchange, such other stock exchange on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market;

ee) "Termination Date" means the date on which a Participant ceases to hold any position with a Participating Corporation or any Affiliate as a director, officer or employee, and, for greater certainty, shall not be before the date on which the Participant's employment with a Participating Corporation or any Affiliate ceases under applicable law;

ff) "Trading Day" means any date on which the Stock Exchange is open for the trading of Shares and on which Shares are actually traded;

gg) "Vested" means the applicable Vesting Conditions in relation to a whole or a percentage of the DSUs and/or PSUs included in an Award made pursuant to the Plan (i) have been met; or (ii) have been waived or deemed to be met pursuant to the Plan and "Vesting" has a comparable meaning;

hh) "Vesting Conditions" means (a) such financial and/or personal performance criteria as may be determined by a Committee in respect of an Award to any Senior Executive or Executives and set out in an Award Notice. Such criteria may relate to XXXXXXXXXX; and (b) such criteria relating to continued service with the Participating Corporations for a period of time as may be determined by a Committee;

ii) "Vesting Date" means the earliest date as of which the applicable Vesting Conditions for a DSU or PSU are met, deemed to have been met or waived as provided in the Plan, which date is, in respect of a PSU, no later than XXXXXXXXXX of the third calendar year following the calendar year in which the services were rendered; and

jj) "U.S. Taxpayer" means an individual who is a U.S. citizen or a U.S. permanent resident for the purposes of the United States Internal Revenue Code.

Facts

1. The Participating Corporations are incorporated under the laws of Canada. The Participating Corporations are each wholly-owned subsidiaries of XXXXXXXXXX . XXXXXXXXXX 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 Participating Corporations are engaged in the business of XXXXXXXXXX . The Participating Corporations, and XXXXXXXXXX , each have a XXXXXXXXXX taxation year end.

2. XXXXXXXXXX file their tax returns with the XXXXXXXXXX Taxation Centre and are located within the area served by the XXXXXXXXXX Tax Services Offices. The XXXXXXXXXX files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3. The Participating Corporations each currently provide annual Bonus payments to certain Senior Executives in respect of employment services rendered by them in the particular calendar year. Each Senior Executive may receive a Bonus on business objectives over the course of a calendar year as soon as practicable following the end of the applicable year.

4. The Participating Corporations now wish to adopt the Plan to provide certain Senior Executives with an additional annual incentive award of DSUs and/or PSUs (the "Performance Award"), which will be awarded to Senior Executives in respect of employment duties performed by the Senior Executives on behalf of the applicable Participating Corporation in a particular calendar year. The Performance Award will be provided in addition to and not in lieu of regular or normal salary that could be received by a Senior Executive in a particular taxation year, and in addition to any Bonus that Senior Executive may receive in respect of that calendar year. The amount of a Senior Executive's Performance Award for any calendar year will be determined by the applicable Committee based on sales, expense and earnings targets of the applicable Participating Corporation and/or individual job performance. The Performance Award will be subject to the satisfaction of certain Vesting Conditions applicable to the Performance Period. The Plan would also allow certain Senior Executives to elect to receive all or a portion of their Bonus for a particular calendar year in the form of DSUs.

5. The salient features of the Plan are described below.

(a) No Award will be made under the Plan to Senior Executives who are XXXXXXXXXX .

(b) The DSU Plan will be administered by a separate Committee for each Participating Corporation with respect to the Participants employed by that Participating Corporation.

(c) The PSU Plan will be administered by a separate Committee for each Participating Corporation with respect to Participants employed by that Participating Corporation.

(d) Each Committee shall, in its sole discretion, determine the Participants under the Plan, the DSU Plan and the PSU Plan. For greater certainty, the making of an election to receive DSUs and/or PSUs shall not, in and of itself, entitle a Senior Executive to an Award under either or both of the DSU Plan and the PSU Plan.

(e) Each Participating Corporation will maintain in its books a DSU Account and a PSU Account for each Participant under the Plan recording the number of DSUs and PSUs, respectively, standing to the credit of the Participant.

(f) Under the Plan, certain Senior Executives may elect irrevocably to receive all or a portion of (i) their Bonus, if any, for any calendar year, and/or (ii) their Performance Award for any calendar year, in the form of DSUs. To the extent that any Bonus is not to be received in the form of DSUs such value shall be paid in cash as soon as practicable after the end of the calendar year to which the Bonus relates. To the extent that any Performance Award is not to be received in the form of DSUs it will be received in the form of PSUs. More specifically:

(i.) Senior Executives at job grade XXXXXXXXXX :

(i.1) Will receive their entire Bonus, if any, for any calendar year in cash shortly after the end of the calendar year, with no right to elect to receive any portion of their Bonus in the form of DSUs; and

(i.2) Will receive their entire Performance Award for a particular calendar year in the form of PSUs with no right to elect to receive a portion of that Performance Award in the form of DSUs; and

(ii.) Senior Executives at job grade XXXXXXXXXX and above:

(ii.1) May elect irrevocably to receive all or a portion (subject to any limitations on such portion as may be specified in the Award) of their Bonus Award Value determined in respect of their Bonus, if any, for any calendar year commencing after the election in the form of DSUs with the remainder of their Bonus, if any, to be paid in cash shortly after the end of the calendar year; and

(ii.2) May elect irrevocably to receive all or a portion (subject to any limitations on such portion as may be specified in the Award) of the Initial Award Value determined in respect of their Performance Award for a calendar year commencing after the election in the form of DSUs and the remainder of that Initial Award Value in the form of PSUs.

(g) Unless otherwise determined by a Committee, having regard to the recommendations of the Senior Executive(s) then holding the office of Chief Executive Officer, or President and Chief Executive Officer, as applicable, of the applicable Participating Corporation, where an Award is made to a Participant the number of DSUs and PSUs in the Award shall be determined as follows:

(i.) Where an Award is made to a Senior Executive at Job Grade XXXXXXXXXX , the number of PSUs in the Award shall be determined by dividing the Initial Award Value of the Award by the Market Value on the Award Date; and

(ii.) Where an Award is made to a Senior Executive at Job Grade XXXXXXXXXX or above:

(ii.1) The number of DSUs in the Award shall be determined as the sum of (i) the amount obtained by dividing the portion of the Bonus Award Value of the Award that the Participant elected (i.e. in accordance with 5(f)(ii) above) to receive in the form of DSUs by the Market Value on the Award Date and (ii) the amount obtained by dividing the portion of the Initial Award Value of the Award that the Participant elected (i.e. in accordance with 5(f)(ii) above) to receive in the form of DSUs by the Market Value on the Award Date; and

(ii.2) The number of PSUs in the Award shall be determined by dividing the portion of the Initial Award Value of the Award that the Participant elected (i.e. in accordance with 5(f)(ii) above) to receive in the form of PSUs by the Market Value on the Award Date.

(h) For greater certainty,

(i.) No PSU granted under the Plan can be converted to a DSU, and all PSUs granted under the Plan must be settled no later than XXXXXXXXXX of the third calendar year following the end of the calendar year in which the related services were rendered; and

(ii.) No DSU granted under the Plan can be converted to a PSU.

(i) In the event that any cash dividend or other cash distribution is paid by XXXXXXXXXX on the Shares, a Participant's DSU Account and/or PSU Account will be credited with additional DSUs and/or PSUs, as applicable. The number of such additional DSUs and/or PSUs will be calculated by dividing the cash dividends or other cash distribution that would have been paid to a Participant if the DSUs and/or PSUs recorded in his or her DSU Account and/or PSUs Account as at the date of payment for the cash dividend or other cash distribution had been Shares, by the Market Value on such payment date. The additional DSUs and/or PSUs credited to a Participant's DSU Account and PSU Account, as applicable, will be subject to the same terms and conditions, including Vesting Conditions and settlement terms, as the PSUs and DSUs in respect of which the additional DSUs and/or PSUs were credited.

(j) In the event of any stock dividend or any alteration in the number or class of, or change in, the Shares resulting from any subdivision, consolidation or reclassification of, or other change in, the Shares or the amalgamation, consolidation or merger of XXXXXXXXXX , or other relevant changes in the capital of XXXXXXXXXX , such proportionate adjustments, if any, as are appropriate to reflect such change, will be made with respect to the number of DSUs and PSUs outstanding under the Plan, all as determined by the applicable Committee in its sole discretion, provided that any such adjustment shall require that the aggregate dollar value of the DSUs and PSUs credited in a Participant's DSU Account and PSU 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. The DSUs and/or PSUs credited to a Participant's DSU Account and PSU Account, as applicable, after such adjustment will be subject to the same terms and conditions, including Vesting Conditions and settlement terms, as the underlying DSUs and PSUs in respect of which the adjustment was made.

(k) Any DSUs and/or PSUs awarded to a Participant that do not become Vested shall be forfeited by the Participant and no cash or other compensation shall at any time be paid to a Participant or any other person in respect of any DSUs and/or PSUs which do not become Vested.

(l) Vested PSUs shall be settled on or as soon as reasonably practicable following the date on which the Committee makes its determination as to the Vesting thereof and in any event no later than XXXXXXXXXX of the year following the year that includes the Vesting Date thereof.

(m) Notwithstanding the preceding paragraph, Vested PSUs granted in respect of services rendered in a taxation year shall be settled no later than December 31 of the third calendar year following the end of the particular year in which the services were rendered.

(n) Settlement of PSUs shall be made by way of a cash payment (net of applicable statutory withholdings) to the Participant or his or her Beneficiary, as the case may be, of an aggregate amount equal to the product of the Market Value as of the Vesting Date multiplied by the number of Vested PSUs then being settled.

(o) No amount is payable to a Participant or, where the Participant has died, his or her Beneficiary, under the DSU Plan prior to the Participant's Termination Date. A Participant or, where the Participant has died, his or her Beneficiary, may elect the date as of which the DSUs credited to the Participant's DSU Account will be redeemed (such date is referred to herein as the "DSU Termination Date") by providing the relevant Participating Corporation with notice. No DSU Termination Date elected by a Participant or Beneficiary may be earlier than the Participant's Termination Date or later than XXXXXXXXXX of the calendar year commencing immediately after the Termination Date (the "Final Settlement Date"). Where a Participant or Beneficiary does not elect a particular date within the permissible period set out above as the Participant's DSU Termination Date, he or she will be deemed to have elected to have the DSUs credited to the Participant's DSU Account redeemed on the Final Settlement Date. The Market Value of the DSUs credited to the Participant's DSU Account as at the DSU Termination Date or Final Settlement Date, as applicable, will be paid to the Participant or, where the Participant has died, his or her 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 Final Settlement Date, as applicable.

(p) Notwithstanding any other provision of the DSU Plan, all amounts payable to, or in respect of, a Participant will be paid on or before December 31 of the calendar year commencing immediately after the Participant's Termination Date.

(q) Where a Participant dies or retires, any unvested DSUs and PSUs then credited to the Participant's DSU Account and PSU Account will be deemed to be Vested as of the Participant's date of death or retirement. Performance measures, if any, applicable to the DSUs and PSUs, for any periods not completed at the time of death or retirement will be deemed to have reached the XXXXXXXXXX % level.

(r) Where a Participant experiences a Disability, the terms of the Plan and the relevant Award Notice will continue to apply to such Participant, except that performance measures, if any, applicable to the DSUs and PSUs, for the year in which the Disability commences and for the subsequent years during which the Disability continues, will be deemed to have reached the XXXXXXXXXX % level.

(s) The DSU Plan and the PSU Plan may be amended or terminated at any time by the Board, but no amendment of the DSU Plan and the PSU Plan will, without the consent of the Participant, affect the rights of a Participant with respect to DSUs and/or PSUs, as applicable, which were credited to his or her DSU Account or PSU Account prior to the date of such DSU Plan and/or PSU Plan amendment and no termination of the Plan will affect the entitlement of any Participant to payment in respect of DSUs and PSUs credited to his or her DSU Account and PSU Account prior to the date of such Plan termination. Notwithstanding the foregoing, any amendment or termination of the DSU Plan will be such that the DSU Plan continuously meets the requirements of Regulation 6801(d) or any successor provision thereto. In the event the DSU Plan is terminated, the DSU Plan will continue to exist until such time as the last remaining Participant in the DSU Plan receives a payment in satisfaction of all DSUs credited to the Participant's DSU Account on the Participant's Termination Date, and further, no amendment or termination will accelerate the payment of amounts under the DSU Plan to Participants.

(t) Notwithstanding any other provision of the DSU Plan, the value of a DSU will always depend on the fair market value of the Shares and no additional DSUs, other benefit, or amount will be granted to a Participant, or to a person not dealing at arm's length with the Participant to compensate for a downward fluctuation in the price of any such Shares.

(u) The Plan shall be an unfunded obligation of the Participating Corporations.

Proposed Transactions

6. The Plan will be established for the benefit of Senior Executives effective XXXXXXXXXX .

Purpose of the Proposed Transactions

7. The purpose of adopting the Plan and crediting DSUs and PSUs, respectively, to the DSU Accounts and PSU Accounts for the benefit of Senior Executives who participate in the Plan is to align the interests of the Senior Executives with those of the shareholders of the Participating Corporations.

Rulings

Provided 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 proposed transactions are as described above, we rule as follows:

A. The DSU Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act, by virtue of the DSU Plan qualifying as a prescribed plan or arrangement pursuant to Regulation 6801(d).

B. The PSU Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act, by reason of the exception under paragraph (k) of that definition, provided that Vested PSUs are settled as described in 5(m) and 5(n) above.

C. No amount will be included in the income of any Participant 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 or PSUs to a Participant's DSU Account or PSU Account under the DSU Plan or PSU Plan, as applicable.

D. Amounts received under the DSU Plan and the PSU Plan by a Participant 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 Participant pursuant to subsection 5(1) of the Act in the year of receipt.

E. Amounts received under the DSU Plan and the PSU Plan by a Participant who is not 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 Participant under subsection 5(1) and subparagraph 115(1)(a)(i) of the Act in the year of receipt to the extent such amounts are attributable to services performed by the Participant in Canada and, if the Participant was resident in Canada at the time he or she performed the services, outside Canada.

F. All amounts payable under the DSU Plan and the PSU Plan to the Beneficiary of a Participant will constitute a right or thing held by the deceased Participant 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 a Participating Corporation, in respect of services rendered by a Participant to the Participating Corporation, to the Participant or if the Participant has died, the Participant's Beneficiary, of amounts described in Rulings D, E, or F above, including any amount withheld in respect of taxes and other source deductions, will be deductible by the Participating Corporation 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 Canada Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX .

Comments

The rulings given herein are based solely on the facts and proposed transactions described above. The documentation submitted with your request does not form part of the facts and proposed transactions and any references to the documentation are provided solely for the convenience of the reader.

Further, 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