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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1)Whether arrangement is exempted from SDA definition by virtue of 6801(d); 2) whether amounts payable after death are "death benefit"; 3) whether amounts payable after death are included in deceased's income or recipient's income by virtue of 70(1) or 70(2).
Position:
1)Yes; 2) No; 3) amount paid after death and payable because of termination of employment before death or payable because of death are "rights or things" to which 70(2) and 70(3) apply.
Reasons:
1)Routine - see ruling E9626393; 2) Amount payable because of death out of a deferred compensation plan (whether funded or unfunded) is not payable in recognition of service but because of performance; 3) amount out of plan is not an amount "payable periodically". See para. 3 of IT-210R2 re accrued salary or wages under 70(1) and E52327, E9126270 & E911866 re bonus & additional forms of remuneration as 70(1) amounts; and para. 14 of IT-212R3 re additional compensation payable (albeit out of EBP) in the event of death as 70(2) amounts.
XXXXXXXXXX 970030
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
Incentive Compensation Arrangements
This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer and its subsidiaries, and further to our telephone conversations XXXXXXXXXX.
Our understanding of the facts and proposed plan is as follows:
FACTS
1.XXXXXXXXXX is incorporated under the laws of Canada and has its head office in XXXXXXXXXX. It is the parent company of
XXXXXXXXXX.
2.XXXXXXXXXX and its subsidiaries which are resident in Canada or carry on business through a permanent establishment in Canada (the "XXXXXXXXXX Group") currently maintain an XXXXXXXXXX. XXXXXXXXXX provides an Executive with compensation based on performance during each calendar year which is paid in addition to the Executive's regular salary. All awards are disbursed on or before XXXXXXXXXX of the year commencing immediately after the year to which the performance award relates.
3.The amount of an award granted to an Executive under the XXXXXXXXXX depends on the Executive's salary grade within the XXXXXXXXXX Group and a weighted average of the following XXXXXXXXXX factors:
XXXXXXXXXX;
XXXXXXXXXX.
4.The corporate and business unit objectives referred to, respectively, in 3(b) and (c) above normally are established by the board of directors of XXXXXXXXXX (the "Board") and senior management of the companies in the XXXXXXXXXX Group prior to the commencement of the calendar year in respect of which the performance award, based on such corporate and business units objectives, is determined.
PROPOSED PLAN
5.The XXXXXXXXXX Group proposes to establish a new incentive compensation plan, the XXXXXXXXXX, for the executives in addition to the XXXXXXXXXX, beginning with the XXXXXXXXXX calendar year. The XXXXXXXXXX will be in writing and will provide as follows:
(a)The Board will determine which Executives will be authorized to participate in the XXXXXXXXXX in respect of each performance period, which will be a calendar year. This determination will be made prior to the commencement of the performance period to which it relates.
(b)Each Executive who is authorized to participate in the XXXXXXXXXX will be given the right to elect in respect of that calendar year whether to participate in one or both of the XXXXXXXXXX. If the Executive elects to participate in both the XXXXXXXXXX, he will participate in both plans equally and awards payable under the two plans will be correspondingly reduced. As confirmed in the above-referenced telephone conversation of XXXXXXXXXX, each Executive who elects to participate in the XXXXXXXXXX will enter into an agreement in writing with his employer reflecting the terms of the arrangement as described herein.
Implementation of the XXXXXXXXXX will be dependent upon the XXXXXXXXXX Group receiving rulings from Revenue Canada XXXXXXXXXX that the XXXXXXXXXX is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations") XXXXXXXXXX the Executives will be given XXXXXXXXXX from the date on which XXXXXXXXXX receives the XXXXXXXXXX ruling to elect whether to participate in the XXXXXXXXXX (or both plans) with respect to the XXXXXXXXXX calendar year.
With respect to the XXXXXXXXXX and subsequent calendar years the Executive will be required to make his election before the commencement of the year (i.e., the performance period) in respect of which the election is made.
(c)Each Executive who elects to participate in the XXXXXXXXXX for a particular calendar year will be eligible to receive an award based on the same criteria as the annual performance awards under the XXXXXXXXXX for the same calendar year (described in 3 above), but the award guidelines will be expressed in deferred stock units (the "Units") rather than as a percentage of the mid-point of an Executive's salary grade, which is how awards are calibrated under the XXXXXXXXXX. Specifically, prior to the commencement of a performance period, the XXXXXXXXXX award guidelines will be translated into a specific number of Units using the value of a Unit determined in accordance with 5(e) below. The number of Units actually awarded to an Executive following a performance period will be based on actual performance over the performance period in relation to the established objectives.
(d)Units will be fully vested upon being awarded to an Executive.
(e)The value of a Unit at any particular date will be equal to the average of the average of the closing prices for XXXXXXXXXX Shares XXXXXXXXXX on the five trading days immediately prior to the particular date. XXXXXXXXXX
(f)At the discretion of the Personnel Committee of the Board, an Executive can be credited with additional Units whenever cash dividends are paid on XXXXXXXXXX Shares. The number of additional Units credited to an Executive in connection with the payment of dividends on the XXXXXXXXXX Shares will be based on the actual amount of dividends that would have been paid to such Executive if he had been awarded actual XXXXXXXXXX Shares under the XXXXXXXXXX rather than Units and on the notional value of the Units determined in accordance with 5(e) above as at the date on which dividends are declared on the XXXXXXXXXX Shares.
(g)In the event of a stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of XXXXXXXXXX assets to shareholders, or any other change affecting the XXXXXXXXXX Shares, such proportionate adjustments, if any, as the Personnel Committee of the Board of Directors in its discretion may deem appropriate to reflect such change, will be made with respect to the number of Units outstanding under the XXXXXXXXXX, provided (as confirmed in the above-referenced telephone conversation of XXXXXXXXXX) such proportionate adjustment does not contravene the condition in 5(k) below.
(h)Units will be redeemable and the value thereof immediately payable at the Executive's option at a time after the Executive retires, dies or otherwise ceases to be an employee of XXXXXXXXXX or a subsidiary of XXXXXXXXXX. With respect to retirement or ceasing employment (other than by death), the Executive will redeem the Units by filing a written notice of redemption with the Executive's employer specifying a redemption date at least five business days after the date on which the redemption notice is provided to the employer, provided that, in any event, the payment to the Executive of the value of the Executive's Units will take place no later than XXXXXXXXXX of the first calendar year commencing after the Executive's retirement or otherwise ceasing to be employed by XXXXXXXXXX or one of its subsidiaries, as the case may be.
(i)If an Executive dies before ceasing to be employed by XXXXXXXXXX or any subsidiary thereof, the Executive's surviving spouse or, if there is no surviving spouse, the Executive's legal representative, may redeem the Executive's Units by filing a written notice of redemption with the Executive's employer specifying a redemption date at least five business days after the date on which the redemption notice is provided to the employer, provided that, in any event, the payment to the spouse or legal representative of the value of the Executive's Units will take place no later than XXXXXXXXXX of the first calendar year commencing after the Executive's date of death.
(j)If an Executive dies after ceasing to be employed by XXXXXXXXXX or any subsidiary thereof but before delivering a notice of redemption with respect to his Units to his employer, the Executive's surviving spouse, or where there is no surviving spouse, the Executive's legal representative, may redeem the Executive's Units by filing a written notice of redemption with the Executive's employer specifying a redemption date at least five business days after the date on which the redemption notice is provided to the employer, provided that, in any event, the payment to the spouse or legal representative of the value of the Executive's Units will take place no later than XXXXXXXXXX of the first calendar year commencing after the date the Executive ceased to be employed by XXXXXXXXXX or any subsidiary thereof.
(k)No amount will be paid to, or in respect of, an Executive under the XXXXXXXXXX or pursuant to any other arrangement to compensate for a downward fluctuation in the price of XXXXXXXXXX Shares, nor will any other form of benefit be conferred upon, or in respect of, an Executive for such purpose.
(l)The aggregate value of the Units redeemed by or in respect of an Executive pursuant to paragraphs 5(h), (i) or (j) above, determined in accordance with paragraph 5(e) above, as at the date of redemption will be paid to the Executive, or his surviving spouse or legal representative in the event of the Executive's death, in the form of cash, XXXXXXXXXX Shares or a combination thereof, at the discretion of the authorized representative of the employer. The Executive, spouse or legal representative will have a contractual right to receive the value of his redeemed Units. The discretion on the part of the authorized representative of the employer will be limited to determining whether the payment will be in the form of a cash payment directly to the individual or whether the particular member of the XXXXXXXXXX Group (i.e., the Executive's employer) will make a cash outlay and use that amount to purchase, on behalf of the individual, shares on the open market (or a combination of the two, as the case may be).
(m)The XXXXXXXXXX may be amended or terminated at any time by the Board, provided that any such amendment or termination will not reduce the rights accrued to any Executive at the date of amendment or termination of the XXXXXXXXXX.
In particular, and with respect to termination, the only effect of the termination will be that the granting of additional Units (other than Units reflecting dividends on XXXXXXXXXX Shares) will be discontinued as of a specific date and no new participants will be admitted to the XXXXXXXXXX after that date. However, an existing participant on that date (i.e. the date as of which no further performance-related Units are granted) will be entitled to the number of Units actually granted to him/her up to that date and will continue to be eligible to receive Units in respect of dividends paid on XXXXXXXXXX Shares until he/she redeems his/her Units in accordance with the terms of the XXXXXXXXXX as set out above, although no new Units will be awarded to such a participant on account of his/her performance as an employee of XXXXXXXXXX or any subsidiary of XXXXXXXXXX. During this time, the rules of the XXXXXXXXXX as set out above will continue to apply (e.g., Units will continue to fluctuate in value based on changes in the fair market value of XXXXXXXXXX shares). In effect the operation of the XXXXXXXXXX will continue unchanged except that no new participants will be enrolled in the XXXXXXXXXX and no new Units (other than in recognition of dividends on XXXXXXXXXX shares) will be granted. The XXXXXXXXXX will finally terminate (for all purposes) when the last remaining participant redeems his/her Units thereunder.
6.As confirmed in the above-referenced telephone conversation of XXXXXXXXXX, no amount will be contributed to a third party or otherwise set aside to fund the benefits under the XXXXXXXXXX.
PURPOSE OF PROPOSED PLAN
7.The purpose of the proposed XXXXXXXXXX is to significantly strengthen the link between executive and shareholder interests by encouraging key executives to voluntarily elect to have a major portion of their pay tied to the long term performance of XXXXXXXXXX Shares.
8.(a)To the best of your knowledge and that of the members of the XXXXXXXXXX Group none of the issues involved in your ruling request is being considered by a tax services office or taxation centre in connection with a tax return already filed and none is under objection or appeal.
(b)The address of XXXXXXXXXX
(c)All members of the XXXXXXXXXX Group are served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
(d)The tax account number of each of the members of the XXXXXXXXXX Group is as follows:
XXXXXXXXXX.
RULINGS GIVEN
Provided that the statement of facts and description of the proposed plan are correct and constitute a complete disclosure of all the relevant facts and relevant terms of the proposed plan, that the proposed plan is established in the manner described herein, we rule as follows:
A.An arrangement in writing between an Executive and his employer under the terms of the XXXXXXXXXX will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be exempted from the definition of a "salary deferral arrangement" as contained in subsection 248(1) of the Income Tax Act (the "Act").
B.Except for those amounts identified in Ruling C below, no amount will be included for purposes of the Act in the income of an Executive as a result of, in and of itself, the Executive's participation in the XXXXXXXXXX.
C.An amount paid by an employer under the XXXXXXXXXX to an Executive in accordance with 5(h) above will be included in the income of the Executive pursuant to subsection 5(1) and section 6 of the Act for the year in which the amount is received.
D.An amount payable by an employer under the XXXXXXXXXX to a spouse or legal representative in accordance with 5(i) or (j) above will constitute a "right or thing" for the purposes of subsection 70(2) of the Act.
E.Subject to paragraph 18(1)(a) and section 67 of the Act, an amount referred to in rulings C and D that is paid by the relevant employer in a particular year will be deductible for that year in accordance with section 9 of the Act.
The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the proposed plan is implemented by XXXXXXXXXX. However these rulings do not apply with respect to participation in the XXXXXXXXXX that has been amended in accordance with 5(m) above or with respect to Units issued before such an amendment the rights and conditions of which are affected by such an amendment.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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