1997 Ruling 9702363 - DIRECTOR FEE, DEFERRED SHARE 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.

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,

XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

970236
Re: Advance Income Tax' Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Our understanding of the facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX is a company incorporated under the laws ofCanada, a resident of Canada and a public corporation. XXXXXXXXXX common shares are listed on XXXXXXXXXX. The expression "public corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").

2.

XXXXXXXXXX

3. XXXXXXXXXX currently has a Board of Directors composed of XXXXXXXXXX directors.

4. For the upcoming term of office, XXXXXXXXXX will pay directors that are not otherwise employed (other than being a director of XXXXXXXXXX) by XXXXXXXXXX (hereinafter referred to as "non-employed directors") the following amounts:

(a) an annual retainer of $XXXXXXXXXX;

(b) a fee of $XXXXXXXXXX for each board and committee meeting attended (in certain circumstances an additional $XXXXXXXXXX fee for each meeting attended is provided to cover travelling costs); and

(c) a fee of $XXXXXXXXXX per year for services as a member of any standing committee of the board and an additional $XXXXXXXXXX per year for services as chairman of any standing committee of the board.

5. A recent trend among leading public companies is to pay a portion of each director's compensation in shares of stock instead of cash, thereby facilitating and encouraging the acquisition of a greater ownership interest in the company. In response to that trend, XXXXXXXXXX is contemplating the establishment of a stock compensation plan, more particularly described below.

Proposed Transactions

6. XXXXXXXXXX will establish "XXXXXXXXXX" (the "Plan") for the benefit of Canadian and non-resident directors of XXXXXXXXXX (the "Participants"). Directors of XXXXXXXXXX who receive employment income, other than director's fees, from XXXXXXXXXX or from one of its subsidiaries will not be eligible to participate in the Plan. The principal features of the Plan are as follows:

(a) The Plan Will be administered by the Committee of the Board of Directors of XXXXXXXXXX generally responsible for compensation related matters (the "Committee"). A notional account will be established for each Participant in order to carry out the objectives of the Plan, more particularly described below. The administrator of the notional accounts is referred to herein as the "Administrator 'I

(b) Each Participant will be allocated 100% of his or her annual retainer in the form of share units representing XXXXXXXXXX common shares, more particularly described below. The Participant will receive the remainder of his or her compensation (meeting, committee and committee chairman fees) in cash net of the applicable withholdings.

7. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter (as defined in paragraph 8 below) and where a Participant's Termination of Board Service (as defined in paragraph 8 below) occurs prior to the last trading day of the Quarter, on the date of the Termination of Board Service:

(a) The number of XXXXXXXXXX common shares paid to a Participant on a deferred basis ("Share Units") with respect to any Quarter shall be determined by dividing the Quarterly Retainer Fee (as defined in paragraph 8 below) by the Market Value (as defined in paragraph 8 below) of a XXXXXXXXXX common share on the Reference Date (as defined in paragraph 8 below) for that Quarter. For greater certainty, no cash payment by XXXXXXXXXX or purchase of XXXXXXXXXX common shares shall take place on the Reference Date in respect of the Quarterly Retainer Fee; instead, the appropriate number of Share Units (including any fractional units) will be credited to the notional account maintained by the Administrator for this purpose.

(b) A Participant's notional account will be credited with dividend equivalents when dividends are paid on XXXXXXXXXX common shares and such dividend equivalents will be converted into additional Share Units based on the Market Value of XXXXXXXXXX common shares on the date dividends are paid by XXXXXXXXXX.

(c) Except as set forth in Section 8 of the Plan, the entitlement date ("Entitlement Date") of a Participant with respect to whom Termination of Board Service has occurred shall be the fourth day following release of XXXXXXXXXX quarterly or annual results immediately following the Participant's Termination of Board Service. A Participant shall be entitled to receive, in satisfaction of the Share Units recorded in the Participant's notional account on the Entitlement Date, a number of XXXXXXXXXX common shares to be purchased by a designated broker on the open market on behalf of the Participant equal to the number of Share Units credited to the Participant's notional account, net of applicable withholdings, reflected in the form of Share Units. On the Entitlement Date, XXXXXXXXXX shall advise the broker of the number of XXXXXXXXXX common shares to be purchased by the broker on the Participant's behalf. The broker will purchase the XXXXXXXXXX common shares as soon as practicable after receiving XXXXXXXXXX notice. The broker will deliver the XXXXXXXXXX common shares to the Participant or his or her estate. In addition, XXXXXXXXXX will make a cash payment to the Participant in an amount equal to the fair market value on the Entitlement Date of any fractional shares. XXXXXXXXXX will pay all brokerage fees arising in connection with the acquisition of XXXXXXXXXX common shares by the broker on the open market and may make a special cash payment to the Participant in an amount sufficient to cover any income tax liability of the Participant as a consequence of the payment of such brokerage fees by XXXXXXXXXX.

(d) The Board of Directors of XXXXXXXXXX may from time to time amend, suspend or terminate the Plan in whole or in part. However, any such amendment, suspension or termination shall not adversely affect the rights of any Participa~t under any agreement existing at the time of such amendment, suspension or termination without the consent of the affected Participant.

(e) In cases of Participants who are citizens or residents of a country other than Canada, XXXXXXXXXX has the right, in its sole discretion, to pay the value, as computed under the Plan, of a Share Unit entitlement (less any applicable withholdings), should it deem the regulatory or other requirements of the applicable foreign lurisdiction associated with the purchase of, or payment in, XXXXXXXXXX common shares too onerous to it or the Participant.

8. Certain terms are ~efined in the Plan as follows:

(a) "Market Value" on a particular day means the market value of one XXXXXXXXXX common share on the basis of the average of the closing prices for a board lot of XXXXXXXXXX common shares on XXXXXXXXXX, on that day, or if at least one board lot of XXXXXXXXXX common shares shall not have been traded on both exchanges on that day, on the immediately preceding day for which at least one board lot was so traded. If, at any time, the XXXXXXXXXX common shares are no longer listed on both XXXXXXXXXX then the market value shall be calculated on the basis of the closing price, on the aforesaid day, for a board lot of XXXXXXXXXX common shares on the stock exchange on which the XXXXXXXXXX common shares are listed and had the greatest volume of trading on that particular day.

(b) "Quarter" means any of the four quarters, of any financial year of XXXXXXXXXX. Currently, xxxxxxxxxx Quarters end on March 31, June 30, September 30 and December 31.

(c) "Quarterly Retainer Fee" means the amount representing twenty-five percent of the annual retainer fee which would, but for the Plan, be payable by XXXXXXXXXX in cash on the last day of each Quarter. With respect to eligible directors that have served as a member of the Board of Directors for a number of days that is less than the full Quarter, the amount will be equal to the quarterly retainer fee multiplied by the quotient determined by dividing the number of days in the particular Quarter during which the Participant served as a member of the Board of Directors of XXXXXXXXXX by the aggregate number of days in the particular Quarter.

(d) "Reference Date", with respect to any Quarter, means the date which shall be used to determine, on a quarterly basis, the Market Value of a XXXXXXXXXX common share for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's notional account pursuant to section 5 of the Plan. The date shall be, unless otherwise determined by the Committee and approved by the Board of Directors of XXXXXXXXXX, the last trading day of such Quarter on which the Market Value of a XXXXXXXXXX common share may be determined or, if a Participant's Termination of Board Service occurs during the Quarter prior to such last trading date, the date of Termination of Board Service of the Participant, provided that if the date of Termination of Board Service is not a trading day on which the Market Value of a XXXXXXXXXX common share may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value may be determined.

(e) "Termination of Board Service" means the cessation of a Participant's status as a member of the XXXXXXXXXX Board of Directors for any reason whatsoever.

9. By way of an example, assume that on XXXXXXXXXX, the Participant is entitled to receive the Quarterly Retainer Fee of $XXXXXXXXXX. Assuming that the Market Value of one XXXXXXXXXX common share on the Reference Date (i.e. XXXXXXXXXX) is $XXXXXXXXXX, the Participant will be credited with XXXXXXXXXX notional Share Units representing xxxxxxxxxx common shares. Further, if a dividend of $XXXXXXXXXX per XXXXXXXXXX common share is declared and paid on XXXXXXXXXX and the Market Value of XXXXXXXXXX common shares on the dividend payment date was $XXXXXXXXXX will convert the dividend equivalent of $XXXXXXXXXX into additional Share Units based on the Market Value of XXXXXXXXXX common shares on the dividend payment date. Accordingly, XXXXXXXXXX will credit to the Participant's notional account and additional XXXXXXXXXX Share Units representing XXXXXXXXXX common shares. If the Participant's Termination of Board Service occurs on XXXXXXXXXX will advise the designated broker to acquire, on the Entitlement Date, XXXXXXXXXX common shares on behalf of the Participant, computed as the number of Share Units in the notional account of the Participant (XXXXXXXXXX Share Units) less applicable withholding taxes reflected in the form of Share Units (using a 50% combined federal/provincial personal tax rate). Assuming that the broker acquired the XXXXXXXXXX shares on behalf of the Participant at an average purchase price of $XXXXXXXXXX per XXXXXXXXXX common share plus brokerage fees of $XXXXXXXXXX in aggregate, the amount included in the participant's income for the XXXXXXXXXX taxation year would be $XXXXXXXXXX of which (assuming a 50% combined federal/provincial personal tax rate) $XXXXXXXXXX would be remitted by XXXXXXXXXX to the relevant taxation authorities and the balance would represent the aggregate cost to the Participant of the XXXXXXXXXX common shares acquired by the broker on the Participant's behalf and distributed to the Participant. In this example, XXXXXXXXXX may make a special cash payment of $XXXXXXXXXX to the Participant to cover the income tax liability in respect of the brokerage fees paid by XXXXXXXXXX on behalf of the Participant. We note that the special cash payment will also be included in the Participant's income and subjected to withholding taxes.

10. XXXXXXXXXX has retained the ability to extend the Plan to cover fees other than annual retainer fees such as meeting and committee fees described in subparagraphs 4(b) and 4(c) above. In the event that such extension should occur, the principles and methodologies described above will apply to any current or deferred payment of such fees subject to such conditions as the Committee may impose.

Purpose of the Proposed Transactions

11. The purpose of the proposed transactions is to provide non-employee directors of XXXXXXXXXX with a long term stock based compensation program.

Additional Information

12. To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request is being considered by a tax services office or a taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

Rulings Given

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and propbsed transactions and that the proposed transactions are completed in the manner described herein, we rule as follows:

13. The Plan will not constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act until such time, if any, as the Plan is amended as described in subparagraph 7(d) above.

14. The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act until such time, if any, as the Plan is amended as described in subparagraph 7(d) above.

15. Provided there are no amendments to the Plan as allowed under subparagraph 7(d) above, the amount to be included in the income of a resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX to the Participant for the rights related to fractional shares as described in subparagraph 7(c) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX to the broker (excluding brokerage fees) to acquire the particular XXXXXXXXXX common shares distributed to the Participant as described in subparagraph 7(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholdings withheld by XXXXXXXXXX as described in subparagraph 7(c) above;

(d) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by XXXXXXXXXX to the broker for the acquisition of the particular XXXXXXXXXX common shares distributed to the Participant by the broker as described in subparagraph 7(c) above; and

(e) under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling C(d) above as described in subparagraph 7(c) above.

16. Provided there are no amendments to the Plan as allowed under subparagraph 7(d) above, the amount to be included in the income of a non-resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by XXXXXXXXXX to the Participant for the rights related to fractional shares as described in subparagraph 7(c) above;

(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by XXXXXXXXXX to the broker (excluding brokerage fees) to acquire the particular XXXXXXXXXX common shares distributed to the Participant as described in subparagraph 7(c) above;

(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of applicable withholdings withheld by XXXXXXXXXX as described in subparagraph 7(c) above;

(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by XXXXXXXXXX to the broker, to the extent they are paid with respect to the acquisition of XXXXXXXXXX common shares, the value of which was brought into income under ruling D(b) above, for the acquisition of the particular XXXXXXXXXX common shares distributed to the Participant by the broker as described in subparagraph 7(c) above; and

(e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is paid with respect to the acquisition of XXXXXXXXXX common shares, the value of which was brought into income under ruling D(d) above, paid by XXXXXXXXXX to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling D(d) above as described in subparagraph 7(c) above.

17. Provided there are no amendments to the Plan as allowed under subparagraph 7(d) above, the cost of the XXXXXXXXXX common shares acquired by the resident Participant will include the broker's cost which was included in the Participant's income in ruling C(b) above and the brokerage fees paid by XXXXXXxxxx which was included in the Participant's income in ruling C(d) above with respect to the acquisition of such shares,

18. Provided there are no amendments to the Plan as allowed under subparagraph 7(d) above, the Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income tax Regulations and will therefore be exempted from the definition of ..~ "salary deferral arrangement" as contained in subsection 248(1) of the Act.

19. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C and D above that are paid by XXXXXXXXXX in a particular year will be deductible by XXXXXXXXXX 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 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Plan is implemented within six months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch