30 November 1996 Ruling 9704273 - DEFERRED DIRECTOR'S FEES 6801(D)

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:

Will 6801(d) apply where a director elects to receive part or all of his or her fee entitlements in deferred share units?

Position:

Yes

Reasons:

All of the 6801(d) conditions are satisfied because the amounts will be received after retirement or loss of employment and amounts will be based on fair market value of the shares of the employer.

XXXXXXXXXX						970427
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

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-referenced taxpayer. In your letter of XXXXXXXXXX, you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

XXXXXXXXXX is a corporation governed by the Canada Business Corporations Act, a public corporation and a taxable Canadian corporation. XXXXXXXXXX common shares are listed on The XXXXXXXXXX Stock Exchange. The expressions "public corporation" and "taxable Canadian corporation" have the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").

XXXXXXXXXX deals with the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX issued common shares are widely held such that no person or related group of persons owns a sufficient number of shares to represent control of XXXXXXXXXX for purposes of the Act. As of XXXXXXXXXX was authorized to issue an unlimited number of common shares without nominal or par value and, as of that date, there were XXXXXXXXXX common shares of XXXXXXXXXX that were issued and outstanding.

In XXXXXXXXXX, the Compensation Committee of the Board of Directors of XXXXXXXXXX (the "Compensation Committee") determined that the level of compensation for the members of its Board of Directors was falling behind that of other Canadian or XXXXXXXXXX public companies and many of the companies now include corporate stock as part of the compensation package offered to their directors.

In XXXXXXXXXX, the Compensation Committee has, subject to receipt of a favourable advance income tax ruling, recommended that non-employee directors (i.e. directors that are not otherwise employed by XXXXXXXXXX) be given the option to receive all or a portion of their compensation in the form of common shares of XXXXXXXXXX.

XXXXXXXXXX currently has a Board of Directors composed of XXXXXXXXXX directors. XXXXXXXXXX the directors are otherwise employed by XXXXXXXXXX and, as a consequence thereof, XXXXXXXXXX directors will be entitled to opt to receive all or a portion of their compensation in the form of common shares of XXXXXXXXXX. All of the current directors are residents of Canada.

XXXXXXXXXX

XXXXXXXXXX has decided to pay its non-employee directors the following amounts:

an annual retainer of $XXXXXXXXXX;

an annual award of XXXXXXXXXX common shares of XXXXXXXXXX that they can elect to receive on a current or deferred basis;

for newly elected or appointed directors, an initial award of XXXXXXXXXX common shares of XXXXXXXXXX which they may elect to receive on a current or deferred basis;

with respect to the Chair of the Audit Committee, an annual retainer of $XXXXXXXXXX and the Chairs of the other committees of the Board of Directors, an annual retainer of $XXXXXXXXXX;

with respect to members of committees of the Board of Directors, other than the Chair, an additional retainer of $XXXXXXXXXX;

a fee of $XXXXXXXXXX for attendance at each meeting of the Board of Directors or each meeting of a committee of the Board of Directors; and

a further allowance of $XXXXXXXXXX per trip (in addition to actual travel and accommodation expenses) paid to the director who is required to travel to meetings of the Board of Directors or a committee of the Board of Directors.

In response to the recent trend of leading public companies paying all or a portion of each director's compensation in shares of stock instead of cash, XXXXXXXXXX is contemplating the establishment of a stock compensation plan, more particularly described below.

Proposed Transactions

XXXXXXXXXX will establish the "XXXXXXXXXX" (the "Plan") for the benefit of its non-employee directors (the "Eligible Directors"). The principle features of the Plan will be as follows:

The Plan will be administered by the Human Resources and Compensation Committee of the Board of Directors. A custodial account will also be established in order to carry out certain objectives of the Plan, more particularly described below. The custodian of the custodial account is referred to herein as the "Administrator";

Each Eligible Director will provide XXXXXXXXXX with an annual election advising XXXXXXXXXX as to the proportion of the cash elements of the Eligible Director's fee entitlements, as described in subparagraphs 6(a), (d), (e), (f) and (g) above, are to be paid in the form of cash, XXXXXXXXXX common shares on a current basis and XXXXXXXXXX common shares on a deferred basis;

Each Eligible Director will provide XXXXXXXXXX with an annual election advising XXXXXXXXXX as to whether the non-cash components of the Eligible Director's fee entitlements, as described in subparagraphs 6(b) and (c) above, will be taken in the form of XXXXXXXXXX common shares on a current basis or deferred basis; and

The XXXXXXXXXX Board of Directors may amend the Plan or terminate the Plan at any time.

The elections contemplated by subparagraphs (b) and (c) must be made in writing, by XXXXXXXXXX for the following calendar year, failing which the Eligible Director shall be deemed to have elected to be paid the cash elements of the annual fee entitlements in cash and the non-cash elements of the fee entitlements in XXXXXXXXXX common shares on a current basis.

Where an Eligible Director elects or is deemed to have elected to be paid his or her fee entitlements in whole or in part in the form of XXXXXXXXXX common shares on a current basis (including any entitlements under subparagraphs 6(b) and (c) above for which an election has been made to receive the XXXXXXXXXX common shares on a current basis), XXXXXXXXXX will transfer an amount of cash, net of any applicable withholdings, which the Eligible Director has elected to be paid in XXXXXXXXXX common shares to the XXXXXXXXXX (hereinafter referred to as the "Agent") who will be acting as the Eligible Director's agent. The Agent will use such payment to purchase, on behalf of and for the account of all Eligible Directors who elected or were deemed to have elected to receive XXXXXXXXXX common shares on a current basis, XXXXXXXXXX common shares on The XXXXXXXXXX Stock Exchange. Each Eligible Director will be allocated a number of XXXXXXXXXX common shares equal to the cash amount, net of withholding taxes, that he or she elected to be paid in the form of XXXXXXXXXX common shares, divided by the average cost (the "Average Cost") per XXXXXXXXXX common share purchased by the Agent. For each Eligible Director only whole XXXXXXXXXX common shares will be acquired and any residual cash will be held by the Agent and used to purchase additional XXXXXXXXXX common shares when future amounts are received from XXXXXXXXXX on behalf of the particular Eligible Director. XXXXXXXXXX will pay all commissions incurred by the Agent in respect of the acquisition of the XXXXXXXXXX common shares. The Agent will hold the XXXXXXXXXX common shares on behalf of the Eligible Directors. Any cash dividends received by the Agent on the shares held for each Eligible Director, net of any applicable taxes in the case of non-resident Eligible Directors, will be used to acquire additional shares on behalf of the particular Eligible Director. The Agent will distribute the XXXXXXXXXX common shares and any cash balance to the Eligible Director upon receipt of written notice from the Eligible Director. "Average Cost" is defined as the average cost, excluding commissions, of the XXXXXXXXXX common shares acquired by the Agent at a particular time.

Where an Eligible Director elects to be paid all or part of his or her fee entitlements in the form of XXXXXXXXXX common shares on a deferred basis (the "Deferred Option"), the following rules will apply:

The number of XXXXXXXXXX common shares allocable to an Eligible Director on a deferred basis ("Deferred Share Units") will be equal to the number of XXXXXXXXXX common shares that the Eligible Director is entitled to receive under subparagraphs 6(b) and (c) above where an election has been made by the Eligible Director to receive such shares on a deferred basis plus the quotient obtained when the portion of the monetary fee entitlements, expressed in dollars, that the director has elected to receive in the form of XXXXXXXXXX common shares on a deferred basis is divided by the fair market value ("Fair Market Value") of XXXXXXXXXX common shares on the particular day. "Fair Market Value" is defined in the Plan to mean the price per XXXXXXXXXX common share equal to the average of the daily high and low board lot trading prices at which the XXXXXXXXXX common shares traded on The XXXXXXXXXX Stock Exchange on the five trading days on which a board lot was traded immediately preceding such date. The Administrator will not receive at that time any cash payment from XXXXXXXXXX or purchase the XXXXXXXXXX common shares represented by the Deferred Share Units, but instead, the appropriate number of Deferred Share Units (including any fractional units) will be credited to a notional account maintained by XXXXXXXXXX for this purpose.

Deferred Share Units will be credited with dividend equivalents when dividends are paid on XXXXXXXXXX common shares and such dividend equivalents will be converted into additional Deferred Share Units based on the Fair Market Value of XXXXXXXXXX common shares on the date dividends are paid.

Following termination of service on the Board of Directors, an Eligible Director to whom Deferred Share Units have been awarded under the Plan must redeem all Deferred Share Units by XXXXXXXXXX of the year following the year of termination. XXXXXXXXXX will pay

where the Eligible Director elects to receive cash, to the Eligible Director (or his or her estate) an amount in cash, equal to the product obtained when the number of Deferred Share Units credited to the Eligible Director's notional account on the termination date is multiplied by the Fair Market Value of one XXXXXXXXXX common share on the termination date, less applicable withholdings, or

where the Eligible Director elects to receive XXXXXXXXXX common shares, XXXXXXXXXX will pay an amount to the Agent, acting as the Eligible Director's agent, sufficient to purchase a number of XXXXXXXXXX common shares equal to the number of Deferred Share Units credited to the Eligible Director's notional account (net of applicable withholdings). The Agent will, as soon as practicable thereafter, purchase those common shares on The XXXXXXXXXX Stock Exchange. XXXXXXXXXX will pay all commissions incurred by the Agent in respect of the acquisition of the XXXXXXXXXX common shares. The Agent will deliver to the Eligible Director a certificate for the XXXXXXXXXX common shares purchased on his or her behalf by the Agent within XXXXXXXXXX days of their purchase. With respect to any fractional share entitlements, XXXXXXXXXX will pay to the Eligible Director an amount equal to the fraction multiplied by the Fair Market Value of XXXXXXXXXX common shares on the termination date.

By way of an example, assume that the annual retainer of a particular Eligible Director is $XXXXXXXXXX common shares and the price of one XXXXXXXXXX common share on the entitlement date is $XXXXXXXXXX. If the Eligible Director elects to have one-half of the annual retainer paid in the form of XXXXXXXXXX common shares on a current basis and the other half of the annual retainer plus the XXXXXXXXXX common shares on a deferred basis, XXXXXXXXXX will pay $XXXXXXXXXX to the Agent to acquire XXXXXXXXXX common shares on The XXXXXXXXXX Stock Exchange on behalf of the Eligible Director and the Administrator will allocate XXXXXXXXXX Deferred Share Units to the Eligible Director's notional account. If a dividend of $XXXXXXXXXX per common share had been declared on XXXXXXXXXX common shares prior to the Eligible Director's termination date when the shares were trading at $XXXXXXXXXX per share then the Agent would have acquired an additional XXXXXXXXXX common shares on behalf of the Eligible Director and the Administrator would have converted the dividend equivalent of $XXXXXXXXXX into additional Deferred Share Units based on the Fair market Value of the XXXXXXXXXX common shares on the dividend date. Accordingly, XXXXXXXXXX will allocate to the Eligible Director's notional account an additional XXXXXXXXXX Deferred Share Units. If the Fair Market Value of the XXXXXXXXXX common shares on the Eligible Director's termination date is $XXXXXXXXXX per share, the Eligible Director would be entitled to receive, before applicable tax withholdings, XXXXXXXXXX common shares purchased by the Agent on The XXXXXXXXXX Stock Exchange on behalf of the Eligible Director.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to enhance XXXXXXXXXX ability to attract and retain high quality individuals to serve as members of its Board of Directors and to promote a greater alignment of interests between non-employee directors and the shareholders of XXXXXXXXXX.

Additional Information

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 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 of the relevant facts and proposed transactions, that the Plan is not amended by the Board of Directors as allowed under subparagraph 8(c) above, and that the proposed transactions are completed in the manner described herein, we rule as follows:

The amount to be included in the income of a resident Eligible Director for a year under the Plan will consist of the aggregate of the following amounts:

under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX to the resident Eligible Director where the resident Eligible Director has not completed an election form or has elected to receive the cash amounts in cash, where the resident Eligible Director has elected to receive cash for his or her Deferred Share Units as described in subparagraph 10(c)(i) above, and where the amount is paid for the rights related to fractional shares as described in subparagraph 10(c)(ii) above;

under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX to the Agent (excluding brokerage fees) on behalf of the resident Eligible Director for a year under the Plan as described in paragraph 9 and subparagraph 10(c)(ii) above;

under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by XXXXXXXXXX as described in paragraph 9 and subparagraph 10(c)(ii) above;

under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by XXXXXXXXXX attributable to the acquisition of the XXXXXXXXXX common shares by the Agent on behalf of the resident Eligible Director as described in paragraph 9 and paragraph 10(c)(ii) above; and

under paragraph 12(1)(j) of the Act, the amount of dividends received by the Agent in respect of shares held by the Agent on behalf of the resident Eligible Director.

The amount to be included in the income of a non-resident Eligible Director for a year under the Plan will consist of the aggregate of the following amounts:

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 non-resident Eligible Director where the non-resident Eligible Director has not completed an election form or has elected to receive the cash amounts in cash, where the non-resident Eligible Director has elected to receive cash for his or her Deferred Share Units as described in subparagraph 10(c)(i) above, and where the amount is paid for the rights related to fractional shares as described in subparagraph 10(c)(ii) above;

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 Agent (excluding brokerage fees) on behalf of the non-resident Eligible Director for a year under the Plan as described in paragraph 9 and subparagraph 10(c)(ii) above;

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 withholding taxes withheld by XXXXXXXXXX as described in paragraph 9 and subparagraph 10(c)(ii) above; and

under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by XXXXXXXXXX, 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 B(b) above, for the acquisition of the XXXXXXXXXX common shares by the Agent on behalf of the non-resident Eligible Director as described in paragraph 9 and paragraph 10(c)(ii) above.

The amount of dividends paid by XXXXXXXXXX to the Trustee in respect of shares held by the Trustee on behalf of the non-resident Eligible Director will be subject to tax under subsection 212(2) of the Act.

Pursuant to subsection 52(1) of the Act, the cost of the XXXXXXXXXX common shares acquired by the resident Eligible Director will include the Agent's cost to acquire the shares plus the brokerage fees paid by XXXXXXXXXX with respect to the acquisition of such shares, both amounts having been included in the particular resident Eligible Director's income in Ruling A above.

The Deferred Option under the Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations.

Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings A(a), A(b), A(c), A(d) and B 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 as described herein 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