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 the payment of director's fees in the form of deferred share units constitute an SDA?
Position: No
Reasons:
Satisfies conditions of 6801(d) of the Regulations.
XXXXXXXXXX 971577
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-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 resident of Canada and a taxable Canadian corporation. XXXXXXXXXX is wholly-owned, directly or indirectly, by XXXXXXXXXX is a public corporation and a taxable Canadian corporation. The expressions "public corporation" and "taxable Canadian corporation" have 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. For the upcoming terms of office, XXXXXXXXXX will pay its non-employee directors the following amounts:
(a) an annual retainer of $XXXXXXXXXX (the "Annual Retainer Fee");
(b) a fee of $XXXXXXXXXX for each board and committee meeting attended and reimbursements for associated travelling expenses; 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.
Proposed Transactions
4. XXXXXXXXXX will establish "XXXXXXXXXX" (the "Plan") for the benefit of Canadian and non-resident directors of XXXXXXXXXX (the "Participants"). Directors of XXXXXXXXXX who are employees of XXXXXXXXXX or of one of its other subsidiaries or affiliates will not be eligible to participate in the Plan. They will, however, be eligible to participate in the XXXXXXXXXX . The principal features of the Plan will be as follows:
(a) The Plan will be administered by the XXXXXXXXXX which is currently responsible for compensation related matters (the "Committee"). An account will be established for each Participant in the Plan in order to carry out the objectives of the Plan, more particularly described below. The administrator of such account is referred to herein as the "Administrator".
(b) Each Participant will be allocated 100% of his or her Annual Retainer Fee 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 (i.e., meeting, committee and committee chairman fees) in cash net of applicable withholdings.
5. Certain terms are defined in the Plan as follows:
(a) "Market Value" on any particular day means the market value of one XXXXXXXXXX common share calculated 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 XXXXXXXXXX stock exchanges on that day, on the immediately preceding day for which at least one board lot was so traded; or if, at any time, the XXXXXXXXXX common shares are no longer listed on 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, expressed in dollars, representing twenty-five percent (25%) of the Annual Retainer Fee which would, but for the Plan, be payable in cash on the last day of each Quarter by XXXXXXXXXX to a Participant, or if, with respect to any Quarter, a Participant has served as a member of the Board of Directors for a number of days that is less than the full Quarter, the amount, expressed in dollars, which is the product of:
(i) the quotient determined by dividing:
(A) the number of days in the particular Quarter during which the Participant served as a member of the Board, by
(B) the aggregate number of days in the particular Quarter;
and
(ii) the amount, expressed in dollars, of the Quarterly Retainer Fee which would otherwise have been payable for such Quarter had the Participant served as a member of the Board for the full 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 account pursuant to section 5 of the Plan, which 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.
6. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter and, where a Participant's Termination of Board Service occurs prior to the last trading day of the Quarter, on the date of Termination of Board Service.
(a) The number of XXXXXXXXXX common shares credited to a Participant's account on a deferred basis ("Share Units") with respect to any Quarter shall be determined by dividing the Quarterly Retainer Fee by the Market Value of a XXXXXXXXXX common share on the Reference Date for that Quarter. For greater certainty, no cash payment by XXXXXXXXXX or purchase of XXXXXXXXXX common shares shall take place on a 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 account maintained by the Administrator for this purpose;
(b) A Participant's 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;
(c) Except as set forth in Section 8 of the Plan, the entitlement date ("Entitlement Date") of a Participant with respect to whom a Termination of Board Service has occurred shall be the fourth day following the 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 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 account, net of applicable withholdings (the "applicable share unit 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 and thus the broker will effectuate such purchase no later than the last day of the first calendar year commencing after the Participant's Termination of Board Service. 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, net of applicable withholdings. XXXXXXXXXX will pay all brokerage fees arising in connection with the acquisition of XXXXXXXXXX common shares by the broker on the open market. XXXXXXXXXX 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 both the special cash payment and the payment of such brokerage fees by XXXXXXXXXX; and
(d) 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 jurisdiction associated with the purchase of, or payment in, XXXXXXXXXX common shares too onerous to it or the Participant.
7. 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 Participant under any agreement existing at the time of such amendment, suspension or termination without the consent of the affected Participant.
8. XXXXXXXXXX.
9. XXXXXXXXXX retains the ability to allow the Plan to cover meeting and committee fees described in paragraphs 3(b) and (c) above (other than expense reimbursements). 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
10. 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. The purpose of the proposed transactions is to provide non-employee directors of XXXXXXXXXX with a long term stock based compensation program.
11. 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 the relevant facts and proposed transactions, and that the terms of the Plan are as described in paragraphs 4, 5, 6 and 8 above, we rule as follows:
12. The Plan will not constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act.
13. The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.
14. 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 6(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 shares distributed to the Participant as described in subparagraph 6(c) above;
(c) under paragraph 6(1)(c) of the Act, the dollar amount of the applicable share unit withholdings withheld by XXXXXXXXXX as described in subparagraph 6(c) above;
(d) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by XXXXXXXXXX for the acquisition of the particular XXXXXXXXXX common shares distributed to the Participant by the broker as described in subparagraph 6(c) above; and
(e) under paragraph 6(1)(c) of the Act, the special cash payment 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 6(c) above.
15. 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 6(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 shares distributed to the Participant, as described in subparagraph 6(c) above;
(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the dollar amount of the applicable share unit withholdings withheld by XXXXXXXXXX as described in subparagraph 6(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 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 6(c); and
(e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the special cash payment 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 6(c) above.
16. The cost of the XXXXXXXXXX common shares acquired by the resident Participant will include the brokers' cost which was included in the Participant's income in ruling C(b) above, to acquire the shares 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.
17. 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 a salary deferral arrangement as contained in subsection 248(1) of the Act.
18. 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 in respect of Participants 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, Customs, Excise, and Taxation provided that the Plan is implemented within six months of the date of this letter.
As discussed in our telephone conversation on XXXXXXXXXX, we are unable to provide the requested ruling on the application of subsection 153(1) of the Act. In this regard, you may want to discuss the source deduction requirements with the Source Deductions Division of Revenue Canada Taxation. Your enquiry should be directed to the following address:
Source Deductions Division
Revenue Canada Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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