30 November 1996 Ruling 9718803 - PHANTOM STOCK PLAN FOR DIRECTORS

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 all or part of the annual retainer in deferred share units?

Position:

Yes.

Reasons:

Plan meets conditions in 6801(d).

XXXXXXXXXX							971880
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Re: XXXXXXXXXX
Stock Plan for Non-Employee Directors (the "Plan")

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named client, and further to our telephone conversations XXXXXXXXXX.

FACTS

1.The Company is a corporation amalgamated under the laws of XXXXXXXXXX, a resident of Canada, and a public corporation as defined in subsection 89(1) of the Income Tax Act (the "Act"). Shares of the Company are listed on the XXXXXXXXXX Exchange.

2.The Company's head office is located at XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.

3.The Company carries on in Canada the business of XXXXXXXXXX. The Company also owns several subsidiaries in Canada and in the United States which carry on similar businesses.

4.The Company currently has a board of directors (the "Board") consisting of XXXXXXXXXX of whom are not otherwise employees of the Company.

5.For the current term of office, the Company will pay non-employee directors the following amounts:

(a)an annual retainer of $XXXXXXXXXX; and

(b)a fee of $XXXXXXXXXX for each Board and committee meeting attended.

6.The Company customarily grants to new non-employee directors options to acquire common shares in the capital of the Company ("Common Shares"). Under their options, grantees are entitled to acquire Common Shares for an amount equal to the fair market value of Common Shares at the time the options are granted. No written agreement or plan governs the granting of these options.

7.It is common among public companies to pay a portion of each director's compensation in the form of shares, phantom shares or stock appreciation rights instead of cash, to attract talented directors and to provide directors with a greater interest in the performance of the companies they serve. Accordingly the Company wishes to establish a stock compensation plan as described below.

PROPOSED PLAN

8.The Company will establish the Plan for the benefit of directors of the Company who do not serve the corporation other than as directors ("Eligible Directors"). As confirmed in our telephone conversation of XXXXXXXXXX, although currently there are no non-resident Eligible Directors, it is intended that the Plan will extend equally to such persons should they be retained by the Company in future. The principal features of the Plan will be as follows:

(a)the Plan will be administered by the Compensation Committee of the Board (or a subcommittee thereof) (the "Committee") or such other persons as may be designated by the Board;

(b)each Eligible Director will be allocated XXXXXXXXXX% of his or her annual retainer (see 5(a) above) in the form of deferred share units ("Units") of the Company (as described in greater detail below). Subject to paragraph (c) below, the remaining XXXXXXXXXX% of the directors' annual retainer will be paid in cash (the "Cash Portion"); and

(c)an Eligible Director may elect to receive the remaining XXXXXXXXXX% of his or her annual retainer in the form of Units. The portion of the Plan described in paragraph 8(b) above and herein is referred to below as the "Deferred Unit Plan".

9.The election contemplated by 8(c) above must be made in writing, within XXXXXXXXXX days after the beginning of the Eligible Director's term to which the annual retainer relates. In the absence of such election the Eligible Director shall be paid the annual retainer XXXXXXXXXX% in Units and XXXXXXXXXX% in cash.

10.The following rules will apply with respect to Units:

(a)The number of Units allocable to an Eligible Director will be equal to the quotient obtained when the portion of the annual retainer, expressed in dollars, that the Eligible Director is to receive in the form of Units is divided by the value (the "Value") of one Common Share on the Purchase Date (as defined below). For these purposes, the Value on a Purchase Date is the mean between the high and low prices of the Common Shares on that date as reported on the principal Canadian securities exchange on which the Common Shares are listed or admitted to trading (or if such exchange is not open on such date, the immediately preceding date on which such exchange is open) or, if the Common Shares are not so listed or traded, the mean between the closing bid price and the closing asking price as quoted on the National Association of Securities Dealers Automated Quotation System on that date, or such other market in which such prices are regularly quoted or, if there have been no published bid or asked quotations with respect to the Common Shares, the Value shall be the value established by the Committee in good faith on that date. The Purchase Date is, unless otherwise determined by the Committee, the third business day following the first release of the Company's quarterly results that occur after the Eligible Director's annual term commenced.

(b)Units will be credited with dividend equivalents when dividends are paid on the Common Shares and such dividend equivalents will be converted into additional Units based on the Value on the date dividends are paid.

(c)On a date determined by the Committee (the "Settlement Date") which is after the date (the "Termination Date") on which an Eligible Director terminates Board service but no later that the last business day in January of the first calendar year commencing after the Termination Date, the Company will pay to the Eligible Director an amount in cash, equal to the product obtained when the number of Units credited to the Eligible Director's account as at the Termination Date is multiplied by the Value as at the Termination Date (the "Settlement Amount"), less applicable withholdings.

11.The Committee may extend the Plan to cover fees received by an Eligible Director for attending meetings (see 5(b) above) and for serving as the chair of a committee of the Board. In the event that such extension should occur, the principals and methods described above will apply to any deferred payment of such fees.

12.Units are not transferable or assignable other than by will or the laws of descent and distribution.

13.The Board may amend the Plan as it deems necessary.

14.The Company will not be making contributions to another person in respect of the Plan nor, as confirmed in our telephone conversation of XXXXXXXXXX, will it set aside or hold in trust any property in respect of the Plan.

PURPOSE OF THE PROPOSED PLAN

15.The purpose of the Plan is to enhance the Company's ability to attract and retain talented individuals to serve as members of the Board and to promote a greater alignment of interests between non-employee members of the board and the shareholders of the Company.

OTHER INFORMATION

16.To the best of your client's knowledge, none of the issues relevant to this ruling request is

(a)relevant to a tax return previously filed by the Company of a related person (as defined in the Act) under the Act;

(b)under consideration by a tax services office or taxation centre in connection with a previously filed tax return of the Company or a related person;

(c)under objection by the Company or a related person;

(d)before the courts; or

(e)the subject of a ruling previously issued to the Company by the Directorate.

RULINGS GIVEN

Provided the above statement of facts and proposed plan are accurate and constitute a complete disclosure of all the relevant facts, provided that the Plan is not amended by the Board as allowed under 13 above, and provided the Plan is implemented as proposed, we rule as follows:

A.The Plan will constitute neither an "employee benefit plan" nor a "retirement compensation arrangement" as those terms are defined in subsection 248(1) of the Act;

B.Provided the Value as described in 10(c) above is the fair market value of a Common Share on the Termination Date, the Deferred Unit Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations;

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

(a)under paragraph 6(1)(c) of the Act, the Cash Portion, if any, paid by the Company to the Eligible Director in cash in the year; and

(b)under paragraph 6(1)(c) of the Act, the Settlement Amount as described in 10(c) above, paid by the Company to the Eligible Director in cash in the year that includes the Settlement Date under the Deferred Unit Plan.

D.The amount to be included in the income of a non-resident Eligible Director for a taxation 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 Cash Portion, if any, to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director in cash in the year; and

(b)under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the Settlement Amount as described in paragraph 10(c) above, to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director in cash in the year that includes the Settlement Date under the Deferred Unit Plan.

E.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 the Company in a particular year will be deductible by the Company 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 on or before XXXXXXXXXX.

OTHER MATTERS

Concerning Ruling B, you asked for the Department's position concerning the determination of the fair market value of a share and we have confirmed with the Department's Audit Directorate the following position:

The fair market value of publicly-traded shares at any point in time should be the price established on the appropriate stock exchange on the particular date. It is the Department's view that the following criteria should be considered in determining a price which is representative of fair market value:

-The closing price on the particular day (in this case the Termination Date),

-The average of the high and low prices for the particular day,

-The simple average of a stock's daily trading price, calculated as the total value of the stock traded during the particular day divided by the total number of shares traded,

-The closing price for the most recent, previous day on which there was active trading, or

-The average closing price of the stock over a limited number of trading days immediately before the valuation date.

Further information concerning valuations may be addressed to the Tax Services Office serving the region in which your client resides. For your client, this service is provided by the XXXXXXXXXX Centre Tax Services Office, and you may contact XXXXXXXXXX.

Yours truly,

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