30 November 1996 Ruling 9719003 - DIVIDEND EQUIVALENT, SDA

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 a dividend equivalent constitute an SDA for purposes of the Act?

Position: No

Reasons:

In this specific case, the facts support that the primary purpose of the dividend equivalents is to retain the employment services of key employees. There is no resultant tax advantage that would support a conclusion that the dividend equivalents are tax motivated.

XXXXXXXXXX							971900
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling 971608, dated XXXXXXXXXX, 1997

This is in reply to your facsimile received XXXXXXXXXX, wherein you advised us of certain amendments to the proposed transactions described in the above-referenced Advance Income Tax Ruling (hereinafter referred to as the "Ruling Letter").

Any reference herein to paragraphs are references to those contained in the Ruling Letter and any defined terms used in this letter have the meanings assigned to them in the Ruling Letter.

The Ruling Letter is hereby amended as follows:

1. The last sentence of paragraph 10 is deleted and replaced by the following:

"If the option holder terminates his or her employment before all of the 1997 Options vest, they forfeit any rights to Dividend Equivalents plus any accrued interest thereon. Dividend Equivalents will not be paid to an option holder whose employment is terminated for cause. The sole purpose of the Dividend Equivalents is to provide additional incentive for an option holder to remain with the Merged Corporation group of companies. It is expected that the ultimate value of the Dividend Equivalent component of the 1997 Options will be insignificant in comparison to the capital appreciation that may be realized with respect to the shares that may be acquired under the 1997 Options."

2. The following rulings are added to the Ruling Letter:

"E. The Dividend Equivalents and the notional interest thereon will not constitute a salary deferral arrangement within the meaning assigned by subsection 248(1) of the Act.

F. The Dividend Equivalents and the notional interest thereon that becomes payable to an option holder will be included in his or her income under subsection 5(1) or paragraph 6(1)(a) of the Act in the year of receipt."

Notwithstanding the above changes, we confirm that, subject to the conditions set out therein, rulings E and F above will be binding on the Department in accordance with the practice outlined in Information Circular 70-6R3, dated December 30, 1996.

Yours truly,

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