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:
1) Whether arrangement is exempted from SDA definition by virtue of 6801(d);
2) Whether amounts payable after death are "death benefit";
3) Whether amounts payable after death are included in deceased's income or recipient's income by virtue of 70(1) or 70(2).
Position:
1) Yes;
2) No;
3) Amount paid after death and payable because of termination of employment before death or payable because of death are "rights or things" to which 70(2) and 70(3) apply.
Reasons:
1) See rulings E9700303 & E9626393;
2) Amount payable because of death out of a deferred compensation plan (whether funded or unfunded) is not payable in recognition of service but because of performance;
3) Amount out of plan is not an amount "payable periodically". See para. 3 of IT- 210R2 re accrued salary or wages under 70(1) and E52327, E9126270 & E911866 re bonus & additional forms of remuneration as 70(1) amounts; and para. 14 of IT-212R3 re additional compensation payable (albeit out of EBP) in the event of death as 70(2) amounts.
XXXXXXXXXX 972452
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
Deferred Stock Unit Plan (the "DSUP")
This is in reply to your letter of XXXXXXXXXX, and your facsimile transmission of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer and its subsidiaries and further to our telephone conversation XXXXXXXXXX.
Our understanding of the facts and proposed plan is as follows:
FACTS
1. XXXXXXXXXX
is a public corporation, a Canadian corporation and a resident of Canada for the purposes of the Income Tax Act (Canada) (the "Act").
2. XXXXXXXXXX and its subsidiaries, which are related to XXXXXXXXXX and residents of Canada for the purposes of the Act, currently maintain a Quality Performance Incentive Plan ("QPI"). The QPI provides certain executives of XXXXXXXXXX and of its subsidiaries for each fiscal year of XXXXXXXXXX with variable compensation based on performance which is paid in addition to the executive's regular salary.
3. The amount of an award granted to an executive under the QPI depends on the executive's salary grade XXXXXXXXXX and the goals established by the Human Resources Committee of the Board of Directors of XXXXXXXXXX (the "HRC") for the attainment of shareholder value. The specific goals established for the QPI may be changed from time to time to be coordinated with XXXXXXXXXX strategic plan and to ensure an alignment with the generation of shareholder value.
4. Currently the QPI is based on XXXXXXXXXX financial performance, equally weighted by measuring actual results against revenue growth. The pool available for QPI can be enhanced if XXXXXXXXXX performance against its comparator group is above average for these. In some functional units and subsidiaries the performance of that business unit's objectives may also have an impact on the overall award size available.
5. The corporate business unit objectives referred to in paragraphs 3 and 4 above normally are established by the board of Directors of XXXXXXXXXX (the "Board") and senior management of XXXXXXXXXX and its subsidiaries prior to the commencement of the fiscal year in respect of which the performance award is determined.
PROPOSED PLAN
6. XXXXXXXXXX and its subsidiaries propose to establish a new incentive compensation plan, the Deferred Stock Unit Plan (the "DSUP"), for certain of their executives in addition to the QPI, beginning with the XXXXXXXXXX fiscal year, i.e., the fiscal year beginning XXXXXXXXXX.
7. The agreement to participate in the DSUP will be in writing and participation on the part of the executives will be voluntary.
8. The DSUP will operate as follows:
(a) The HRC will determine which executives will be authorized to participate in the DSUP in respect of each performance period, which will be XXXXXXXXXX fiscal year. This determination will be made prior to the commencement of the performance period to which it relates. Executives of XXXXXXXXXX and its subsidiaries are eligible for participation consideration, but such participation shall be limited to one performance per calender year.
(b) Each executive who is authorized to participate in the DSUP will be given the right to elect in respect of that fiscal year whether to participate in one or both of the QPI and DSUP. If the executive elects to participate in both QPI and DSUP, he/she will participate in both plans on an equal basis in that awards payable under the two plans will be correspondingly reduced. Each executive who elects to participate in the DSUP will enter into an agreement in writing with his employer reflecting the terms of the arrangement as described herein.
(c) Implementation of the DSUP for the XXXXXXXXXX fiscal year (i.e., the fiscal year beginning XXXXXXXXXX) will be dependent upon XXXXXXXXXX receiving a favourable advance income tax ruling from Revenue Canada confirming that the DSUP is a "prescribed plan or arrangement" as described in paragraph 6801(d) of the Income Tax Regulations (the "Regulations"). If such ruling is issued, the executives will be given 15 days from the date on which XXXXXXXXXX receives such ruling to elect whether to participate in the DSUP or the QPI (or both plans) with respect to the XXXXXXXXXX fiscal year.
(d) With respect to the XXXXXXXXXX and subsequent fiscal years the Executive will be required to make his/her election in writing before the commencement of the year (i.e., the performance period) in respect of which the election is made.
(e) Each Executive who elects to participate in the DSUP for a particular fiscal year will be eligible to receive an award based on the same criteria as the annual performance awards under the QPI for the same fiscal year (described above), but the award guidelines will be expressed in deferred stock units (the "Units") rather than as a percentage of the mid-point of an executive's salary grade, which is how awards are calibrated under the QPI. Specifically, prior to the commencement of a performance period, the QPI award guidelines will be translated into a specific number of Units using the value of a Unit determined in accordance with paragraph 8(g) below. The number of Units actually awarded to an executive following a performance period will be based on actual performance over the performance period in relation to the established objectives.
(f) Units will be fully vested upon being awarded to an executive.
(g) The value of a Unit at any particular date will be equal to the average of the closing prices for common shares of XXXXXXXXXX (the "XXXXXXXXXX Common Shares") on XXXXXXXXXX Stock Exchange on the five trading days immediately prior to the particular date. Any currency conversion required to be calculated for the purposes of the DSUP will be made at XXXXXXXXXX published rate of exchange on the relevant day.
(h) At the discretion of the HRC, an executive can be credited with additional Units whenever cash dividends are paid on XXXXXXXXXX Common Shares. The number of additional Units credited to an executive in connection with the payment of dividends on XXXXXXXXXX Common Shares will be based on the actual amount of dividends that would have been paid to such executive if he had been awarded actual XXXXXXXXXX Common Shares under the DSUP rather than Units and on the notional value of the Units determined in accordance with paragraph 8(g) above as at the date on which dividends are declared on XXXXXXXXXX Common Shares.
(i) In the event of a stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of XXXXXXXXXX assets to shareholders, or any other change affecting the XXXXXXXXXX Common Shares, such proportionate adjustments, if any, as the HRC in its discretion may deem appropriate to reflect such change, will be made with respect to the number of Units outstanding under the DSUP, provided such proportionate adjustment does not contravene the condition in paragraph 8(r) below.
(j) Units will be redeemable and the value thereof immediately payable at the executive's option at a time after the executive retires, dies or otherwise ceases to be an employee of XXXXXXXXXX or a subsidiary of XXXXXXXXXX.
(k) With respect to retirement, the executive will redeem the Units by filing a written notice of redemption with the executive's employer specifying a redemption date at least five business days after the date on which the redemption notice is provided to the executive's employer. The aggregate value of the Units so redeemed will be paid to the executive by the executive's employer within ten business days after the redemption date, provided that, in no event, shall such payment take place later than XXXXXXXXXX of the first calendar year commencing after the executive's retirement. If the executive fails to file a written notice of redemption with the executive's employer before XXXXXXXXXX of the first calendar year commencing after the executive's retirement (the "Last Day"), the executive shall be deemed to have filed on the Last Day a written notice of redemption with the executive's employer for his/her Units specifying XXXXXXXXXX of such year as the redemption date, in which case the aggregate value of the Units so redeemed will be paid to the executive by the executive's employer no later than XXXXXXXXXX of the same year.
(l) If the executive otherwise ceases to be employed by XXXXXXXXXX or one of its subsidiaries, other than by retirement or death or disability, as the case may be, the executive will redeem the Units by filing a written notice of redemption with XXXXXXXXXX specifying a redemption date at least five business days after the date on which the redemption notice is provided to the executive's employer. The aggregate value of the Units so redeemed will be paid to the executive by the executive's employer within ten business days after the redemption date. If the executive fails to file a written notice of redemption with the executive's employer before the day (the "Last Day") that is the fifth business day before the 60th day after the date the executive ceases employment, the executive shall be deemed to have filed on the Last Day a written notice of redemption with the executive's employer for his/her Units specifying such 60th day as the redemption date.
(m) If an executive dies before ceasing to be employed by XXXXXXXXXX or any subsidiary thereof, the beneficiary of the Units appointed in the executive's will or, in the absence of such beneficiary, the legal representative of the executive's estate may redeem the executive's Units by filing a written notice of redemption with the executive's employer specifying a redemption date at least five business days after the date on which the redemption notice is provided to the employer. The aggregate value of the Units so redeemed will be paid to the beneficiary or the legal representative, as the case may be, by the executive's employer within ten business days after the redemption date. If the beneficiary or legal representative, as the case may be, fails to file a written notice of redemption with the executive's employer before the day (the "Last Day") that is the fifth business day before the 60th day after the date on which the executive died, the beneficiary or legal representative, as the case may be, shall be deemed to have filed on the Last Day a written notice of redemption with the executive's employer for his/her Units specifying such 60th day as the redemption date. In such cases as to where the will has not been probated XXXXXXXXXX will retain the funds and credit interest on such funds from time to time at XXXXXXXXXX rate until such time as it can legally pay such funds to the beneficiary or legal representative.
(n) If an executive dies after ceasing to be employed by XXXXXXXXXX or any subsidiary thereof but before filing a notice of redemption with his/her employer, paragraphs 8(k) or (l) above, as the case may be, shall apply with such modifications as the circumstances require. The notice of redemption shall be filed by the beneficiary of the Units appointed in the executive's will or, in the absence of such beneficiary, the legal representative of the executive's estate. In such cases as to where the will has not been probated XXXXXXXXXX will retain the funds and credit interest on such funds from time to time at XXXXXXXXXX rate until such time as it can legally pay such funds to the beneficiary or legal representative.
(o) If the executive is transferred to another country where the continuation of such DSUP is not allowed, the executive will be treated in the same manner as that as if he/she had retired, in accordance with paragraph 8(k) above.
(p) In all cases a redemption of Units can take effect only within such periods as designated from time to time by XXXXXXXXXX compliance requirements as being "open windows" for insider trading, regardless of whether or not such participant is in fact an "insider" and subject to any provision of the Act. In the event that the redemption date selected by an executive, the beneficiary appointed by an executive or the legal representative of an executive's estate does not fall during an "open window" period on or after the sixth trading day of such "open window" period, the redemption date will be deemed to be the sixth trading day of the next succeeding "window period"; or in the event such sixth trading day of the next succeeding "window period" falls after the outside redemption dates set forth in paragraphs 8(k), (l) or (m) hereof, as the case may be, the redemption date shall be the sixth trading day of the next preceding "window period", subject to any provision of the Act.
(q) A notice of redemption shall apply to all Units held by the executive (or the executive's estate) at the time the notice is filed. An executive may not redeem only a portion of his/her Units.
(r) No amount will be paid to, or in respect of, an executive under the DSUP or pursuant to any other arrangement to compensate an executive for a downward fluctuation in the price of XXXXXXXXXX Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an executive for such purpose.
(s) The aggregate value of the Units redeemed by or in respect of an executive pursuant to paragraphs 8(k), (l), (m) or (n) above, determined in accordance with paragraph 8(g) above, as at the redemption date will be paid to the executive, or the executive's beneficiary or legal representative in the event of the executive's death (the "Recipient"), in the form of cash, XXXXXXXXXX Common Shares or a combination thereof, at the discretion of the authorized representative of the executive's employer. The Recipient will have a contractual right to receive the value of his redeemed Units. The discretion on the part of the authorized representative of the executive's employer will be limited to determining whether the payment will be in the form of a cash payment directly to the Recipient or whether the executive's employer will make a cash outlay and use that amount to purchase, on behalf of the Recipient, shares on the open market (or a combination of the two, as the case may be).
(t) The DSUP may be amended or terminated at any time by the Board, provided that any such amendment or termination will not reduce the rights accrued to any executive at the date of amendment or termination of the DSUP.
(u) In particular, and with respect to termination, the only effect of the termination will be that the granting of additional Units (other than Units reflecting dividends on XXXXXXXXXX Common Shares) will be discontinued as of a specific date and no new participants will be admitted to the DSUP after that date. However, an existing participant on that date (i.e., the date as of which no further performance-related Units are granted) will be entitled to the number of Units actually granted to her/him up to that date and will continue to be eligible to receive Units in respect of dividends paid on XXXXXXXXXX Common Shares until he/she redeems his/her Units in accordance with the terms of the DSUP as set out above, although no new Units will be awarded to such a participant on account of his/her performance as an employee of XXXXXXXXXX or any subsidiary of XXXXXXXXXX. During this time, the rules of the DSUP as set out above will continue to apply (e.g., Units will continue to fluctuate in value based on changes in the fair market value of XXXXXXXXXX Common shares). In effect the operation of the DSUP will continue unchanged and no new Units (other than in recognition of dividends on XXXXXXXXXX Common shares) will be granted. The DSUP will finally terminate (for all purposes) when the last remaining participant redeems his/her Units thereunder.
(v) No amounts will be contributed to a third party or otherwise set aside to fund the benefits under the DSUP.
(w) The participation in the DSUP will not in and of itself construe nor imply any employment rights. In situations where the employee ceases to be an employee other than on retirement, death or disability, whether for cause or otherwise, the right to participate in the DSUP will cease immediately and all awards not yet vested will be deemed to be null and void and of no value will be paid in recognition of such forfeiture.
(x) The DSUP will be administered by the senior officer responsible for Human Resources of XXXXXXXXXX on behalf of and under instructions of the HRC.
PURPOSE OF PROPOSED PLAN
9. The purpose of the proposed DSUP is to significantly strengthen the link between executive and shareholder interests by encouraging key executives to voluntarily elect to have a major portion of their variable compensation tied to the long term performance of XXXXXXXXXX Common Shares.
10. (a) To the best of your knowledge and that of XXXXXXXXXX or any of its subsidiaries none of the issues in respect of which rulings are herein requested is currently under consideration by a tax services office or taxation centre in connection with a tax return already filed and none is under objection or appeal.
(b) XXXXXXXXXX (but not all its subsidiaries) deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
(c) The tax account number of XXXXXXXXXX.
RULINGS GIVEN
Provided that the statement of facts and description of the proposed plan are correct and constitute a complete disclosure of all the relevant facts and relevant terms of the proposed plan, that the proposed plan is established in the manner described in paragraphs 6 to 8(s) and 8(u) to 8(x) above, we rule as follows:
A. An arrangement in writing between an executive and the executive's employer under the terms of the DSUP will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be exempted from the definition of a "salary deferral arrangement" as contained in subsection 248(1) of the Income Tax Act (the "Act").
B. Except for those amounts identified in Ruling C and D below, no amount will be included pursuant to subsection 5(1) and section 6 of the Act in the income of an executive as a result of, in and of itself, the executive's participation in the DSUP.
C. An amount paid by the executive's employer under the DSUP to an executive in accordance with paragraph 8(k) or (l) above will be included in the income of the executive pursuant to subsection 5(1) and section 6 of the Act for the year in which the amount is received.
D. An amount payable by the executive's employer under the DSUP to the executive's beneficiary or legal representative in accordance with paragraphs 8(m) and (n) above will constitute a "right or thing" for the purposes of subsection 70(2) of the Act.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, an amount referred to in rulings C or D that is payable by the executive's employer in a particular year, including an amount used by such employer to acquire XXXXXXXXXX Common Shares on the open market, in accordance with paragraph 8(s), will be deductible for that year in accordance with section 9 of the Act.
F. Paragraph 7(3)(b) of the Act will not apply to an amount referred to in rulings C or D that is used by the executive's employer to acquire XXXXXXXXXX Common Shares on the open market in accordance with paragraph 8(s).
G. Paragraph 110(1)(d) of the Act will not apply to an amount referred to in rulings C or D that is used by the executive's employer to acquire XXXXXXXXXX Common Shares on the open market in accordance with paragraph 8(s).
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 by XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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