1997 Ruling 9725683 - DEFERRED SHARE UNITS, STOCK OPTIONS

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) Will the payment of deferred share units be an SDA?

2) Will the right to issue treasury shares for share units create

a section 7 problem?

Position:

1) No 2) No

Reasons:

1) 6801(d) satisfied

2) We have previously stated that no section 7 where employer has right to pay cash or issue shares so 6801(d) would apply if no section 7.

XXXXXXXXXX 972568
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-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 was incorporated on XXXXXXXXXX under the Canada Business Corporations Act under the name XXXXXXXXXX. On XXXXXXXXXX articles of amendment were filed in order to change the company ‘s name. The Company is a resident of Canada and has a XXXXXXXXXX year end. It is currently a corporation which is indirectly controlled by a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Income Tax Act (Canada) (the "Act"). The Company has not carried on any activities since its incorporation.

2. From its date of incorporation until XXXXXXXXXX the common shares of the Company were owned by XXXXXXXXXX ("Parentco"). On XXXXXXXXXX, the shares of the Company were transferred by Parentco to XXXXXXXXXX ("Subco"), a subsidiary controlled corporation of Parentco. Prior to XXXXXXXXXX, Subco was called XXXXXXXXXX. The expression "subsidiary controlled corporation" has the meaning assigned by subsection 248(1) of the Act.

3.

XXXXXXXXXX

4. On or before XXXXXXXXXX, the Company acquired from Subco all of its direct and indirect interests in its XXXXXXXXXX and other related assets. In addition, the employees of Subco were transferred to the Company. An initial public offering will be made in respect of up to XXXXXXXXXX% of the Company's common shares. The purpose of this reorganization is to establish the Company as a separate Canadian public company XXXXXXXXXx.

5. The Company will have a Board of Directors composed of XXXXXXXXXX directors. Certain of these directors will not be employees of the Company, a subsidiary of the Company, Parentco, or any other subsidiary of Parentco ("non-employee directors").

6. While in office, the Company will pay its non-employee directors an annual retainer in the amount of U.S. $XXXXXXXXXX.

7. 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. In response to that trend, the Company is contemplating the establishment of a stock compensation plan, more particularly described below.

Proposed Transactions

8. The Company will establish "XXXXXXXXXX" (the "Plan") for the benefit of Canadian and non-resident directors of the Company. Only non-employee directors are eligible to participate in the Plan (the "Participants"). The principal features of the Plan will be as follows:

(a) The Plan will be administered by the Committee of the Board of Directors of the Company generally 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 XXXXXXXXXX% of his or her Quarterly Retainer Fee, within the meaning assigned in paragraph 9(c) below, in the form of a number of common shares of the Company credited to a notional account maintained for each Participant on a deferred basis ("Share Units") where each Share Unit would be the equivalent of a common share of the Company, more particularly described below. The Participant will receive the remainder of his or her compensation in cash net of applicable withholdings.

(c) Under no circumstances shall Share Units be considered common shares of the Company nor shall they entitle any Participant to exercise voting rights or any other rights attaching to ownership of common shares of the Company, nor shall any Participant be considered the owner of common shares of the Company until after the issuance of treasury shares or the purchase of shares on the open market.

9. Certain terms are defined in the Plan as follows:

(a) "Market Value" on a particular day means the market value of one the Company's common shares on the basis of the average of the closing prices for a board lot of the Company's common shares on XXXXXXXXXX Exchange, on that day, or if at least one board lot of the Company's common shares shall not have been traded on both exchanges on that day, on the immediately preceding day for which at least one board lot was so traded. If, at any time, the Company's common shares are no longer listed on XXXXXXXXXX Exchange, then the market value shall be calculated on the basis of the closing price on the aforesaid day, for a board lot of the Company's common shares on the stock exchange on which the Company's 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 the Company. Currently, the Company's Quarters end on XXXXXXXXXX.

(c) "Quarterly Retainer Fee", means the amount representing XXXXXXXXXX percent of the annual retainer fee which would, but for the Plan, be payable by the Company in cash on the last day of each Quarter. With respect to eligible directors that have served as a member of the Board of Directors for a number of days that is less than the full quarter, the amount will be equal to the quarterly retainer fee multiplied by the quotient determined by dividing the number of days in the particular Quarter during which the Participant served as a member of the Board of Directors of the Company by the aggregate number of days in the particular 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 common share of the Company for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's account pursuant to section 6 of the Plan. The date shall be, unless otherwise determined by the Committee and approved by the Board of Directors of the Company, the last trading day of such Quarter on which the Market Value of a common share of the Company 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 the Company common share may be determined, the Reference Date shall be the day immediately preceding the 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 Company's Board of Directors for any reason whatsoever.

10. 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 Share Units with respect to any Quarter shall be determined by dividing: (a) one-half of the Quarterly Retainer Fee by (b) the Market Value of a common share of the Company on the Reference Date for that Quarter. For greater certainty, no cash payment by the Company or purchase of the Company's common shares shall occur on a Reference Date in respect of one-half of the Quarterly Retainer Fee payable in Share Units; 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 the Company's common shares and such dividend equivalents will be converted into additional Share Units based on the Market Value of the Company's common shares on the date the dividends are paid.

(c) Except as set forth in Section XXXXXXXXXX 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 the Company's quarterly or annual results immediately following the Participant's Termination of Board Service, and in no event will the Entitlement Date be later than the last day of the first calendar year commencing after the Participant's Termination of Board Service. A Participant shall be entitled to receive, at the sole discretion of the Company, in satisfaction of the Share Units recorded in the Participant's account on the Entitlement Date, one of the following:

i) an amount of cash equal to the number of Share Units multiplied by the Market Value of a common share of the Company on the Entitlement Date;

ii) common shares of the Company issued from Treasury; or

iii) common shares of the Company purchased on the open market by a designated broker.

In determining the number of common shares of the Company that will be issued from treasury or purchased on the open market, the Company will take the applicable withholding taxes into consideration (the "Withholdings"). For instance, if the applicable withholding tax rate (combined federal and provincial) is 50% then the number of common shares of the Company that will be issued from treasury or purchased on the open market will be 50% of the number of Share Units held in the Participant's account. The Company will then remit, on behalf of the particular Participant, an amount equal to value determined when the number of shares issued to or purchased for the Participant is multiplied by the Market Value of the Company 5 shares on the Entitlement Date. In the case of shares acquired on the open market, the Company shall advise the broker, on the Entitlement Date of the number of the Company's common shares to be purchased by the broker on the Participant's behalf. The broker will deliver the Company 5 common shares, acquired on the Participant's behalf, to the Participant or his or her estate. In addition, regardless of whether or not treasury shares or market shares are used to satisfy the Participant's Share Units, the Company 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. The Company will pay all brokerage fees arising in connection with the acquisition of the Company 5 common shares by the broker on the open market and 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 the Company.

11. The Board of Directors of the Company 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.

12.

XXXXXXXXXX

XXXXXXXXXX

13. The Company has retained the ability to extend the Plan to cover all or a portion of the XXXXXXXXXX% of the retainer fee currently payable in cash, as well as to cover fees other than annual retainer fees such as meeting and committee fees. 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

14. The purpose of the proposed transactions is to provide non-employee directors of the Company with a long term stock based compensation program.

Additional Information

15. To the best of your knowledge and the knowledge of the Company, 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 8, 9, 10 and 12 above, we rule as follows:

A. The Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.

B. The Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.

C. When cash is received in satisfaction of the resident Participant's Share Units as described in subparagraph 10(c)i), the Participant will include the amount paid by the Company, before withholding taxes, in his or her income under paragraph 6(1)(c) of the Act.

D. When cash is received in satisfaction of the non-resident Participant's Share Units as described in subparagraph 10(c)i), the non-resident Participant will include the amount, to the extent attributable to services rendered in Canada, paid by the Company, before withholding taxes, in his or her income under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act.

E. The amount to be included in the income of a resident Participant for the year under the Plan, where the Company issues common shares to the Participant in satisfaction of the Participant's Share Units as described in subparagraph 10(c)ii) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Participant for the rights related to fractional shares as described in subparagraph 10(c) above;

(b) under paragraph 7(1)(a) of the Act, the amount representing the aggregate Market Value of the Company's common shares issued to the Participant as described in subparagraph 10(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount of Withholdings withheld by the Company as described in subparagraph 10(c) above.

F. The amount to be included in the income of a non-resident Participant for the year under the Plan, where the Company issues common shares to the non-resident Participant in satisfaction of the non-resident Participant's Share Units as described in subparagraph 10(c)ii) above, 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 the Company to the non-resident Participant for the rights related to fractional shares as described in subparagraph 10(c) above;

(b) under paragraph 7(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, representing the aggregate Market Value of the common shares issued to the non-resident Participant as described in subparagraph 10(c) above;

(c) 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 withholdings withheld from the non-resident Participant by the Company as described in subparagraph 10(c) above;

G. The amount to be included in the income of a resident Participant for the year under the Plan, where the Participant has received common shares of the Company that were purchased by the designated broker on the open market in satisfaction of the Participant's Share Units as described in subparagraph 10(c)iii) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Participant for the rights related to fractional shares as described in subparagraph 10(c) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the broker (excluding brokerage fees) to acquire the particular shares that will be distributed to the Participant as described in subparagraph 10(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount of Withholdings withheld by the Company as described in subparagraph 10(c) above;

(d) under paragraphs 6(1)(a) of the Act, the amount of brokerage fees paid by the Company for the acquisition of the particular common shares of the Company distributed to the Participant by the broker as described in subparagraph 10(c) above; and

(e) under paragraph 6(1)(c) of the Act, the special cash payment paid by the Company 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 G(d) above as described in subparagraph 10(c) above.

H. The amount to be included in the income of a non-resident Participant for a year under the Plan, where the non-resident Participant has received shares purchased by the designated broker on the open market in satisfaction of the non-resident Participant's Plan Share Units as described in subparagraph 10(c)iii) above, 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 the Company to the non-resident Participant for the rights related to fractional shares as described in subparagraph 10(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 the Company to the broker (excluding brokerage fees) to acquire the particular common shares of the Company to be distributed to the non-resident Participant, as described in subparagraph 10(c) above;

(c) 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 Withholdings withheld from the non-resident Participant by the Company as described in subparagraph 10(c) above;

(d) under paragraphs 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by the Company, to the extent they are paid with respect to the acquisition of the Company common shares , the value of which was brought into income under ruling H(b) above, for the acquisition of the particular common shares of the Company distributed to the nonresident Participant by the broker as described in subparagraph 10(c); and

(e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the special cash payment paid by the Company to the non-resident Participant to compensate the Participant for the income tax liability in respect of an amount included in the non-resident Participant's income in ruling H(d) above as described in subparagraph 10(c) above.

I. The adjusted cost base to the Participant of any common shares of the Company acquired by the resident Participant shall:

(a) in the case of shares issued from Treasury, include, pursuant to paragraph 53(1)(j) of the Act, the amount included in income as described in ruling E(b) above; or

(b) in the case of the Company common shares acquired on the open market, the aggregate of

a. the cost to acquire the shares which was included in the Participant's income in ruling G(b) above, and

b. the brokerage fees paid by the Company, which were included in the Participant's income in ruling G(d) above.

J. 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.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C, D, E(a), E(c), F(a), F(c), G and H above that are paid by the Company in a particular year in respect of Participants, will be deductible by the Company 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 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