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:
Would an agreement to issue shares under section 7 result in the deferral of a benefit that could otherwise be considered a salary deferral arrangement?
Position:
Yes
Reasons:
Paragraph 7(3)(a) clearly states that no other amount could be included in income under Part I in respect of the agreement.
XXXXXXXXXX 972800
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
XXXXXXXXXX is a corporation organized under the laws of Canada and is a taxable Canadian corporation. XXXXXXXXXX is an indirect wholly-owned subsidiary of XXXXXXXXXX. The common shares of XXXXXXXXXX are traded through the XXXXXXXXXX. XXXXXXXXXX acquired its interest in XXXXXXXXXX. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act"). XXXXXXXXXX has a XXXXXXXXXX fiscal year end.
XXXXXXXXXX deals with the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Taxation Centre.
XXXXXXXXXX is a public limited company
XXXXXXXXXX
XXXXXXXXXX, together with its subsidiaries, is
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Pursuant to an "Agreement and Plan of Merger" (the "Merger Agreement") dated XXXXXXXXXX agreed to a certain merger (the "Merger"). Under the terms of the Merger Agreement, the following will take place:
XXXXXXXXXX will be merged with and into XXXXXXXXXX (the "Merged Corporation"). XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX solely for the purpose of the Merger.
The Merged Corporation will be a wholly-owned subsidiary of XXXXXXXXXX.
XXXXXXXXXX will be renamed XXXXXXXXXX.
The Merger is scheduled to close (the "Merger Close") immediately after receipt of all necessary approvals, and could occur by XXXXXXXXXX. After the Merger Close, XXXXXXXXXX, Merged Corporation and XXXXXXXXXX will all have a XXXXXXXXXX fiscal year end.
One of the employee benefit programs offered by XXXXXXXXXX to selected employees of XXXXXXXXXX and its affiliates (excluding employees of XXXXXXXXXX and employees of XXXXXXXXXX and its affiliates that are resident in Canada) is the Executive Deferred Compensation Plan (the "EDC Plan"). A plan with essentially the same terms and conditions as the EDC Plan will continue to be offered by the Merged Corporation after the Merger Close. The basic terms and conditions of the EDC Plan relevant to the proposed transactions may be summarized as follows:
XXXXXXXXXX fiscal year is currently the calendar year. Selected employees may be awarded a bonus for the fiscal year (the "Cash Incentive Bonus"). The procedure for the determination, approval, award and payment of the Cash Incentive Bonus for each fiscal year is as follows:
The Cash Incentive Bonus to be awarded to each employee for a fiscal year is recommended by XXXXXXXXXX management after the end of the fiscal year.
The Cash Incentive Bonus for the fiscal year recommended by XXXXXXXXXX management is then submitted for approval by the compensation committee of XXXXXXXXXX board of directors (the "Compensation Committee") in the first quarter of the year following the fiscal year.
The Cash Incentive Bonus that has been approved by the Compensation Committee is then awarded and paid (to the extent not deferred in accordance with the terms described below) to the employee within approximately one to two weeks following the date of such approval (the "Approval Date").
The purpose of the EDC Plan is to provide the employee with an opportunity to defer all or a portion of the Cash Incentive Bonus until a fixed date (the "Employee's Maturity Date"). The Employee's Maturity Date can be any date that is in the period beginning at least three years from the Approval Date and ending on the employee's retirement date. To obtain the deferral of the Cash Incentive Bonus to be awarded for the fiscal year, the employee must submit a written election prior to the earlier of the date on which the Cash Incentive Bonus for the fiscal year is recommended by XXXXXXXXXX management and the end of the fiscal year. The election is irrevocable, except in the event of severe financial hardship, in which case XXXXXXXXXX may exercise its discretion to permit an earlier payment from the Plan.
If a Cash Incentive Bonus is awarded to the employee, the election will determine which portion of the Cash Incentive Bonus has to be paid in cash (the "Cash Portion") and which portion is to be paid on a deferred basis (the "Deferred Portion"). The Deferred Portion is converted into a number of incentive stock units ("XXXXXXXXXX ISUs") which is then issued to the employee. The number of XXXXXXXXXX ISUs to be granted is calculated by dividing the U.S. dollar amount of the Deferred Portion determined on the Approval Date by the fair market value of XXXXXXXXXX Stock on the Approval Date (only trades in U.S. dollars). As an incentive for the employee to participate in the EDC Plan, XXXXXXXXXX issues an additional number of XXXXXXXXXX ISUs equal to XXXXXXXXXX% of the XXXXXXXXXX ISUs to the employee in respect of the Deferred Portion. Each XXXXXXXXXX ISU provides the employee with the right to receive a share of XXXXXXXXXX authorized common stock ("XXXXXXXXXX Stock") on the Employee's Maturity Date. The additional XXXXXXXXXX ISUs which are provided as an incentive to participate in the EDC Plan vest over three years while the XXXXXXXXXX ISUs representing the Deferred Portion vest when they are granted.
On the Maturity Date, the employee will receive one treasury share of XXXXXXXXXX Stock from XXXXXXXXXX for each of his or her XXXXXXXXXX ISUs. Treasury shares of XXXXXXXXXX Stock for this purpose include both newly-issued shares of XXXXXXXXXX Stock and shares which have been repurchased and returned to treasury by XXXXXXXXXX as permitted under United States law.
Approximately one year prior to the Maturity Date, the employee is provided with one opportunity to amend the Maturity Date to a later date that is at least three years later than the current Maturity Date and earlier than the employee's retirement date. We will continue to refer to the date that the XXXXXXXXXX Stock has to be issued in exchange for the XXXXXXXXXX ISUs as the "Maturity Date".
If the employee's employment is terminated by XXXXXXXXXX for cause as defined in the employee's employment agreement or the XXXXXXXXXX Executive Severance Program (or if not so defined under certain circumstances including a deliberate material act or omission by the employee in his or her duties), the non-vested portion of the employee's XXXXXXXXXX ISUs will be forfeited.
If the employee voluntarily terminates employment prior to the Maturity Date,
treasury shares of XXXXXXXXXX will be issued within sixty days in respect of the vested portion of the XXXXXXXXXX ISUs held by the employee or as soon as administratively practicable following the date of termination of employment; and
the non-vested portion of the employee's XXXXXXXXXX ISUs will be forfeited.
If the employee's employment is terminated by XXXXXXXXXX other than for cause, the Maturity Date with respect to all of the employee's XXXXXXXXXX ISUs, whether vested or not, will accelerate and treasury shares of XXXXXXXXXX will be issued within sixty days to the employee in respect of each XXXXXXXXXX ISU held by the employee or as soon as administratively practicable following the date of termination of employment.
In connection with the pending Merger, the following modifications have been made to the EDC Plan.
As it is anticipated that the Merger Close could occur prior to the end of XXXXXXXXXX normal fiscal year of XXXXXXXXXX, the Cash Incentive Bonus that may be awarded to an employee in respect of the 1997 fiscal year (the "1997 Cash Incentive Bonus") would be recommended by XXXXXXXXXX management and approved by the Compensation Committee just prior to the Merger Close, (rather than in early 1998 as would normally be the case) and will, to the extent not deferred, be paid in XXXXXXXXXX.
To obtain a deferral of the 1997 Cash Incentive Bonus, the employee submitted a written election to XXXXXXXXXX before the end of the summer of 1997.
Each XXXXXXXXXX ISU granted to an employee by XXXXXXXXXX prior to the Merger Close will be converted after the Merger Close into:
XXXXXXXXXX of an incentive stock unit representing the right to receive XXXXXXXXXX ADSs ("XXXXXXXXXX ISUs"). (Each XXXXXXXXXX ISU will entitle the employee to receive one newly issued XXXXXXXXXX ADS on the Maturity Date. Simultaneous with the issue of XXXXXXXXXX ADS, XXXXXXXXXX will deposit with the depositary a sufficient number of newly-issued XXXXXXXXXX ordinary shares.); and
XXXXXXXXXX cash consideration (the "Cash Consideration") which will be paid in XXXXXXXXXX.
On a going forward basis, assuming that the Merger Close occurs, all incentive stock units granted under the EDC Plan in respect of Cash Incentive Bonuses for fiscal years after 1997 will be XXXXXXXXXX ISUs to be granted by XXXXXXXXXX. The number of XXXXXXXXXX ISUs to be granted will be calculated by dividing the dollar amount of the Deferred Portion determined on the date the Cash Incentive Bonus is approved by the remuneration committee of the board of directors of XXXXXXXXXX by the fair market value of a XXXXXXXXXX ADS on such date. XXXXXXXXXX will then provide a XXXXXXXXXX matching award by the grant of additional XXXXXXXXXX ISUs.
Following the Merger Close, an XXXXXXXXXX employee who has been granted XXXXXXXXXX ISUs which automatically convert to XXXXXXXXXX ISUs under the EDC Plan or an XXXXXXXXXX employee who has been granted XXXXXXXXXX ISUs is entitled to receive, upon the declaration of dividends on XXXXXXXXXX ADSs an equivalent amount ("Dividend Equivalents") with respect to the XXXXXXXXXX ISUs held by the employee. Dividend Equivalents payable on ISUs are not eligible for deferral, but rather, are to be paid as they become due.
Selected employees of XXXXXXXXXX may be granted from time to time the Cash Incentive Bonus, but they do not currently participate in the EDC Plan.
Proposed Transactions
Selected employees of XXXXXXXXXX who may be awarded Cash Incentive Bonuses will be permitted to participate in the EDC Plan, commencing with the Cash Incentive Bonus to be paid in XXXXXXXXXX in respect of the 1997 fiscal year. To participate in the EDC Plan, the eligible employees will be required to submit a written election to XXXXXXXXXX prior to the earlier of the date on which the 1997 Cash Incentive Bonus is recommended by XXXXXXXXXX management just prior to the Merger Close and the normal 1997 fiscal year-end of XXXXXXXXXX. Each eligible XXXXXXXXXX employee that elects to participate in the EDC Plan will hereinafter be referred to as a "Participant".
The same terms and conditions of the EDC Plan applicable to XXXXXXXXXX employees, described in paragraph 8 above, including the modifications to the EDC Plan affecting the 1997 fiscal year made in connection with the pending Merger will be equally applicable to the Participants, except that the Cash Incentive Bonus to be awarded to each eligible XXXXXXXXXX employee for each fiscal year will be recommended by XXXXXXXXXX management. In addition, the Cash Portion described in paragraph 8(c) above, the Cash Consideration described in paragraph 8(g)iii)b. above and the Dividend Equivalents described in paragraph 8(h) above will be paid to the Participants by XXXXXXXXXX.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to provide XXXXXXXXXX employees with compensation and incentive benefits that are necessary to attract and retain skilled and talented senior personnel. The XXXXXXXXXX compensation and benefit programs have already proven their worth in achieving these objectives.
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 set out in your submissions, we rule as follows:
The grant of an XXXXXXXXXX ISU by XXXXXXXXXX or a XXXXXXXXXX ISU by XXXXXXXXXX after the Merger Close to a Participant in accordance with the Participant's election described in paragraph 10 above, constitutes an agreement to issue shares for the purposes of section 7 of the Act.
The amount to be included in a Participant's income for a year in respect of the Cash Incentive Bonus and the EDC Plan will consist of the following amounts:
under subsection 5(1) of the Act, the Cash Portion received from XXXXXXXXXX in the year;
under subsection 5(1) of the Act, the Cash Consideration received from XXXXXXXXXX in the year;
under subsection 5(1) of the Act, the Dividend Equivalents received from XXXXXXXXXX in the year; and
under paragraph 7(1)(a) of the Act, the amount representing the fair market value of the XXXXXXXXXX Stock or the XXXXXXXXXX ADS, as the case may be, issued to the Participant in the year.
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 proposed transactions are completed 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
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