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:
Whether arrangement is exempted from SDA definition by virtue of 6801(d);
Position:
Yes;
Reasons:
All requirements in 6801(d) are met.
XXXXXXXXXX 973377
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Tax Ruling
XXXXXXXXXX ("Opco") -
Account # XXXXXXXXXX - Phantom Stock Plan
This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed plan is as follows:
FACTS
1. Opco is incorporated under the laws of Canada and has its head office in XXXXXXXXXX.
Opco deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. Its mailing address is XXXXXXXXXX.
PROPOSED PLAN
2. Opco is proposing to establish a new arrangement (the "Plan") to provide benefits to its directors ("Directors") in respect of their services on the board of directors of Opco ("Board") after XXXXXXXXXX. The new arrangement would apply in respect of service after XXXXXXXXXX, both by current Directors and by individuals who become Directors after XXXXXXXXXX.
3. The relevant terms of the Plan are as follows:
(a) Effective as of the Opco annual general meeting of shareholders ("AGM") each year, the annual Board retainer ("ABR") paid by Opco to Directors, including Opco's XXXXXXXXXX, for the period from that AGM to the next AGM, but not including meeting, committee or additional fees or retainers to committee chairs, will be paid in deferred shares (the "Phantom Stock").
(b) Phantom Stock will not entitle a Director to any shareholder rights, including, without limitation, voting rights, dividend entitlements or rights on liquidation.
(c) Opco will maintain for each Director a notional Phantom Stock Account (the "Account") which will be credited with grants of Phantom Stock made to the Director from time to time.
(d) The number of Phantom Stock to be granted and credited to a Director's Account will be calculated by dividing the ABR by the twenty day simple average of the prices of an Opco Share on the XXXXXXXXXX Stock Exchange on the days preceding the specific grant date (the "Stock Price"). This will be done each time a portion of the ABR is scheduled to be paid. Where a Director's ABR is denominated in other than Canadian currency it will be converted to Canadian currency at the date of each grant.
(e) Phantom Stock will be fully vested upon being granted and credited to a Director's Account.
(f) A Director's Account will be credited with additional Phantom Stock whenever cash dividends are paid on Opco Shares. The number of additional Phantom Stock credited to a Director's Account in connection with the payment of dividends on the Opco Shares will be computed by taking the actual amount of dividends that would have been paid to such Director if he/she had held actual Opco Shares rather than Phantom Stock divided by the Stock Price of Opco Shares as at the date on which dividends are paid.
(g) In the event of any stock dividend, stock split, combination or exchange of Opco Shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Opco assets to shareholders, or any other change affecting Opco Shares, subject to 3(m) below, such proportionate adjustments, if any, as the Executive Committee of the Board in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of Phantom Stock held in a Director's Account under the Plan.
(h) An amount equal to the fair market value ("Fair Market Value") of the Phantom Stock will not be payable until after a Director's death or retirement. "Director's retirement" means the date on which the Director ceases to be an employee of Opco or a related person.
(i) The Fair Market Value of the Phantom Stock credited to a Director's Account, net of applicable withholdings, shall be payable after the earlier of the Director's death or retirement, provided that, in any event, the payment will take place no later than December 31st of the first calendar year commencing after the Director's death or retirement, as the case may be; and for purposes of (j) to (l) below, the Fair Market Value of the Phantom Stock will be determined by the formula
A x B
where
A is the Stock Price of an Opco Share, and
B is the number of Phantom Stock credited to the Director's Account.
(j) If the Director dies, the Fair Market Value of the Phantom Stock credited to the Director's Account will be payable to the Director's legal representative within one hundred and twenty days after the Director's death and, for purposes of computing variable A in the formula in (i) above, an Opco Share will be valued at the Stock Price on the date of the Director's death.
(k) Except in the case of a completed takeover, if the Director retires, the Director may elect to receive the Fair Market Value of the Phantom Stock credited to her or his Account at any time (the "Election Day") within the twelve months following her/his retirement. The amount payable will be paid at the earlier of a date within fifteen days after the Election Day and the last day of the twelve month period following the effective date of the Director's retirement (the "Last Day"). If the Director fails to file an election before the Last Day, the amount payable will be paid on the Last Day. For purposes of computing variable A in the formula in (i) above, an Opco Share will be valued at the Stock Price on the earlier of the Election Day and the Last Day.
(l) If the Director retires within ten days of a completed takeover of Opco, the Fair Market Value of the Phantom Stock credited to the Director's Account will be payable within fifteen days after the date of the Director's retirement and, for purposes of computing variable A in the formula in (i) above, an Opco Share will be valued at the price at which Opco Shares are acquired in the completed takeover.
(m) No amount will be paid to, or in respect of, a Director under the Plan, or pursuant to any other arrangement to compensate for a downward fluctuation in the price of Opco Shares, nor will any other form of benefit be conferred upon, or in respect of, a Director for such purpose.
(n) The terms of the Plan will provide that the Board can unilaterally amend or terminate the Plan at any time except with respect to rights that have accrued to a Director at the date of the amendment or termination of the Plan.
(o) Opco will be responsible for all costs relating to the administration of the Plan.
PURPOSE OF PROPOSED PLAN
4. The purpose of the proposed Plan is to enhance Opco's ability to attract and retain talented individuals to serve as members of the Board and to promote a greater alignment of interests between the Directors and the shareholders of Opco.
5. To the best of your knowledge and that of Opco none of the issues in respect of which rulings are herein requested is:
(a) in an earlier return of Opco or a related person,
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of Opco,
(c) under objection by Opco or a related person,
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(e) the subject of a ruling previously issued by the Directorate.
RULINGS GIVEN
Provided that the statement of facts and the 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 2, 3(a) to (m), and 3(o) above, we rule as follows:
A. An arrangement in writing between Opco and a Director under the terms of 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 Income Tax Act (the "Act").
B. The Plan will not constitute a "retirement compensation arrangement" or an "employee benefit plan" as defined under subsection 248(1).
C. Except for those amounts identified in Ruling D below, no amount will be included pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of a Director in respect of the Plan whether by reason of the implementation of the Plan or prior to any payment to the Director.
D. Payments received under the Plan by a Director in accordance with paragraphs 3(i) to (l) above will be included in the income of the Director pursuant to subsection 5(1), section 6 or subparagraph 115(1)(a)(i) of the Act for the year in which the payments are received. If a Director dies before any amount payable under 3(i) to (l) above is paid, the amount payable to Director's legal representative as a result of the death 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, any amount referred to in ruling D above that is a cash payment made by Opco in a particular year that satisfied any portion of a Director's or Director's legal representative's entitlement under the Plan, in accordance with paragraph 3(i) to (l) above, will be deductible for that year 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 by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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