30 November 1997 Ruling 9807853 - 6801 (D) PLAN - DEFERRED SHARE UNITS

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:

Confirmation that the plan is a prescribed plan under paragraph (d) of Regulation 6801.

Position: Yes.

Reasons: The plan meets all the conditions in paragraph (d) of Regulation 6801.

XXXXXXXXXX 980785
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Re: Advance Income Tax Ruling
Deferred Share Unit Plans (the “Plans”)
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling regarding the above Plans. We also acknowledge the various phone conversations (XXXXXXXXXX) which resulted in amendments to the Plans as evidenced by your facsimile dated XXXXXXXXXX.

Our understanding of the facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX is incorporated under the laws of Canada. It is a “public corporation” and a “taxable Canadian corporation” as those terms are defined in subsection 89(1) of the Income Tax Act (“the Act”). The common shares of XXXXXXXXXX are traded on XXXXXXXXXX. It has a fiscal year-end of XXXXXXXXXX.

2.

XXXXXXXXXX

3. XXXXXXXXXX has a stock option plan for its directors, officers and employees. The exercise price of options granted under the plan is determined by XXXXXXXXXX board of directors, and cannot be lower than the market value of the shares on the date the options are granted. The options expire no later than XXXXXXXXXX years after the date they are granted.

4. In addition to annual salary and benefits, senior executives of XXXXXXXXXX and of its subsidiaries may be entitled to annual cash bonuses, as determined from time to time by management and XXXXXXXXXX board of directors, based on the individual’s performance and merit, and on corporate performance.

5. XXXXXXXXXX currently has a board of directors composed of XXXXXXXXXX directors.

6. For the current term of office, XXXXXXXXXX will pay directors that are not otherwise employees of XXXXXXXXXX (hereinafter referred to as “non-employed directors”) the following amounts:

a) An annual retainer of $XXXXXXXXXX for non-executive Directors, the retainer being paid on a quarterly basis.

b) An annual retainer of $XXXXXXXXXX for the chairman of the board, and $XXXXXXXXXX for the vice-chairman of the board, the retainers being paid on a quarterly basis.

c) A fee of $XXXXXXXXXX for each board meeting attended.

d) On an annual basis, XXXXXXXXXX stock options for each director, XXXXXXXXXX.

e) XXXXXXXXXX stock options on the appointment of a new director.

PROPOSED TRANSACTIONS

7. XXXXXXXXXX will establish a new incentive plan for non-employed directors (the “Directors’ Plan”), and a separate new incentive plan for senior executives (the “Executives’ Plan”). The Directors’ Plan and the Executives’ Plan are referred to collectively in these advance income tax rulings as the “Plans”. The Plans will be governed by an agreement in writing between XXXXXXXXXX and each of the participating directors or executives, as the case may be, and as evidenced by the election forms required to be filed by each Director or Executive, as the case may be, to participate therein.

8. For the purposes of these advance income tax rulings, the relevant definitions are the following:

a) “Additional Retainer” shall mean any amount or amounts to be received by a director as remuneration that is not part of his or her Annual Retainer Fee as described herein.

b) "Annual Bonus" shall mean the amount of annual discretionary cash bonuses for executives based on the executive’s performance and merit as determined by the committee.

c) "Annual Retainer Fee" shall mean the amount, expressed in Canadian dollars, of the annual retainer which would, but for the Plan, be payable in cash by XXXXXXXXXX to a director for one year of service as a member of the Board beginning on the date of the annual meeting of shareholders of XXXXXXXXXX at which the director is elected and ending on the date immediately preceding the date of the following annual meeting of shareholders of XXXXXXXXXX, and for greater certainty, Annual Retainer Fee shall not include any other fee which may be payable by XXXXXXXXXX to the director in connection with services rendered by such director to XXXXXXXXXX, whether in his or her capacity as a director or otherwise.

d) "Board" shall mean the Board of Directors of XXXXXXXXXX.

e) "Business Day" shall mean a day, other than Saturday or Sunday, on which banking institutions in Canada are not authorized or obligated by law to close.

f) "Committee" shall mean:

i) in the case of the Directors’ Plan: the XXXXXXXXXX Committee of the Board of Directors of XXXXXXXXXX or such other committee of the Board comprised of members of the Board as the Board shall from time to time appoint to administer the Directors’ Plan.

ii) in the case of the Executives’ Plan: the XXXXXXXXXX Committee of the Board of Directors of XXXXXXXXXX or such other committee of the Board comprised of members of the Board as the Board shall from time to time appoint to administer the Executives’ Plan.

g) "Common Share" shall mean a common share of XXXXXXXXXX.

h) "Deferred Share Unit", or “DSU” shall mean a unit credited to an executive’s account or a director’s account, as the case may be, in accordance with the terms and conditions of the Directors’Plan or the Executives’Plan, as the case may be.

i) "Director" shall mean each member of the Board, who at the time of execution of the Plan, and at all times thereafter while such member continues to serve as a member of the Board, is not otherwise an employee of XXXXXXXXXX or any subsidiary thereof; provided, however, that the Committee, in its sole discretion, may determine from time to time that one or more members of the Board, who would otherwise participate in the Plan, shall be excluded.

j) "Executive" shall mean the officers of XXXXXXXXXX, the President of any operating subsidiary and other employees of XXXXXXXXXX or of any subsidiary of XXXXXXXXXX, who are not occupying the position of Director and who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial measure to the successful performance of XXXXXXXXXX or of such subsidiary.

k) "Market Value" of a Common Share shall mean the weighted average closing price for a Board lot of the Common Shares of XXXXXXXXXX traded XXXXXXXXXX on the three (3) trading days immediately preceding the relevant date, which prices shall be converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the relevant date. If on the relevant date, there is not a noon rate of exchange of the Bank of Canada, then the Market Value of a Common Share covered by a DSU shall be determined as provided above on the first day immediately preceding the relevant date for which there was a noon rate of exchange. If at any time, the Common Shares are no longer listed on XXXXXXXXXX, the Market Value shall be calculated in such manner as may be determined by the Committee from time to time. The Market Value shall always be established in relation to the fair market value of a Common Share of XXXXXXXXXX or a corporation related thereto. The Market Value of a Common Share shall be rounded up to the nearest whole cent.

l) "Quarter" means any of the four quarters of any financial year of XXXXXXXXXX as may be adopted from time to time and, until the financial year of XXXXXXXXXX is changed, shall mean the quarters ending XXXXXXXXXX.

m) "Quarterly Retainer Fee" shall mean the amount, expressed in Canadian dollars, representing XXXXXXXXXX of the Annual Retainer Fee that would, but for the Plan, be payable in cash on the last day of each Quarter by XXXXXXXXXX to a Director, or if, with respect to any Quarter, a Director has served as a member of the Board for a number of days that is less than the full Quarter, the amount, expressed in Canadian dollars, which is the product of: (i) the quotient determined by dividing: (A) the number of days in such Quarter during which the Director served as a member of the Board, and (B) the aggregate number of days in such Quarter, and (ii) the amount, expressed in Canadian dollars, of the Quarterly Retainer Fee which would otherwise have been payable for such Quarter had the Director served as a member of the Board for the full Quarter.

n) "Reference Date" shall mean:

i) in the case of a Director: with respect to any Quarter, the date used to determine the Market Value of a Common Share for purposes of determining the number of DSUs to be credited in respect of such Quarter to a Director's account; which date shall generally be the last Business Day of such Quarter or, if the Settlement Date occurs during the Quarter prior to such last Business Day, the resignation date of a Director.

ii) in the case of an Executive: with respect to any fiscal year, the date used to determine the Market Value of a Common Share for purposes of determining the number of DSUs to be credited in respect of such fiscal year to an Executive's account; which date shall generally be the date of approval of the Annual Bonus of an Executive by the Committee.

o) "Resignation Date" means, in the case of the Directors’ Plan, the earliest date on which both of the following conditions are met: (1) the Director has ceased to be a member of the Board for any reason whatsoever, including the death of the Director, and (2) the Director is neither an employee nor a member of the board of XXXXXXXXXX or a subsidiary thereof. In the case of the Executives’ Plan, “Resignation Date” means the earliest date on which both of the following conditions are met: (1) the Executive has ceased to be employed by XXXXXXXXXX or any subsidiary thereof for any reason whatsoever, including termination of employment by the employer, voluntary resignation, retirement from active employment, permanent disability or death of the Executive, and (2) the Executive is not a member of the board of XXXXXXXXXX or a director of the board of any subsidiary of XXXXXXXXXX.

p) "Settlement Date" with respect to a participating Director or Executive to whom a Resignation Date has occurred shall generally be (and in all instances shall never be later than) the last Business Day of the calendar year following the calendar year during which the Resignation Date occurs. A Director or Executive may, on or before the Resignation Date, choose, in writing, a date which is after the Resignation Date but before the date which would otherwise be the Settlement Date (the “Elected Date”). In such a case, the Settlement Date shall be the fourth trading day following the release of XXXXXXXXXX quarterly or annual financial results immediately following the Elected Date, provided that, if the Elected Date occurs on the same date as the release of XXXXXXXXXX financial results, the Settlement Date shall, in such a case, be the fifth trading day immediately following such release of XXXXXXXXXX financial results.

q) "Subsidiary" shall have the meaning ascribed to the term "subsidiary body corporate" in Section 2(5) of the Canada Business Corporations Act.

9. For the purposes of these advance income tax rulings, the relevant features of the Plans are as follows:

a) The Plans will be administered by the Committee and will be effective XXXXXXXXXX.

b) Under the Directors’ Plan, a Director may elect to be allocated, in lieu of cash payment, not less than 1% and not more than 100% of his or her Annual Retainer Fee in the form of DSUs. Provided a Director has elected to be allocated 100% of his or her Annual Retainer Fee in the form of DSUs, the Director may also elect to be allocated, in lieu of cash payment, not less than 100% of his or her Additional Retainer in the form of DSUs. The Director shall have the right to elect once each calendar year the percentage of such amounts that he or she wishes to receive in the form of DSUs, with the election to be made by the end of the calendar year preceding the year to which the election applies. In the case of a new Director, the election is to be made within 30 days after the appointment of the Director, with such election to apply in respect of payments of fees for quarters commencing after the date of the election. For 1998, existing Directors must make the election no later than XXXXXXXXXX, with the election to apply for the third and fourth quarters.

c) Under the Executives’ Plan, an Executive shall have the right to elect to be allocated, in lieu of cash payment, not less than 1% and not more than 100% of his or her Annual Bonus in the form of DSUs. The Executive shall have the right to elect once each fiscal year, prior to the end of the fiscal year immediately preceding the year in which an Annual Bonus may be ascertained. The Annual Bonus for a fiscal year shall be recommended by management after the end of the year, and shall then be submitted for approval by the Committee in the first Quarter of the following year.

d) Under the Plans, DSUs will be fully vested upon being credited to a Director or an Executive.

e) The amount of DSUs credited to a Director or Executive shall be based on the dollar amount of the fees or Annual Bonus which the Director or Executive, as the case may be, has elected to be allocated in the form of DSUs, divided by the Market Value of a Common Share of XXXXXXXXXX on the Reference Date.

f) A Director or Executive shall be credited with additional DSUs, equal to the amount of each dividend declared and paid by XXXXXXXXXX (excluding dividends paid in additional Common Shares of XXXXXXXXXX, but including dividends which may be paid in cash or shares at the option of the shareholder), multiplied by the number of DSUs credited in the Director’s or Executive’s DSU account on the record date for the payment of such dividend, and divided by the Market Value of a Common Share of XXXXXXXXXX, determined on the dividend payment date.

g) XXXXXXXXXX shall maintain or cause to be maintained for each Director and Executive a record of the amount of DSUs credited to the individual, and a written notification of the balance in the account shall be provided to each Director and Executive annually. A Director or Executive shall not be entitled to any certificate or other document evidencing the DSUs, and under no circumstances shall DSUs be considered Common Shares of XXXXXXXXXX, nor shall they entitle any Director or Executive to exercise voting rights or any other rights attaching to the ownership or control of Common Shares.

h) The rights or interests of a Director or an Executive under the Plans shall not be assignable or transferable, otherwise than by testamentary disposition or in accordance with the laws governing the devolution of property in the event of death.

i) After the Resignation Date, the Director or Executive shall be entitled, on the Settlement Date, to an amount equal to the number of DSUs standing to the credit, on that date, of the Director or Executive, as the case may be, multiplied by the Market Value of a Common Share of XXXXXXXXXX determined on the Settlement Date. The amount may be paid in cash or, at the sole discretion of the Committee, in Common Shares of XXXXXXXXXX, or any combination thereof.

j) A Director who becomes an employee of XXXXXXXXXX or a Subsidiary thereof shall no longer be eligible to continue to participate in the Directors’ Plan. DSUs already credited to his or her account shall become governed by the Executives’ Plan. An Executive who becomes a Director of XXXXXXXXXX shall no longer be eligible to continue to participate in the Executives’ Plan. DSUs already credited to his or her account shall become governed by the Directors’ Plan.

k) If the Committee has determined that payment be made in the form of Common Shares as described in subparagraph 9(i) above, a number of XXXXXXXXXX Common Shares will be purchased by a designated broker on the open market on behalf of the Director or Executive, equal to the number of DSUs credited to the Director’s or Executive’s notional account, net of applicable withholdings. XXXXXXXXXX shall advise the broker of the number of Common Shares to be purchased by the broker on behalf of the Director or Executive. The broker will purchase the XXXXXXXXXX Common Shares as soon as practical after receiving notification from XXXXXXXXXX, and will deliver the XXXXXXXXXX Common Shares to the Director or Executive or to his or her estate. XXXXXXXXXX will also make a cash payment to the Director or Executive in lieu of fractional Common Shares.

l) All expenses of administration of the Plans shall be borne by XXXXXXXXXX, including any reasonable brokerage fees relating to a purchase of the XXXXXXXXXX Common Shares under the Plans, as described in subparagraph 9( i) above.

m) In the event that the XXXXXXXXXX Common Shares are subdivided or consolidated into a different number of Common Shares, the number of DSUs recorded in the account of the Director or Executive shall be adjusted by replacing such number by a number equal to the number of Common Shares which would have been held by the Director or Executive immediately after the subdivision or consolidation, should the Director or Executive have held a number of Common Shares equal to the number of DSUs recorded in the individual’s account, on the record date for such stock subdivision or consolidation. In the event that the XXXXXXXXXX Common Shares are changed into or exchanged for a different number or kind of shares of XXXXXXXXXX or of another corporation, there shall be substituted for each XXXXXXXXXX Common Share referred to in the Plans the kind of shares into which each XXXXXXXXXX Common Share has been changed or for which each XXXXXXXXXX Common Share has been exchanged, and an equitable adjustment shall be made, if required, in the number of DSUs recorded in the account of the Director or Executive. In the event that there are any other changes in the number or kind of outstanding XXXXXXXXXX Common Shares or of any shares into which XXXXXXXXXX Common Shares have been changed or exchanged, there shall be substituted for each XXXXXXXXXX Common Share referred to in the Plans or for each share into which the XXXXXXXXXX Common Share has been changed or exchanged, the kind of shares into which each XXXXXXXXXX Common Share or each such share has been so changed or exchanged, and an equitable adjustment shall be made in the number of DSUs recorded in a Director’s or Executive’s account. In the event that, at the Settlement Date, there is no public market for the XXXXXXXXXX Common Shares or for shares substituted therefor, the obligations of XXXXXXXXXX under the Plans shall be satisfied by a payment in cash in such amount as is reasonably determined by the Committee to be fair and equitable in the circumstances. However, any such amount shall always be established in relation to the fair market value of a Common Share of XXXXXXXXXX or of a corporation related thereto.

n) The Board may, from time to time amend, suspend or terminate the Plans in whole or in part, or the terms of DSUs credited in accordance with the Plans. If any such amendment, suspension or termination will materially or adversely affect the right of a Director or Executive with respect to DSUs credited to the individual, the written consent of the individual to such amendment, suspension or termination shall be obtained, except that written consent shall not be required if such amendment, suspension or termination is required to comply with applicable laws, regulations, rules, orders of government or regulatory authorities or the requirement of any stock exchange on which XXXXXXXXXX shares are listed. If the Directors’ Plan or the Executives’ Plan is terminated, DSUs previously credited shall remain outstanding and in effect and settled in accordance with the terms of the Plans, which shall continue to have effect for such purpose. XXXXXXXXXX

10. XXXXXXXXXX may be compensated by its subsidiaries under the Executives’ Plan in respect of individuals who are employees of the subsidiaries.

11. Other than payments in satisfaction of DSUs as described herein, and of normal administration costs of the Plan, XXXXXXXXXX shall not make any contributions or payments to a third party in respect of the Plans and, in particular, shall not make any contributions or payments to a custodian or trustee. In addition, third party guarantees shall not be provided with respect to any awards or credits under the Plans.

PURPOSE OF THE PROPOSED TRANSACTIONS

12. The purpose of the Directors’ Plan is to assist XXXXXXXXXX in attracting and retaining individuals with experience and ability to serve as members of the Board, to allow the XXXXXXXXXX Directors to participate in the long-term success of the corporation, and to provide a greater alignment of interests between the Directors and shareholders of XXXXXXXXXX. The purpose of the Executives’ Plan is to assist XXXXXXXXXX and its subsidiaries in attracting and retaining individuals with experience and ability, to allow senior Executives of XXXXXXXXXX and its subsidiaries to participate in the long-term success of the group, and to provide a greater alignment of interests between the senior Executives and the shareholders of XXXXXXXXXX.

ADDITIONAL INFORMATION

13. To the best of your knowledge and belief, none of the issues or matters in respect of which rulings are being requested are being considered by a Tax Services Office or a Taxation Centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

RULINGS GIVEN

14. Provided the above facts and proposed transactions are accurate and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the terms of the Plan are as described above, we rule as follows:

a) Section 7 of the Act will not apply to the Plans.

b) Neither Plan will constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act.

c) Neither Plan will constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

d) Each Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and as such will be excluded from being a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

e) Except for those amounts identified in rulings f) and g) below, no amount will be included in the income of a Director or Executive pursuant to section 3, subsection 5(1), paragraphs 6(1)(a) or (c), subsection 6(3) or paragraph 56(1)(a) of the Act, as a result of the participation of a Director or Executive in either of the Plans.

f) The amount to be included in the income of a resident Director or Executive for a year under a Plan will consist of the aggregate of the following amounts:

i) under paragraph 6(1)(c) of the Act, the cash amount paid by XXXXXXXXXX in the year to the Director or Executive in lieu of fractional Common Shares described in subparagraph 9(k) above and for DSUs where Common Shares are not delivered to a Director or Executive;

ii) under paragraph 6(1)(c) of the Act, the amount paid by XXXXXXXXXX in the year to the broker (excluding brokerage fees) to acquire the Common Shares distributed to a Director or Executive as described in subparagraph 9(k) above;

iii) under paragraph 6(1)(c) of the Act, the amount of applicable withholdings withheld by XXXXXXXXXX in the year as described in subparagraph 9(k) above;

iv) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by XXXXXXXXXX in the year for the acquisition of the Common Shares distributed to the Director or Executive by the broker as described in subparagraph 9(l) above; and

g) The amount to be included in the income of a non-resident Director or Executive for a year under a Plan will consist of the aggregate of the following amounts:

i) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the cash amount, to the extent it is attributable to services rendered in Canada, paid by XXXXXXXXXX in the year to the Director or Executive in lieu of fractional Common Shares as described in subparagraph 9(k) above and for DSUs where Common Shares are not delivered to a Director or Executive;

ii) 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 XXXXXXXXXX in the year to the broker (excluding brokerage fees) to acquire the Common Shares distributed to the Director or Executive, as described in subparagraph 9(k) above;

iii) 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 by XXXXXXXXXX in the year as described in subparagraph 9(k) above;

iv) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid by the XXXXXXXXXX in the year, to the extent they are paid with respect to the acquisition of the Common Shares distributed to the Director or Executive by the broker, as described in subparagraph 9(l) above, and attributable to services rendered in Canada; and

h) Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings f) and g) that are paid by XXXXXXXXXX in a particular year 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 Plan is implemented within six months of the date of this letter. Furthermore, these rulings will be binding only in respect of the last version of the Plans, as submitted for our review today, and will not be binding in the event the Plan is amended as outlined in subparagraph 9(n) above.

Yours truly,

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