1999 Ruling 9814633 - 6801(D), BONUS ARRANGEMENT

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: Bonus arrangement that is subject to a phantom stock plan.

Position: O.K.

Reasons: Meets the conditions in 6801(d) of the Act.

XXXXXXXXXX
XXXXXXXXXX 981463
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above noted taxpayer. In your subsequent letters dated XXXXXXXXXX, you provided additional information in respect of the facts and proposed transactions described below. 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 (“Parentco”) is a public corporation. The principal market for trading in Parentco shares is XXXXXXXXXX Stock Exchange. Parentco shares also trade onXXXXXXXXXX Stock Exchange and XXXXXXXXXX Stock Exchange. The expression public corporation has the meaning assigned by subsection 89(1) of the Income Tax Act (the “Act”).

Parentco offers various financial services through its operating subsidiaries.

2. XXXXXXXXXX (the “Employer”) is incorporated under the laws of Canada and has its head office in XXXXXXXXXX. The Employer is a subsidiary wholly-owned corporation of Parentco. The expression subsidiary wholly-owned corporation has the meaning assigned by subsection 248(1) of the Act. The Employer and Parentco are related corporations.

The Employer files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

3.

XXXXXXXXXX

Proposed Transactions

4. The Employer proposes to establish a new arrangement, the “XXXXXXXXXX” (the “Plan”). The relevant terms of the Plan are as follows:

(a) Each year, the Employer shall designate those key employees (the “Participants”) who will be entitled to share in the base pool, a term defined in (b) below, and the performance pool, a term defined in (d) below, in respect of that particular year. The Employer will designate the percentage of the two pools that will be allocated to the particular Participant for that particular year. The allocation to a Participant in one year does not give the Participant any right or claim to an allocation of a percentage of any pool for any future year. A key employee is defined to be an employee who, in the opinion of the President of the Employer, has demonstrated a capacity for contributing in a substantial measure to the successful performance of the Employer.

(b) Each year, an amount equal to XXXXXXXXXX basis points multiplied by the amount by which assets under the Employer’s management have increased on a XXXXXXXXXX year moving average shall be considered a bonus pool (the “Base Pool”). A “basis point” is defined in the Plan to mean XXXXXXXXXX. In the event that assets, on a XXXXXXXXXX year moving average basis, decline in a year, the Base Pool for that year shall be nil.

(c) At the end of each calendar year, the Participant will be credited with a notional amount equal to the Participant’s percentage of the Base Pool for that particular year. The amount credited to the Participant will be converted to deferred stock units (“Deferred Stock Units”). The number of Deferred Stock Units granted shall be determined by dividing the amount credited to the Participant’s Base Pool Account by the average of the closing price of a share of Parentco on the five consecutive trading days immediately before the end of the calendar year. An account (the “Deferred Stock Unit Account”) shall be maintained by the Employer for each Participant and shall be credited with the Participant’s Base Pool Deferred Stock Units. The Base Pool Deferred Stock Units will vest XXXXXXXXXX years after being credited to the Participant’s Deferred Stock Unit Account.

(d) The Plan also provides for a performance pool (the “Performance Pool”). The Performance Pool will be:

(i) XXXXXXXXXX basis points multiplied by the amount by which assets under the Employer’s management have increased on a XXXXXXXXXX year moving average,

multiplied by

(ii) a percentage based on the investment performance, as defined in subparagraph 3(e) below, provided that, in the event that assets, on a XXXXXXXXXX year moving average basis, decline in a year, the Performance Pool for that particular year will be nil and the base for measuring future increases in assets under the Employer’s management will be the historical high of the XXXXXXXXXX year moving average calculation.

(e) For the purposes of determining the Performance Pool,

(i) the investment performance with respect to a particular year will mean the average percentile ranking of all funds managed by the Employer based on the performance of the funds managed by the Employer over the performance period as compared against a specific peer group’s performance over the same period. The Employer’s Board of Directors (the “Board”) will determine the specific peer group prior to the commencement of the performance period;

(ii) the percentage to be used for each percentile ranking will be:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

(calculations will be made on a straight line basis between the above points); and

(iii) the Performance Pool with respect to a particular year will be calculated after the end of the XXXXXXXXXX year period immediately following the particular year (the “Performance Period”).

(f) Performance Pool entitlements will vest at the end of the Performance Period.

(g) In the event a Participant voluntarily terminates his or her employment with the Employer or the Participant is terminated for cause, any unvested entitlements with respect to the Performance Pool will be forfeited. In the event of a Participant retiring or terminating his or her employment other than for cause, any unvested amounts shall vest on the normal vesting date described in the Plan. In the event an active, retired or terminated Participant with rights under the Plan dies, the Participant’s unvested rights to amounts in the Performance Pools will vest on the normal vesting dates described in the Plan. After a Participant’s death, amounts in respect of future Performance Pools will be paid, net of applicable withholding taxes, to the Participant’s beneficiary 30 days after the normal vesting date. A Participant will be considered to have retired when his or her employment is terminated after attaining age 65 or, with the Employer’s consent, after attaining the age of 55, unless the Participant is terminated for cause. The expression “terminated for cause” has the meaning assigned to it in the Plan.

(h) Where an amount relating to the Performance Pool has vested and the Participant is still employed by the Employer, the vested amount will automatically be converted to Deferred Stock Units. The number of Deferred Stock Units credited to the Participant’s Deferred Stock Unit Account in respect of the Participant’s vested Performance Pool amount will be equal to the vested amount pertaining to the particular Participant divided by the average of the closing price of the Parentco shares on XXXXXXXXXX Stock Exchange for the immediately preceding five consecutive trading days.

(i) Additional Deferred Stock Units will be credited to a Participant’s Deferred Share Unit Account whenever cash dividends are paid on Parentco’s shares. The number of additional Deferred Stock Units will be calculated by determining the dividends that would have been paid to the Participant if the Deferred Stock Units in the Participant’s Deferred Stock Unit Account had been shares of Parentco.

(j) 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 Parentco assets to shareholders, or any change affecting the Parentco shares, such proportionate adjustments, if any, as the Employer’s Board, in its discretion, may deem appropriate to reflect such a change, shall be made with respect to the number of Deferred Stock Units outstanding under the Plan.

(k) For greater certainty, Deferred Stock Units will not entitle a Participant to any shareholder rights, including, without limitation, voting rights, dividend entitlements or rights on liquidation.

(l) Within 30 days after the earliest of the Participant’s death, retirement or termination of employment with the Employer, the Employer will pay an amount, net of the applicable withholding taxes, equal to the value of the Deferred Stock Units credited to the Participant’s Deferred Stock Unit Account, except those forfeited in accordance with the Plan, which will be determined by multiplying the number of Deferred Stock Units by the average of the closing price of the Parentco shares on XXXXXXXXXX Stock Exchange for the immediately preceding five consecutive trading days.

The Participants will not be entitled, either immediately or in the future, either absolutely or contingently, to receive or obtain any amount or benefit granted or to be granted for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Parentco shares.

5. The Plan will be administered by the Chairman and President of the Employer. The Plan may be amended or terminated at any time in whole or in part by the Board provided that no amendment shall adversely affect the rights of any Participant already accrued on the date of the amendment without the consent of the affected Participant.

Purpose of the Proposed Transactions

6. The purpose of the proposed transactions is to enhance the Employer’s ability to attract and retain talented individuals to serve as senior executives and other key employees and to promote a greater alignment of interests between the Participants and the shareholders of Parentco.

Additional Information

7. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Employer or of a person related to the Employer;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Employer or of a person related to the Employer;

(c) is under objection by the Employer or by a person related to the Employer;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the terms of the Plan are as described in paragraph 4 above, we rule as follows:

A. The Plan will not constitute an employee benefit plan or a retirement compensation arrangement, within the meanings assigned to those terms under subsection 248(1) of the Act.

B. 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.

C. In respect of a Participant’s participation in the Plan, the Participant will include the amounts received before the applicable withholding taxes in a particular year, as described in subparagraphs 4(h) and (m) above, in his or her income for that particular year under subsection 5(1) of the Act.

D. The amount payable by the Employer to a deceased Participant’s beneficiary out of the Participant’s Base Pool Account, as described in subparagraph 4(h) above, or in respect of the value of the Deferred Stock Units credited to the deceased Participant’s notional account, as described in subparagraph 4(n) above, will constitute a right or thing held by the deceased Participant at the time of death for the purposes of subsection 70(2) of the Act.

E. The amounts, before the applicable withholding taxes, in respect of future Performance Pools that vest subsequent to a Participant’s death and are paid, as described in subparagraph 4(h) above, will be included in the deceased Participant’s final return under subsection 70(1) of the Act.

F. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C, D and E above that are paid by the Employer in a particular year will be deductible by the Employer in accordance with section 9 of the Act.

The above rulings, which are based on the Act in its present form and does not take into consideration 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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