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: Will a phantom stock plan for non-employee directors be excluded from SDA rules under 6801(d)?
Position: Yes.
Reasons: Standard plan that is being implemented by most public companies..
XXXXXXXXXX
XXXXXXXXXX 982138
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
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. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the relevant facts and proposed transactions is as follows:
RELEVANT FACTS
1. XXXXXXXXXX (the “Corporation”) is a company incorporated under the laws of XXXXXXXXXX, a resident of Canada and a public corporation. The Corporation’s common shares are listed on XXXXXXXXXX Stock Exchange. The expression “public corporation” has the meaning assigned by subsection 89(1) of the Income Tax Act (the “Act”).
The Corporation files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
2. The Corporation’s business involves the distribution of XXXXXXXXXX. The Corporation's head office is located at XXXXXXXXXX.
3. The Corporation’s Board of Directors (the “Board”) is currently comprised of XXXXXXXXXX directors.
4. For the upcoming term of office, the Corporation will pay to each of its directors that are not otherwise employed by the Corporation or any of its subsidiaries (other than being a director) the following amounts:
a) an annual retainer fee of $XXXXXXXXXX;
b) a fee of $XXXXXXXXXX for each Board meeting attended;
c) a fee of $XXXXXXXXXX per year for services as chairman of any standing committee; and
d) a fee of $XXXXXXXXXX per year for services as chairman of the Board.
5. A recent trend among leading public companies is to pay all or a portion of a director's compensation in shares of stock or units tracking the value of such shares, instead of cash. In response to that trend, the Corporation is contemplating the establishment of a compensation plan more particularly described below.
PROPOSED TRANSACTIONS
6. The Corporation will establish the "XXXXXXXXXX" (the "Plan”) for the benefit of Canadian directors of the Corporation (the "Participants"). Directors of the Corporation who receive employment income, other than director's fees, from the Corporation or from one of its subsidiaries will not be eligible to participate in the Plan. The principal features of the Plan are as follows:
(a) The Plan will be administered by the Board or a committee comprised of members of the Board (the “Committee”). A notional account will be established for each Participant in order to carry out the objectives of the Plan, more particularly described below. The administrator of the notional accounts is referred to herein as the "Administrator".
(b) A Participant may elect to participate under the Plan. Each Participant who elects to participate in the Plan shall be paid that portion of his or her annual retainer fee in the form of phantom share units (the “Units”). The election must be made in writing by the Participant as soon as practicable after the date on which the Plan is adopted by the Corporation. In the case of an eligible director who becomes a member of the Board after the implementation of the Plan, his or her election must be made as soon as practicable after the date on which his or her term as a member of the Board commences. All elections shall remain in force and effect until all Units credited to the Participant’s account have been cancelled. The Board may, at its discretion, limit the portion of the annual retainer fee for any given year in respect of an earlier election.
(c) A participant who becomes an employee of the Corporation or a subsidiary thereof, or who, as a result of a determination by the Committee, shall no longer be eligible to continue to participate in the Plan, shall not be entitled to receive Units in respect of any future retainer fees. However, Units already credited to such Participant’s notional account shall remain governed by the Plan.
7. Certain terms are defined in the Plan as follows:
(a) "Market Value" of a common share of the Corporation shall mean the closing board lot sale price thereof on the immediately preceding trading day, or, in case no such sale takes place on such date, the average of the closing bid and asked prices as reported by XXXXXXXXXX Stock Exchange (provided that if no such price exists on such date and no bid and asked prices are available for such date, the Market Value in respect of such date shall be established on the same basis on the last previous date for which such price or prices were reported).
(b) "Quarter" means any of the four quarters, of any financial year of the Corporation as may be adopted from time to time.
(c) "Quarterly Retainer Fee" means the amount of the annual retainer fee which would, but for the Plan, be payable by the Corporation in cash on the last day of each Quarter to a Participant. With respect to a Participant that has served as a member of the Board for a number of days that is less than the full Quarter, the amount expressed in dollars, which is the product of: (i) the quotient determined by dividing (A) the number of days in the particular Quarter during which the Participant served as a member of the Board, and (B) the aggregate number of days in the particular Quarter; and (ii) the amount, expressed in dollars, of the Quarterly Retainer Fee which would otherwise have been payable for such Quarter had the Participant served as a member of the Board for the full Quarter.
(d) “Postponed Payment Date” shall mean the date, if any, elected by the Participant, pursuant to paragraph 7(e) of the Plan, which date shall be subsequent to the Settlement Date, as defined below, but no later than December 31 of the calendar year following the calendar year in which the Participant’s Resignation Date, as defined below, occurs.
(e) "Reference Date", with respect to any Quarter, means the date used to determine the Market Value of a common share of the Corporation for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's notional account. The date shall be, unless otherwise determined by the Committee and approved by the Board of the Corporation, the last trading day of such Quarter on which the Market Value of a common share may be determined or, if the Settlement Date with respect to a Participant occurs during the Quarter prior to such last trading date, the Reference Date shall mean the Resignation Date of such Participant, provided that if the Resignation Date is not a trading day on which the Market Value of a common share of the Corporation may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value may be determined.
(f) "Resignation Date" means, in respect of a Participant, the earliest date on which both of the following conditions are met:
(i) the date on which the Participant ceases to be a member of the Board of the Corporation and any subsidiary of the Corporation for any reason whatsoever, including the death of the participant; and
(ii) the date on which the Participant ceases to be employed by the Corporation or a person related to the Corporation.
8. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter and where a Participant's Resignation Date occurs prior to the last trading day of the Quarter, on the Resignation Date:
(a) The number of Units (including fractional Units rounded to four decimal places) credited to a Participant’s notional account maintained by the Administrator with respect to any Quarter shall be determined by dividing the Participant’s Quarterly Retainer Fee by the Market Value of a common share of the Corporation on the Reference Date for that Quarter. For greater certainty, no cash payment by the Corporation or purchase of common shares of the Corporation shall take place on the Reference Date in respect of the Quarterly Retainer Fee.
(b) A Participant's notional account will be credited with dividend equivalents when dividends are paid on the common shares of the Corporation and such dividend equivalents will be converted into additional Units based on the Market Value of the common shares of the Corporation on the date dividends are paid by the corporation.
(c) The settlement date ("Settlement Date") of a Participant with respect to whom a Resignation Date has occurred shall be the second trading day following the release of the Corporation’s quarterly or annual financial results immediately following the Resignation Date with respect to such Participant. If the Resignation Date occurs on the same date as the release of the Corporation’s financial results, the Settlement Date shall, in such case, be the third trading day immediately following such release of the Corporation’s financial results. In full satisfaction of the Units recorded in his or her account on the Settlement Date, the Participant shall receive, net of the applicable withholding taxes, a cash payment equal to the Market Value on the Settlement Date (the “Cash Payment”) of that number of common shares equal to the Units then recorded in his or her notional account. A Participant may irrevocably elect on his or her Resignation Date to have the Cash Payment paid to him or her on the Postponed Payment Date. For greater certainty, the Participants will receive their cash payment entitlements no later than the end of the first calendar year commencing after the applicable Resignation Date and any cash payments made by the Corporation, under the Plan, will be based on the fair market value of the common shares of the Corporation on the Settlement Date. 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 common shares of the Corporation.
(d) The Committee may, in its sole discretion, allow a Participant to elect to receive any other fees payable in respect of services to be rendered as a member of the Board that would otherwise be payable in cash, in the form of Units. The Participant will be entitled, at any time, to revoke his or her election in respect of the deferral of the receipt of such other fees. This revocation will only apply to the deferral of such other fees and not to an earlier election to defer the receipt of part of or all of his or her annual retainer fees.
9. The Board of the Corporation 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.
PURPOSE OF THE PROPOSED TRANSACTIONS
10. The purpose of the proposed transactions is to provide non-employee directors of the Corporation with a long term stock based compensation program in order to promote a greater alignment of interests between non-employee directors and the shareholders of the Corporation.
11. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or of a person related to the Corporation;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Corporation or of a person related to the Corporation;
(c) is under objection by the Corporation or by a person related to the Corporation;
(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 provided that the terms of the Plan are as described in paragraphs 6, 7 and 8 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. 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.
D. The amount to be included in the income of a Participant for a year under the Plan will consist of the aggregate of the following amounts:
(a) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the Participant as described in subparagraph 8(c) above; and
(b) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in subparagraph 8(c) above.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in ruling D that are paid by the Corporation in a particular year in respect of Participants that are directors of the Corporation will be deductible by the Corporation 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 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 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
7
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