1998 Ruling 9821583 - DIRECTORS' FEES, PHANTOM STOCK

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 meets the requirements of 6801(d).

XXXXXXXXXX
XXXXXXXXXX 982158
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX and your facsimiles 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 Canada, a resident of Canada and a public corporation. The Corporation’s common shares are listed on XXXXXXXXXX. 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. XXXXXXXXXX

3.

XXXXXXXXXX

4. The Corporation’s Board of Directors (the “Board”) is currently comprised of XXXXXXXXXX directors. Certain of these directors are not employees of the Corporation, or any affiliate of the Corporation (“non-employee directors”). The term “affiliate” has the meaning assigned by the Canada Business Corporations Act.

5. A recent trend among leading public companies is to pay all or a portion of a director's compensation in shares instead of cash, thereby facilitating and encouraging the acquisition of a greater ownership interest in the Corporation. In response to that trend, the Corporation is contemplating the establishment of a stock compensation plan with features more particularly described below.

PROPOSED TRANSACTIONS

6. When the plan, described below, is implemented, the Corporation will pay to each of its non-employee directors the following amounts:

a) an annual retainer fee of $XXXXXXXXXX;

b) a fee of $XXXXXXXXXX for each Board or committee meeting attended;

c) a fee of $XXXXXXXXXX per year for services as a member of any standing committee; and

d) a fee of $XXXXXXXXXX per year for services as chairman of any standing committee.

For greater certainty, the Board may amend the fee structure from time to time.

7. The Corporation will establish the "XXXXXXXXXX" (the "Plan”) for the benefit of Canadian and non-resident non-employee directors of the Corporation (the "Participants"). The principal features of the Plan are as follows:

(a) The Plan will be administered by the committee of the Board generally responsible for compensation related matters (the “Committee”). Each Participant will enter into an agreement with the Corporation which shall set out certain rights and obligations of each of the parties under the Plan. A notional account will be established for each Participant in the Plan 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) Each Participant will be paid his or her annual retainer fee in the form of phantom share units (the “Units”) credited to his or her notional account. Each Unit will be the equivalent of a common share of the Corporation. Under no circumstances shall the Units be considered common shares of the Corporation nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of common shares of the Corporation, nor shall any Participant be considered the owner of common shares of the Corporation until after the purchase of the shares, under the Plan, on the open market.

(c) A Participant who becomes an employee of the Corporation or an affiliate thereof, shall not be entitled to receive Units in respect of any future retainer fees (or other fees). However, Units already credited to such Participant’s notional account shall remain governed by the Plan.

8. Certain terms are defined in the Plan as follows:

(a) "Market Value" shall mean the market value of one common share of the Corporation calculated on the basis of the average of the closing prices for a board lot of common shares of the Corporation on XXXXXXXXXX, on that day, or if at least one board lot of common shares of the Corporation shall not have been traded on XXXXXXXXXX stock exchanges on that day, on the immediately preceding day for which at least one board lot was so traded; or if, at any time, the common shares of the Corporation are no longer listed on XXXXXXXXXX, then the market value shall be calculated on the basis of the closing price in Canadian dollars, on the aforesaid day, for a board lot of common shares of the Corporation on the stock exchange on which the common shares are listed and had the greatest volume of trading on the particular day.

(b) "Quarter" means any of the four quarters, of any financial year of the Corporation, currently ending on March 31, June 30, September 30 and December 31.

(c) "Quarterly Retainer Fee" means the amount, expressed in dollars, representing twenty-five percent (25%) 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) "Reference Date", with respect to any Quarter, means the date which shall be used to determine, on a quarterly basis, the Market Value of a common share of the Corporation for purposes of determining the number of 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, the last trading day of such Quarter on which the Market Value of a common share of the Corporation may be determined or, if the Termination of Board Service, as defined below, occurs during the Quarter prior to such last trading date, the date of Termination of Board Service of the Participant, provided that if the Termination of Board Service 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.

(e) "Termination of Board Service" means, in respect of a Participant, the latest of the following two dates:

(i) the date on which the Participant ceases to be a member of the Board of the Corporation for any reason whatsoever; and

(ii) the date on which the Participant ceases to be employed by the Corporation or a person related to the Corporation.

9. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter and where a Participant's Termination of Board Service occurs prior to the last trading day of the Quarter, on the date of the Termination of Board Service:

(a) The number of Units allocated to a Participant with respect to any Quarter shall be determined by dividing the 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; instead, the appropriate number of Units (including any fractional units computed to four decimal places) will be credited to the notional account maintained by the Administrator for this purpose.

(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) Except as set forth in Section XXXXXXXXXX of the Plan, the entitlement date ("Entitlement Date") of a Participant with respect to whom Termination of Board Service has occurred shall be the fourth trading day following the release of the Corporation’s quarterly or annual results immediately following the Participant's Termination of Board Service, provided that if a Participant’s Termination of Board Service occurs on the same date as the release of the Corporation’s results, the Entitlement Date shall, in such case, be the fifth trading day immediately following such release of the Corporation’s results. A Participant shall be entitled to receive no later than the end of the first calendar year commencing after the Termination of Board Service, in satisfaction of the Units recorded in the Participant's notional account on the Entitlement Date, the number of common shares of the Corporation equal to the nearest whole number of Units (rounded down) credited to the Participant's notional account, net of applicable withholding taxes. The Corporation shall notify the designated broker of the number of common shares of the Corporation to be purchased by the broker on the open market on the Participant's behalf. The broker will purchase the common shares of the Corporation as soon as practical after receiving the Corporation's notice and, for greater certainty, the broker shall effect such purchase no later than the last day of the first calendar month commencing after the Participant's Termination of Board Service. The broker will deliver the common shares of the Corporation to the Participant or his or her estate. In addition, the Corporation will make a cash payment to the Participant in an amount equal to the fair market value on the Entitlement Date of any fractional Unit, net of applicable withholdings. The Corporation will pay all brokerage fees arising in connection with the acquisition of the common shares of the Corporation by the broker on the open market and may, at its discretion, make a special cash payment to the Participant in an amount sufficient to cover any income tax liability of the Participant as a consequence of the payment of such brokerage fees and special cash payment by the Corporation.

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, at its discretion, allow a Participant to receive his or her fees, other than the annual retainer fees, otherwise payable in cash in the form of Units which would be subject to the terms of the Plan.

(e) Where the Corporation, in its sole discretion, determines that it is not feasible to credit a Unit to a Participant’s notional account because such crediting would not comply with all applicable laws, the Corporation shall satisfy its obligation by means of an equivalent cash payment to the Participant.

In cases of Participants who are citizens or residents of a country other than Canada, the Corporation has the right, in its sole discretion, to pay entirely in cash the value, as computed under the Plan, of a Unit entitlement (less any applicable withholdings), should it deem the regulatory or other requirements of the applicable foreign jurisdiction associated with the purchase of, or payment in, common shares of the Corporation too onerous to it or the Participant.

10. 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

11. The purpose of the proposed transactions is to provide non-employee directors of the Corporation with a long term stock based compensation program.

ADDITIONAL INFORMATION

12. 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 in respect of the Corporation or a person related to the Corporation; or

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

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 7, 8 and 9 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 resident 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 for the rights related to fractional shares as described in subparagraph 9(c) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in subparagraph 9(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in subparagraph 9(c) above;

(d) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by the Corporation for the acquisition of the particular common shares of the Corporation distributed to the Participant by the broker as described in subparagraph 9(c) above; and

(e) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling (d) above as a consequence of the payment of such brokerage fees by the Corporation.

E. The amount to be included in the income of a non-resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) 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 the Corporation to the Participant for the rights related to fractional shares as described in subparagraph 9(c) above;

(b) 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 the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in subparagraph 9(c) above;

(c) 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 withholding taxes withheld by the Corporation as described in subparagraph 9(c) above;

(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of brokerage fees paid by the Corporation for the acquisition of the particular common shares of the Corporation distributed to the Participant by the broker as described in subparagraph 9(c) above; and

(e) 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 the Corporation to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling (d) above as a consequence of the payment of such brokerage fees by the Corporation.

F. The adjusted cost base to the Participant of any common shares of the Corporation acquired by the resident Participant shall be the aggregate of:

(a) the cost to acquire the shares which was included in the Participant's income in ruling D(b) above; and

(b) the brokerage fees paid by the Corporation, which were included in the Participant's income in ruling D(d) above.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings D and E above, 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 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 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

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