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 982889
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Tax Ruling
XXXXXXXXXX (the "Corporation") - XXXXXXXXXX
Proposed Deferred Stock Unit Plan (the "Plan")
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our telephone conversations (XXXXXXXXXX) and your facsimile transmissions of XXXXXXXXXX.
Although no draft version of the Plan was attached to the advance income tax ruling request, our understanding of the facts and proposed Plan is as follows:
DEFINITIONS
Certain terms and expressions used in this letter are defined as follows:
"Board" means the board of directors of the Corporation.
"Deferred Stock Unit" means a notional number of Shares (as defined below) maintained in a notional account on behalf of a Member (also defined below) pursuant to the Plan.
"Deferred Stock Unit Value" means the value of a Deferred Stock Unit, established as follows:
(a) for the purposes of being credited to a member's account for the XXXXXXXXXX Fiscal Year (as defined below), it shall be equal to the closing price of a share of the Corporation on a specified stock exchange on the date, in XXXXXXXXXX, on which Members are notified by the Corporation of their eligibility to participate in the Plan for the XXXXXXXXXX Fiscal Year.
(b) for the purposes of being credited to a member's account in any particular Fiscal Year other than XXXXXXXXXX, it shall be equal to the closing price of a share of the Corporation on a specified stock exchange on the date, during the first quarter of the Fiscal Year, on which Members are notified by the Corporation of their eligibility to participate in the Plan for the Fiscal Year.
(c) for the purposes of being debited from a Member's account in exchange for cash, on Redemption Date (as defined below), it shall be equal to the fair market value of a Share (also defined below) on the Redemption Date.
"Elected Amount" means the dollar value of the percentage of the Incentives (as defined below) that a senior management officer has elected to receive in the form of Deferred Stock Units.
"Employee" means an individual who is a senior management officer of the Corporation.
"Fiscal Year" means the Corporation's "fiscal period" as defined under section 249.1 of the Income Tax Act (the "Act"). The Corporation currently has a Fiscal Year-end of XXXXXXXXXX.
"Incentives" means the annual performance incentive compensation to which members may become entitled in respect of a year.
"Member" means an Employee who has become a participant in the Plan by making an election (as described in 3(a) below).
"Redemption Date" with respect to a Member, means such date as elected by the Member or, in case of the Member's death, a designated beneficiary (a dependent, relation or legal representative of the Employee) and comprised within the period beginning on the day immediately following the Termination Date (as defined below) and ending on December 31 of the first calendar year after the Member's Termination Date.
"Share" means a common share of the Corporation and such other share substituted therefor as a result of amendments to the articles of the Corporation, reorganization or otherwise.
"Termination Date" with respect to a Member, means the date of the event (whether a retirement, termination or loss of employment or office, or death) causing the Member to no longer be any of an officer or employee of the Corporation.
RELEVANT FACTS
1. The Corporation is a public corporation and a taxable Canadian corporation for purposes of the Act and its shares are listed for trading on a public stock exchange. The Corporation deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its Business Number is XXXXXXXXXX and its mailing address is XXXXXXXXXX.
PROPOSED PLAN
2. The Corporation is proposing to establish a new arrangement as a second performance incentive plan for its Employees, under which all or part of their Incentives may be granted as Deferred Stock Units rather than as a cash payment.
3. The relevant terms of the Plan are as follows:
(a) Every Employee may elect, in writing, not later than XXXXXXXXXX, with respect to the XXXXXXXXXX Fiscal Year and during the first quarter of the Fiscal Year with respect to each following Fiscal Year, to receive as Deferred Stock Units a percentage of the Incentives to which the Employee may become entitled during the Fiscal Year. Once the election is made for a Fiscal Year, it is irrevocable.
(b) An account shall be maintained by the Corporation for each Member and will be credited with notional grants of Deferred Stock Units received by a Member from time to time.
(c) The number of Deferred Stock Units granted to a Member in respect of a year will be calculated by dividing the Elected Amount by the Deferred Share Unit Value (established in the manner described in paragraphs (a) or (b) of the above definition of that term).
(d) Upon allocation, the Deferred Stock Units will be fully vested in the Member.
(e) Whenever cash dividends are paid on the Shares, additional Deferred Stock Units will be credited to the Member's Deferred Stock Unit account. The number of such additional Deferred Stock Units will be calculated by dividing the total amount of the dividends that would have been paid to such Member, if the Deferred Stock Units in the Member's Deferred Stock Unit account had been Shares, by the fair market value of a Share on the date on which the cash dividends were paid on the Shares.
(f) In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin-off or other distribution (other than normal dividends) of Corporation assets to shareholders, or any other change affecting the Shares, the number of Deferred Stock Units held in the Member's account may be adjusted to reflect the particular event. However, no amount will be paid to, or in respect of, a Member under the Plan or pursuant to any other arrangement, and no Deferred Stock Unit will be granted nor will any credit be made to such Member's Deferred Stock Unit account under the Plan to compensate for a downward fluctuation in the price of Shares, nor would any other form of benefit be conferred upon, or in respect of a Member for such purpose.
(g) Upon the Member's Termination Date, the Employee (or, in case of the Employee's death, a designated beneficiary of the Employee such as a dependant, relation or legal representative of the Employee) shall determine a date, the Redemption Date, on which the Deferred Stock Units will be converted to cash.
(h) On Redemption Date, an amount equal to the Deferred Stock Unit Value (established in the manner described in paragraph (c) of the definition of that term) multiplied by the number of Deferred Stock Units held in a Member's account at that time, net of applicable withholdings, shall become payable.
(i) There will be no shares issued, authorized, reserved or sold by the Corporation or any corporation related thereto at any time in connection with an award of incentive compensation in the form of Deferred Stock Units under the Plan. The Corporation or any corporation related thereto will not purchase any shares at any time in connection with any incentive compensation under the Plan.
(j) The Corporation will be responsible for all costs relating to the administration of the Plan.
(k) The terms of the Plan will provide that the Board can unilaterally amend or terminate the Plan at any time, except with respect to Deferred Stock Units that have been allocated to a Member under the Plan as of the date of amendment or termination.
PURPOSE OF PROPOSED PLAN
4. The purpose of the proposed Plan is to aid the Corporation in securing and retaining officers and other key employees with outstanding ability, to provide compensation opportunities that are compatible with shareholders' interests and to encourage equity ownership.
5. To the best of your knowledge and that of the Corporation none of the issues in respect of which rulings are herein requested are:
(a) in an earlier return of the Corporation or a related person,
(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Corporation,
(c) under objection or appeal by the Corporation 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 and that the proposed Plan is established in the manner described in paragraphs 2 and 3(a) to (j) above, we rule as follows:
A. An arrangement in writing between the Corporation and a Member 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 Act.
B. 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 Member in respect of the Plan whether by reason of the implementation of the Plan or prior to any payment to the Member.
C. No amount will be included in the income of a Member pursuant to section 5 or 6 of the Act in respect of the payment by the Corporation of the costs relating to the administration of the Plan.
D. Payments received under the Plan by a Member in accordance with paragraph 3(h) above and applicable withholdings will be included in the income of the Member 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. Payments received by the Member's designated beneficiary will also be subject to tax, in the year of receipt, in accordance with 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 the Department provided the proposed Plan is implemented within six (6) months of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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