1999 Ruling 9831833 - 6801 (D) DEFERRED SHARE UNIT PLAN

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
XXXXXXXXXX 983183
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Re: Advance Income Tax Ruling
Deferred Share Unit Plan for Key Employees (the “Key Employees’ Plan”)
XXXXXXXXXX (the “Corporation”) (XXXXXXXXXX)

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

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

DEFINITIONS

1. For the purposes of this letter, the relevant definitions are the following:

a) “Affiliate” shall mean an Affiliate of the Corporation as that term is defined in paragraph 3 of Revenue Canada’s Interpretation Bulletin IT-337R3, Retiring Allowances.

b) “Board” shall mean the Board of Directors of the Corporation.

c) “Committee” shall mean the Committee of Directors of the Corporation whose mandate includes all executive compensation matters which is currently named the XXXXXXXXXX.

d) “Conversion Date” shall mean, with respect to any calendar year, the date used to determine the Market Value of a share for purposes of determining the number of DSUs to be credited in respect of that year to a Key Employee’s account, which date shall be the last business day in the year immediately preceding the performance period (i.e. the calendar year).

e) “Deferred Share Unit”, or “DSU”, shall mean a unit credited by means of a bookkeeping entry on the books of the Corporation to a Participant’s account in accordance with the terms of the Key Employees’ Plan, the value of which, on a particular date, shall be equal to the Market Value of a Share.

f) “Entitlement Date” with respect to a Participant who had a Termination Date, shall be the day that is thirty (30) days after the Termination Date, except in cases where termination will occur within ninety (90) days following the change in control of the Corporation (as defined in the Key Employees’ Plan), in which case the Entitlement Date shall be the fifth (5th) trading day following the Participant’s Termination Date.

Notwithstanding the foregoing, if a Participant’s Entitlement Date falls between the record date and the payment date for dividends on Shares, such Participant’s Entitlement Date shall be deemed to be the date immediately following the dividend payment date.

Notwithstanding the foregoing, if the Corporation is unable to calculate the number of DSUs credited to a Participant’s account due to the lack of necessary data, such Participant’s Entitlement Date shall be the next following trading day on which such data is available to the Corporation.

In any event, DSUs will be redeemed and amounts payable under the Key Employees’ Plan will be paid to the Participant or the Participant’s estate before December 31st of the calendar year immediately following the year in which the Participant’s Termination Date occurred.

g) “Key Employee” shall mean an officer or other employee of the Corporation or of any Affiliate of the Corporation who, in the opinion of the Committee, has demonstrated a capacity for contributing in a substantial measure to the successful performance of the Corporation or of such Affiliate.

h) “Management Incentive Compensation” otherwise referred to as “MIC” shall mean cash awards under the Corporation’s Management Incentive Plan (“MIP”), based on corporate and business unit performance and individual contribution to the Corporation’s results, measured against predetermined objectives, that may be payable to an employee of the Corporation or any Affiliate thereof in respect of a performance period (i.e. the calendar year).

i) “Market Value” of one Share on a particular day shall mean the average of the closing prices for a board lot of Shares on the XXXXXXXXXX Stock Exchange (“XXXXXXXXXX”), on the five (5) trading days immediately preceding the particular day, or if at least one board lot of Shares shall not have been traded on the XXXXXXXXXX on any such day, on the immediately preceding day for which at least one board lot was so traded; or if, at any time, the Shares are no longer listed on the XXXXXXXXXX, then the Market Value shall be calculated on the basis of the average closing price, as aforesaid, for a board lot of Shares on the stock exchange on which the Shares are listed and had the greatest volume of trading during such five day period. The Market Value shall always depend on the fair market value of a Share or a share of a corporation related to the Corporation.

j) “Participant” shall mean a Key Employee who has been granted DSUs under the Key Employees’ Plan.

k) “Share” shall mean a common share, without nominal or par value, of the capital stock of the Corporation.

l) “Termination Date” shall mean the earliest date on which both of the following conditions are met: the Key Employee (1) has ceased to be employed by the Corporation or any Affiliate for any reason whatsoever, including termination of employment by the employer (whether or not for cause), voluntary resignation, retirement from active employment or death of the Key Employee, and (2) is not a Director of the Board or of the board of an Affiliate.

RELEVANT FACTS

2. The Corporation is incorporated under the laws of XXXXXXXXXX and is the parent of the XXXXXXXXXX group of companies. 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 Shares of the Corporation are principally traded on the XXXXXXXXXX. The Corporation has a fiscal year-end of XXXXXXXXXX. The Corporation files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

3. In addition to annual salary and benefits, Key Employees of the Corporation and of its Subsidiaries may be entitled to MIC payments in the form of annual cash bonuses in accordance with criteria determined from time to time by the Board, based on the individual’s performance and merit, and on corporate performance.

PROPOSED PLAN

4. The Corporation will establish a separate new incentive plan for Key Employees (the “Key Employees’ Plan”) in addition to the MIP. The Key Employees’ Plan will comprise of a plan text, written agreements between the Corporation and each Participant, and election forms acknowledging each Key Employee’s participation therein.

5. The relevant features of the Key Employees’ Plan are as follows:

a) The Key Employees’ Plan will be administered by the Committee, beginning with the 1999 calendar year.

b) Prior to the commencement of a calendar year (except for the 1999 calendar year), the Board will determine which Key Employees will be authorized to participate in the Key Employees’ Plan for such year.

c) Under the Key Employees’ Plan, a Key Employee who has been authorized to participate in the Key Employees’ Plan in the upcoming calendar year may elect to participate in the MIP alone, both the MIP and the Key Employees’ Plan, or in the Key Employees’ Plan alone by electing to have XXXXXXXXXX% (the “Elected Percentage”) of the Key Employee’s MIC allocated, in lieu of a cash payment, in the form of DSUs. A Key Employee wishing to elect shall do so in writing, before the commencement of the calendar year for which the election is made. For 1999, Key Employees will be given fifteen business days from the date on which the Corporation receives this letter to make an election. Once made, an election shall be irrevocable.

d) The number of DSUs credited to a Key Employee for a particular year shall be based on the dollar amount of the MIC payment which a Key Employee has elected to be allocated in the form of DSUs (i.e. the Elected Percentage multiplied by the MIC), divided by the Market Value of a Share on the Conversion Date.

e) Under the Key Employees’ Plan, DSUs will be fully vested upon being credited to a Key Employee.

f) In the event that any cash dividend is declared and paid by the Corporation on Shares, a Participant shall be credited with additional DSUs. The number of such additional DSUs will be calculated by dividing the total amount of the dividends that would have been paid to such Participant, if the DSUs in the Participant’s account had been Shares, by the Market Value of a Share on the date on which the cash dividends were paid on the Shares.

g) In the event of any stock dividend, stock split or consolidation affecting the number of Shares, the DSUs credited to a Participant’s account under the Key Employees’ Plan will be adjusted in the same manner as if each DSU were a Share. In the event of any exchange of shares or other change in the Shares into a different number or kind of shares of the Corporation or of any corporation related thereto, or of any other change in the Shares or shares into which Shares have been changed or for which they have been exchanged, such equitable adjustments, as the Committee may reasonably determine, shall be made with respect to the number of DSUs then recorded in the Participant’s account under the Key Employees’ Plan. However, no amount will be paid to, or in respect of, a Participant under the Key Employees’ Plan or pursuant to any other arrangement, and no DSU will be granted nor will any credit be made to such Participant’s DSU account under the Key Employees’ 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 Participant for such purpose.

h) The Corporation shall maintain in its books an account for each Participant recording at all times the number of DSUs standing to the credit of the Participant. Upon payment in satisfaction of DSUs credited to a Participant in the manner described in subparagraphs 5(i) to (n) below, such DSUs shall be cancelled. A written confirmation of the balance in a Participant’s account shall be mailed by the Corporation to the Participant at least once a year.

i) The Participant or the Participant’s estate shall be entitled, on the Entitlement Date, to redeem the DSUs credited to the Participant’s account. On that date, an amount equal to the number of DSUs standing to the Participant’s credit on that date, multiplied by the Market Value of a Share on the Entitlement Date, shall become payable to the Participant.

j) The amount payable to a Participant (or the Participant’s estate), as determined under subparagraph 5(i) above, net of applicable withholdings, will be used to acquire Shares on the open market through an independent broker designated by the Participant (the “Designated Broker”). This is subject to the Corporation’s discretion to pay (or cause the Participant’s employer to pay) the amount so payable, net of applicable withholdings, in cash, if the Corporation considers the requirements of the jurisdiction applicable to the Participant, the Participant’s estate or the Participant’s employer with respect to the purchase of the Shares to be too onerous.

k) If the Corporation has determined that payment will be made in the form of Shares as described in subparagraph 5(j) above, the Corporation will calculate the number of whole Shares to be purchased by the Designated Broker on the open market on behalf and for the benefit of the Participant or the Participant’s estate. The number of whole Shares will be determined by dividing the amount payable, as determined under subparagraph 5(j) above, net of applicable withholdings, by the Market Value of a Share as determined on the Entitlement Date. On the Entitlement Date or, if the Entitlement Date is not a trading date for Shares on the XXXXXXXXXX, on the next such trading date, the Corporation shall advise the Designated Broker of the specified number of whole Shares to be purchased on behalf of the Participant or the Participant’s estate. The Designated Broker will purchase the specified number of whole Shares as soon as practicable after being notified by the Corporation. On or before the date of settlement with respect to the purchase of the Shares by the Designated Broker, the Corporation, acting as agent for the Participant or the Participant’s estate, will pay (or cause the Participant’s employer to pay) the purchase price of the specified number of Shares to the Designated Broker, together with any reasonable brokerage fees or commissions related thereto. The Corporation will also make a cash payment, net of applicable withholdings, to the Participant or the Participant’s estate with respect to fractional DSUs still standing to the Participant’s credit after the maximum number of whole Shares have been purchased as described above.

l) Except as specifically set out in the Key Employees’ Plan or in an “Agreement” (as defined in the Key Employees’ Plan), no Key Employee, Participant or other person shall have any claim or right to any Shares or other benefit in respect of DSUs granted pursuant to the Key Employees’ Plan. Neither the Key Employees’ Plan nor any award thereunder shall be construed as granting a Participant a right to be retained as an employee of the Corporation or of any of its Affiliates or a claim or right to any future grants of DSUs. Neither the Key Employees’ Plan nor any action taken thereunder shall interfere with the right of the employer of a Key Employee or a Participant to terminate the employment of such Key Employee or Participant at any time. The payment of any sum of money in cash in lieu of notice of the termination of employment shall not be considered as extending the period of employment for the purposes of the Key Employees’ Plan. Under no circumstances shall DSUs be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of Shares by virtue of the Key Employees’ Plan until after the date of the purchase of such Shares on the open market as referred to in 5(k) above.

m) The Key Employees’ Plan could be amended, suspended or terminated in whole or in part at any time by the Board, provided that any such amendment would not adversely affect the rights accrued to any Participant under any agreement at such time without the consent of the affected Participant. DSUs that have been granted under the Key Employees’ Plan prior to its termination date will, at the discretion of the Board, become immediately payable in accordance with the terms of the Key Employees’ Plan in effect at such date or remain outstanding and be paid in due course upon the Participant’s Termination Date for purposes of the Key Employees’ Plan in accordance with the terms and conditions applicable to such DSUs immediately prior to the termination of the Key Employees’ Plan.

PURPOSE OF THE PROPOSED PLAN

6. The purpose of the Key Employees’ Plan is significantly strengthen the link between employee and shareholder interests by encouraging Key Employees to voluntarily elect to have a portion of their compensation tied to the long term performance of the Shares.

ADDITIONAL INFORMATION

7. 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 tax centre in connection with a previously filed tax return of the Corporation,

c) under objection 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 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 Key Employees’ Plan are as described in subparagraphs 5(a) to 5(l) above, we rule as follows:

A. Section 7 of the Act will not apply to the Key Employees’ Plan.

B. The Key Employees’ Plan will not constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act.

C. The Key Employees’ Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

D. The Key Employees’ 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 Key Employee pursuant to section 3, subsection 5(1), paragraphs 6(1)(a) or (c), subsection 6(3) or paragraph 56(1)(a) of the Act, solely as a result of the participation of a Key Employee in the Key Employees’ Plan.

F. The amount to be included in the income of a resident Key Employee for a year under the Key Employees’ Plan will consist of the aggregate of the following amounts:

i) under paragraph 6(1)(a) of the Act, the cash amount paid in the year to the Key Employee (or his or her estate) by the Corporation or the Key Employee’s employer in lieu of fractional DSUs as described insubparagraph 5(k) above and the cash amount paid for DSUs where Shares are not delivered to the Key Employee (or his or her estate) as described in subparagraph 5(j) above;

ii) under paragraph 6(1)(a) of the Act, the amount paid in the year by the Corporation or the Key Employee’s employer to the Designated Broker (excluding brokerage fees) to acquire the Shares delivered to the Key Employee (or his or her estate) as described in subparagraph 5(k) above;

iii) under paragraph 6(1)(a) of the Act, the amount of applicable withholdings withheld in the year by the Corporation or the Key Employee’s employer as described in subparagraph 5(j) above with respect to cash payments to the Key Employee or the Key Employee’s estate, or described in subparagraph 5(k) above with respect to brokerage fees paid to the Designated Broker and cash payments to the Key Employee or the Key Employee’s estate, in lieu of fractional DSUs; and

iv) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid in the year by the Corporation or the Key Employee’s employer, to the Designated Broker, for the acquisition of the Shares delivered to the Key Employee (or his or her estate) as described in subparagraph 5(k) above.

G. The amount to be included in the income of a non-resident Key Employee for a year under the Key Employees’ Plan will consist of the aggregate of the following amounts:

i) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the cash amount, to the extent it is attributable to services rendered in Canada, paid to the Key Employee (or his or her estate) by the Corporation or the Key Employee’s employer in the year in lieu of fractional DSUs as described in subparagraph 5(k) above and the cash amount paid for DSUs where Shares are not delivered to the Key Employee (or his or her estate) as described in subparagraph 5(j) above;

ii) 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, paid in the year by the Corporation or the Key Employee’s employer to the Designated Broker (excluding brokerage fees) to acquire the Shares delivered to the Key Employee (or his or her estate), as described in subparagraph 5(k) above;

iii) 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 applicable withholdings withheld in the year by the Corporation or the Key Employee’s employer as described in subparagraph 5(j) above with respect to cash payments to the Key Employee or the Key Employee’s estate, or described in subparagraph 5(k) above with respect to brokerage fees paid to the Designated Broker and cash payments to the Key Employee or the Key Employee’s estate, in lieu of fractional DSUs; and

iv) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage fees paid in the year by the Corporation or the Key Employee’s employer, to the Designated Broker, to the extent they are paid with respect to the acquisition of the Shares delivered to the Key Employee (or his or her estate) as described in subparagraph 5(k) above, and attributable to services rendered in Canada.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings F) and G) that are payable to a Key Employee in a particular year will be deductible for that year to the Corporation or the Key Employee’s employer (“the Payer”), as the case may be, in accordance with section 9 of the Act, provided the payment is made in respect of a Key Employee employed by the Payer.

I. An amount payable by the Corporation or the Key Employee’s employer under the Key Employees’ Plan to the Key Employee’s estate or beneficiary thereof, in accordance with subparagraphs 5(j) or (k) above, will constitute a right or thing for the purposes of subsection 70(2) 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 Key Employees’ 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 Key Employees’ Plan, as submitted for our review, and will not be binding in the event the Key Employees’ Plan is amended or terminated as outlined in subparagraph 5(m) above.

Yours truly,

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

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