1999 Ruling 9906633 - 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 990663
XXXXXXXXXX

Attention: XXXXXXXXXX
XXXXXXXXXX, 1999

Re: Advance Income Tax Ruling
Deferred Share Unit Plan (the "Plan")

XXXXXXXXXX (“SUB 1") (XXXXXXXXXX)
XXXXXXXXXX (“SUB 2") (XXXXXXXXXX)
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 Plan. We also acknowledge the various phone conversations (XXXXXXXXXX) which resulted in amendments to the Plan as evidenced by your facsimile dated XXXXXXXXXX.

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

Relevant Facts

1. The Corporation, SUB 1 and SUB 2 are incorporated under the laws of XXXXXXXXXX, have their head office in XXXXXXXXXX, file their tax returns at the XXXXXXXXXX Taxation Centre and deal with the XXXXXXXXXX Tax Services Office. Each corporation is a "taxable Canadian corporation" as this term is defined in subsection 89(1) of the Income Tax Act ("the Act"). The Corporation is a "public corporation" as this term is defined under subsection 89(1) of the Act. The common shares of the Corporation are traded on the XXXXXXXXXX.

2. SUB 1 and SUB 2 are wholly-owned subsidiaries of the Corporation and thus all three corporations are related for purposes of the Act. SUB 2 is XXXXXXXXXX with a fiscal year-end of XXXXXXXXXX. SUB 1 has a fiscal year-end of XXXXXXXXXX and its business is XXXXXXXXXX.

3. The Corporation and SUB 2 currently have a board of directors composed of XXXXXXXXXX and XXXXXXXXXX directors respectively. SUB 1 currently does not have non-employee directors on its board of directors, but may appoint one or more non-employee directors in the future and elect to participate in the Plan.

4. For the current term of office, the Corporation and SUB 2 will pay their directors that are not otherwise employees the following amounts:

a) An annual retainer for being a member of the relevant board of directors.

b) An annual retainer for being a member of a committee of a board of directors.

c) Per meeting fees for attending board or committee meetings.

d) Such number of stock options to acquire common shares of the Corporation, as determined in the discretion of the board of directors of the Corporation

PROPOSED TRANSACTIONS

5. The Corporation will establish a new incentive plan for its, SUB l's and SUB 2's non-employee directors (the "Plan"). The Plan will be governed by an agreement in writing between the Corporation and each of the participating directors as evidenced by the election forms required to be filed by each director to participate therein

6. For the purposes of these advance income tax rulings, the relevant definitions are the following

a) "Annual Retainer" shall mean the amount, expressed in Canadian dollars, of the annual retainer which would, but for the Plan, be payable in cash by the Corporation, SUB 1 or SUB 2 to a Director for one year of service as a member of the Board or of the board of Directors of SUB 1 or SUB 2, beginning on the date of the annual meeting of shareholders at which the Director is elected and ending on the date immediately preceding the date of the following annual meeting of shareholders, and for greater certainty, Annual Retainer shall not include any other fee which may be payable to the Director in connection with services rendered by such Director to the Corporation, SUB 1 or SUB 2, whether in his or her capacity as a Director or otherwise.

b) "Board" shall mean the Board of Directors of the Corporation.

c) "Business Day" shall mean a day, other than Saturday or Sunday, on which banking institutions in XXXXXXXXXX are not authorized or obligated by law to close.

d) "Committee" shall mean the Compensation Committee of the Board or such other person as designated by the Board.

e) "Common Share" shall mean a common share without nominal or par value of the Corporation.

f) "Deferred Share Unit", or "DSU", shall mean a bookkeeping entry, equivalent in value to a Common Share, credited in accordance with an election made by a Director under the terms and conditions of the Directors' Plan.

g) "Director" shall mean each member of the Board or of the board of Directors of a Subsidiary who, at the time of execution of the Plan and at all times thereafter while such member continues to serve as a member of the Board or of the board of a Subsidiary, is not otherwise an employee or a Director of the Board or of the board of any subsidiary of the Corporation

h) "Market Value" of a Common Share, for a relevant date, shall mean the closing price of a Common Share as reported on the XXXXXXXXXX for the date immediately preceding the relevant date (or, if such exchange is not open on such date, the immediately preceding date on which such exchange is open), or, if the Common Shares are not so listed or traded, the closing price of a Common Share as reported on the securities exchange on which such shares are listed and had the greatest volume of trading, or, if the Common Shares are not so listed or traded, the Market Value shall be the value established by the Committee in good faith. The Market Value shall always be established in relation to the fair market value of a Common Share or of a share of a corporation related to the Corporation.

i) "Other Permitted Compensation" shall mean such an annual retainer for being a member of a committee of a board of Directors or such per meeting fees for attending board or committee meetings as the Committee has, in its discretion, permitted to be received in lieu of cash by Directors, in the form of DSUs.

j) "Resignation Date" means, in respect of a Director, the earliest date on which both of the following conditions are met: (i) the Director has ceased to be a member of the Board or of the board of a Subsidiary of the Corporation for any reason whatsoever, including the death of the Director; and (ii) the Director is neither an employee of the Corporation or any subsidiary thereof, nor a member of the Board or of the board of any subsidiary of the Corporation.

k) "Settlement Date" with respect to a Director to whom a Resignation Date has occurred, shall be the later of (i) 30 days following the Resignation Date; and (ii) the first Business Day following the next release of the Corporation's quarterly financial results following the Resignation date, and in any event shall be no later than the end of the first calendar year commencing after the Resignation Date.

l) "Subsidiary" means any of SUB1 or SUB2 unless such SUB has not elected to participate in the Plan.

7. For the purposes of these advance income tax rulings, the relevant features of the Plan are as follows:

a) The Plan will be administered by the Committee and will be effective on the date of this letter.

b) Under the Plan, a Director may elect to be allocated, in lieu of cash payment, up to 100% of his or her Annual Retainer in the form of DSUs. The Director shall have the right to elect once each fiscal year the percentage of such Annual Retainer that he or she wishes to receive in the form of DSUs, with the election to be made by the end of the fiscal year of the Corporation or Subsidiary preceding the year to which the election applies. In the case of a new Director, the election is to be made within 7 days after the appointment of the Director, with such election to apply in respect of payments of fees for fiscal quarters commencing after the date of the election. For 1999, existing Directors must make the election as soon as possible after the issuance of this letter, with the election to apply for the balance of the relevant fiscal year. If no election is made by a Director in respect of a particular fiscal year, the Director shall be paid his or her Annual Retainer in cash. The Committee also has the discretion to permit Directors to elect to receive DSUs in lieu of their Other Permitted Compensation, but the Committee has not yet exercised its discretion in this regard.

c) Under the Plan, DSUs will be fully vested upon being credited to a Director.

d) The amount of DSUs credited to a Director shall be based on the dollar amount of the Annual Retainer and, if applicable, Other Permitted Compensation, which the Director has elected to be allocated in the form of DSUs, divided by the Market Value of a Common Share as at the last Business Day of a fiscal quarter of the Corporation or of a Subsidiary, as the case may be.

e) A Director shall be credited with additional DSUs, equal to the amount of each dividend declared and paid by the Corporation, multiplied by the number of DSUs credited in the Director's DSU account on the record date for the payment of such dividend, and divided by the Market Value of a Common Share determined on the dividend payment date.

f) A Director shall not be entitled to any certificate or other document evidencing the DSUs and under no circumstances shall DSUs be considered Common Shares, nor shall they entitle any Director to exercise voting rights or any other rights attaching to the ownership or control of Common Shares.

g) The rights or interests of a Director under the Plan shall not be assignable or transferable, otherwise than by testamentary disposition or in accordance with the laws governing the devolution of property in the event of death.

h) Immediately after the Resignation Date, the Director shall be entitled, on the Settlement Date, to an amount equal to the number of DSUs standing to his or her credit, multiplied by the Market Value of a Common Share determined on the Settlement Date. The amount may be paid in cash or, at the sole discretion of the Committee, in Common Shares or any combination thereof.

i) If the Committee has determined that payment be made in whole or in part in the form of Common Shares as described in subparagraph 7(h) above, a number of Common Shares will be purchased by a designated broker on the open market on behalf of the Director, net of applicable withholdings. The Corporation shall advise the broker of the number of Common Shares to be purchased by the broker on behalf of the Director. The broker will purchase the Common Shares as soon as practicable after receiving notification from the Corporation, and will deliver the Common Shares to the Director or to his or her estate, as the case may be. The Corporation will also make a cash payment to the Director in lieu of fractional Common Shares.

j) If desired, a Director may pay an amount equivalent to the applicable withholdings to the Corporation, in which case the Corporation shall cause the broker to deliver the full number of Common Shares to which he would otherwise be entitled, but for the Corporation's withholding obligations.

k) All expenses of administration of the Plan shall be borne by the Corporation, including any reasonable brokerage fees relating to a purchase of the Common Shares under the Plan, as described in subparagraphs 7(i) and (j) above.

l) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of the Corporation's assets to shareholders, or any other change affecting shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of DSUs outstanding under the Plan. However, no amount will be paid to, or in respect of, a Director under the Plan or pursuant to any other arrangement, and no DSU will be granted nor will any credit be made to such Director's DSU 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 Director for such purpose.

m) The Board may, from time to time, amend, suspend or terminate the Plan in whole or in part, or the terms of DSUs credited in accordance with the Plan. If any such amendment will materially or adversely affect the right of a Director with respect to DSUs credited to such Director, the written consent of such Director to such amendment shall be obtained. However, if the Plan is terminated, prior awards shall remain outstanding and in effect and be settled in due course in accordance with the terms of the Plan (which shall continue to have effect, but only for such purposes) on the Settlement Date.

8. Any expenses incurred or payments made by the Corporation under the Plan in respect of Directors of SUB 1 or SUB 2 shall be charged to and reimbursed by SUB 1 or SUB 2, as the case may be.

9. Other than payments in satisfaction of DSUs as described herein, and of normal administration costs of the Plan, the Corporation shall not make any contributions or payments to a third party in respect of the Plan and, in particular, shall not make any contributions or payments to a custodian or trustee. In addition, third party guarantees shall not be provided with respect to any awards or credits under the Plan.

10. DSUs shall not be transferable or assignable other than by will or the laws of succession.

PURPOSE OF THE PROPOSED TRANSACTIONS

11. The purpose of the Plan is to assist the Corporation in attracting and retaining individuals with experience and ability to serve as members of the Board or its subsidiaries' boards, to allow these Directors to participate in the long-term success of the Corporation, and to provide a greater alignment of interests between the Directors and shareholders of the Corporation.

ADDITIONAL INFORMATION

12. 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

13. 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 Plan are as described in paragraphs 6, 7(a) to (l) and 8 to 10 above, we rule as follows:

A) Section 7 of the Act will not apply to the Plan.

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

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

D) The 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 ruling F) below, no amount will be included in the income of a Director 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 Director in the Plan.

F) The amount to be included in the income of a resident Director for a year under a Plan will consist of the aggregate of the following amounts:

i) under paragraph 6(1)(c) of the Act, the cash amount paid in the year to the Director (or his or her estate) by the Corporation in lieu of fractional DSUs as described in subparagraph 7(i) above and the cash amount paid for DSUs where Common Shares are not delivered to the Director (or his or her estate) as described in subparagraph 7(h) above;

ii) under paragraph 6(1)(c) of the Act, the amount paid in the year by the Corporation to the designated broker (excluding brokerage fees) to acquire the Common Shares delivered to the Director (or his or her estate) as described in subparagraph 7(4) above;

iii) under paragraph 6(1)(c) of the Act, the amount, if any, of applicable withholdings withheld by the Corporation in the year as described in subparagraph 7(i) above;

iv) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by the Corporation in the year for the acquisition of the Common Shares delivered by the broker to the Director (or his or her estate) as described in subparagraph 7(k) above;

G) Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in ruling F) that are paid by the Corporation in a particular year in respect of participating Directors who are members of its board of Directors will be deductible by the Corporation in accordance with section 9 of the Act. Any amounts paid to the Corporation by SUB 1 or SUB 2 in respect of payments made by the Corporation under the Plan to participating Directors who are members of their respective board of directors, pursuant to paragraph 8 above, shall, subject to paragraph 18(1)(a) and section 67 of the Act, be deductible by SUB 1 or SUB 2 (as the case may be) in accordance with section 9 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 Plan is implemented within six months of the date of this letter.

Yours truly,

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