1999 Ruling 9908203 - 6801(D), PHANTOM STOCK PLAN, DIRECTORS

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: Can they implement a standard phantom stock plan for the directors of the corporation?

Position: Yes

Reasons: Meets 6801(d)

XXXXXXXXXX
XXXXXXXXXX 990820
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
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 facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX (the "Corporation") is incorporated under the laws of XXXXXXXXXX and has its head office in XXXXXXXXXX. The Corporation is a taxable Canadian corporation and a public corporation for purposes of the Income Tax Act (the "Act"). The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of 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 has a Board of Directors (the "Board"). The directors are paid an annual retainer fee which is exclusive of Board meeting fees, committee fees and additional fees or retainers paid to committee chairs. The annual retainer fee is payable quarterly in arrears on April 30, July 31, October 31 and January 31 in each fiscal year of the Corporation.

3. The Corporation's common shares (the "Shares") trade primarily on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

4. The Corporation is in the business of XXXXXXXXXX.

Proposed Transactions

5. The Corporation will establish the "XXXXXXXXXX" (the "Plan") on XXXXXXXXXX for the benefit of certain eligible directors of the Corporation (see the definition of Director in subparagraph 6(c) below).

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

(a) "Annual Board Retainer" means the annual retainer paid by the Corporation to a Director in a financial year for service on the Board exclusive of Board meeting fees, committee fees or additional fees and retainers to committee chairs.

(b) "Board" means the Board of Directors of the Corporation.

(c) "Director" means a director of the Corporation, other than a person who is also a full-time employee of the Corporation or a person related to the Corporation.

(d) "Value of a Deferred Share Unit" means the aggregate value of each trade of Shares on XXXXXXXXXX Stock Exchange during the ten trading days preceding such time (which value shall be determined for each trade by multiplying the volume of Shares by the trading price) divided by the aggregate total volume of Shares traded on XXXXXXXXXX Stock Exchange during such ten trading days.

7. The principal features of the Plan will be as follows:

(a) The Plan will be administered by the Management Resources and Compensation Committee of the Board (the "Committee"). An account will be established for each Director in order to carry out the objectives of the Plan, more particularly described below.

(b) Each Director will be paid a set percentage of his or her Annual Board Retainer in cash, net of withholding taxes, with the balance being paid in the form of a number of notional shares of the Corporation being credited to a notional account maintained for each Director on a deferred basis ("Deferred Share Units"). Before the commencement of a fiscal year, the Board shall determine the percentage of the Annual Board Retainer that will be paid in cash and in Deferred Share Units for that fiscal year.

(c) On the last day of each quarter, the Director will be entitled to receive one-quarter of his or her Annual Board Retainer ("Quarterly Fee"). The percentage to be paid in the form of Deferred Share Units will be multiplied by the Quarterly Fee to determine a deferred value (the "Value"). The number of Deferred Share Units to be credited to the Director's notional account ("Deferred Share Unit Account") will be determined by dividing the Value attributable to the particular Director by the Value of a Deferred Share Unit on that particular date.

(d) Whenever cash dividends are paid on the Corporation's Shares, additional Deferred Share Units will be credited to the Director's Deferred Share Unit Account. The number of such additional Deferred Share Units will be calculated by dividing the aggregate amount of the dividends that would have been paid to such Director if the Deferred Share Units in the Director's Deferred Share Unit Account had been Shares by the Value of a Deferred Share Unit on the record date for the payment of such dividends.

(e) In the event of a subdivision, redivision or consolidation of the Shares or the issue of Shares as a stock dividend, or a reorganization or recapitalization of the Corporation or its amalgamation, merger or consolidation into or with another corporation, or the sale of all or substantially all of the assets of the Corporation, such proportionate adjustments, to reflect such change or changes shall be made with respect to the number of Deferred Share Units outstanding under the Plan . In addition, the Board may, in its discretion, make proportionate adjustments where there are other changes affecting the Shares.

(f) The Deferred Share Units credited to a Director's Deferred Share Unit Account shall be redeemed by the Director (or, where the Director has died, his or her estate) on the earliest date on which both of the following conditions are met (the Director's Termination Date):

(i) the Director has ceased to be a Director for any reason whatsoever, including the death of the Director; and

(ii) the Director is neither an employee of the Corporation or a person related to the Corporation nor a member of the board of directors of a corporation related to the Corporation.

(g) The Corporation will redeem a Director's Deferred Share Units (or, if the Director has died, to his or her estate, as the case may be), net of the applicable withholding taxes, in one of three different ways (completely at the Corporation's discretion). Within three business days following the Director's Termination Date, the Corporation will redeem the Deferred Share Units in one of the following ways:

(i) the payment of a lump sum cash payment (equal to the number of Deferred Share Units credited to the Director's Deferred Share Unit Account multiplied by the Value of a Deferred Share Unit on the Director's Termination Date), net of the applicable withholding taxes;

(ii) issuing Shares from its treasury equal to the number (rounded down) of Deferred Share Units credited to the Director's Deferred Share Unit Account, net of the applicable withholding taxes. For example, if the fair market value of the Deferred Share Units credited to the Director's Deferred Share Unit Account is $1,000 then $500 will be withheld and remitted, and the Corporation will issue Shares from its treasury equal to the number (rounded down) computed when the remaining $500 is divided by the Value of a Deferred Share Unit on the Director's Termination Date. An amount related to any fractional share that is not satisfied through the issuance of Shares from treasury will be paid in cash (equal to the remaining fraction of a Deferred Share Units credited to the Director's Deferred Share Unit Account multiplied by the Value of a Deferred Share Unit on the Director's Termination Date), net of the applicable withholding taxes; or

(iii) having Shares purchased, on behalf of the Director, by a registered broker equal to the number (rounded down) of Deferred Share Units credited to the Director's Deferred Share Unit Account, net of the applicable withholding taxes. For example, if the fair market value of the Deferred Share Units credited to the Director's Deferred Share Unit Account is $1,000 then $500 will be withheld and remitted, and the Corporation will have a registered broker purchase a number of Shares on the open market equal to the number (rounded down) computed when the remaining $500 is divided by the Value of a Deferred Share Unit on the Director's Termination Date. An amount related to any fractional share that is not satisfied through the acquisition of Shares on the open market will be paid in cash (equal to the remaining fraction of a Deferred Share Unit credited to the Director's Deferred Share Unit Account multiplied by the Value of a Deferred Share Unit on the Director's Termination Date), net of the applicable withholding taxes.

(h) The Corporation will be responsible for all costs relating to the administration of the Plan, including any brokerage fees related to the acquisition of Shares of the Corporation by a registered broker on behalf of a Director.

(i) Other than by operation of law, the Plan does not allow for the assignment or transfer of the Deferred Share Units, or any other benefits under the Plan.

(j) Under no circumstances shall Deferred Share Units be considered Shares of the Corporation nor shall they entitle any Director to exercise voting rights or any other rights attaching to ownership of Shares of the Corporation until after the issuance of Shares from treasury or the purchase of Shares on the open market. For greater certainty, the Plan does not provide any Director with an amount or benefit for the purpose of reducing the impact, in whole or in part, of any reduction in the fair market value of the Shares of the Corporation or a corporation related thereto.

8. From time to time, the Board may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or terminate the Plan or amend the terms of any Deferred Share Unit granted under the Plan; provided , however, that any approvals required under applicable provisions of law are obtained and no such amendments or termination shall be made at any time which has the effect of adversely affecting the existing rights of a Director under the Plan without his or her consent in writing.

Purpose of the Proposed Transactions

9. The purpose of the proposed transactions is to attract and retain talented non-full-time employee directors for the Corporation and to promote a greater alignment of interests between such persons and shareholders of the Corporation.

Additional Information

10. 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 Given

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 5, 6 and 7 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, unless the redemption of a Director's Deferred Share Units is made in accordance with the option described in subparagraph 7(g)(ii) above, in which case the provisions of section 7 of the Act shall govern.

D. When cash is received in satisfaction of a resident Director's Deferred Share Units, as described in subparagraph 7(g)(i) above, the resident Director will include the amount paid by the Corporation, before withholding taxes, in his or her income under paragraph 6(1)(c) of the Act.

E. When cash is received in satisfaction of a non-resident Director's Deferred Share Units, as described in subparagraph 7(g)(i) above, the non-resident Director will include the amount, to the extent attributable to services rendered in Canada, paid by the Corporation, before withholding taxes, in his or her income under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act.

F. The amount to be included in the income of a resident Director for the year under the Plan, where the Corporation issues Shares to the Director in satisfaction of the Director's Deferred Share Units, as described in subparagraph 7(g)(ii) above, 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 Director for the rights related to the remaining fraction of a Deferred Share Unit;

(b) under 7(1)(a) of the Act, the amount representing the aggregate fair market value of the Corporation's Shares issued to the Director; and

(c) under 6(1)(c) of the Act, the amount of the withholdings withheld by the Corporation in respect of the amounts described in (a) and (b) herein.

G. The amount to be included in the income of a non-resident Director for the year under the Plan, where the Corporation issues Shares to the non-resident Director in satisfaction of the non-resident Director's Deferred Share Units, as described in subparagraph 7(g)(ii) above, 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 attributable to services rendered in Canada, paid by the Corporation to the non-resident Director for the rights related to the remaining fraction of a Deferred Share Unit;

(b) under paragraph 7(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, representing the aggregate fair market value of the Corporation's Shares issued to the non-resident Director; and

(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent attributable to services rendered in Canada, of the withholdings withheld by the Corporation in respect of the amounts described in (a) and (b) herein.

H. The amount to be included in the income of a resident Director for the year under the Plan, where the resident Director has received Shares of the Corporation that were purchased by the registered broker on the open market in satisfaction of the resident Director's Deferred Share Units, as described in subparagraph 7(g)(iii) above, 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 Director for the rights related to the remaining fraction of a Deferred Share Unit;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the registered broker (excluding brokerage fees) to acquire the particular Shares that will be distributed to the resident Director;

(c) under paragraph 6(1)(c) of the Act, the amount of the withholdings withheld by the Corporation in respect of the amounts described in (a) and (b) herein; and

(d) under paragraph 6(1)(a) of the Act, the amount of the brokerage fees paid by the Corporation for the acquisition of the Shares of the Corporation distributed to the resident Director by the broker.

I. The amount to be included in the income of a non-resident Director for the year under the Plan, where the non-resident Director has received Shares of the Corporation that were purchased by the registered broker on the open market in satisfaction of the non-resident Director's Deferred Share Units, as described in subparagraph 7(g)(iii) above, 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 Director for the rights related to the remaining fraction of a Deferred Share Unit;

(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 registered broker (excluding brokerage fees) to acquire the particular Shares that will be distributed to the resident Director;

(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 the withholdings withheld by the Corporation in respect of the amounts described in (a) and (b) herein; and

(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount of the brokerage fees paid by the Corporation, to the extent they are paid with respect to the acquisition of Shares of the Corporation the value of which was brought into income under ruling I(b) above, for the acquisition of the Shares of the Corporation distributed to the non-resident Director by the broker.

J. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings D, E, F(a), F(c), G(a), G(c), H, and I above that are paid by the Corporation in a particular year in respect of a Director, 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 account 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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