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 an executive share purchase plan be considered an EBP for purposes of the Act?
Position: Yes.
Reasons: The plan meets the definition of EBP and does not qualify as an SDA or RCA for purposes of the Act.
XXXXXXXXXX 991960
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Company") is a corporation governed by the Canada Business Corporations Act. The Company is a taxable Canadian corporation and a public corporation for purposes of the Income Tax Act (the "Act"). Its common shares (the "Shares") are posted for trading on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Act.
The Company's address is XXXXXXXXXX. The Company 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. The Company has determined that its executives must attain and maintain a certain level of share ownership of the Company's Shares. Currently, there are approximately XXXXXXXXXX individuals who are in the category of executives who are eligible to participate in the proposed executive share ownership plan described below. Most of the executives eligible for the Plan reside in XXXXXXXXXX and the other executives reside elsewhere in Canada. The value of Shares to be held will be expressed as a multiple of the executive's base annual salary. The Board of Directors of the Company has approved the following share ownership guidelines (the "Guidelines"):
Multiple of
Position Base Annual Salary
XXXXXXXXXX
Proposed Transactions
4. The Company proposes to establish an executive share ownership plan (the "Plan") for the benefit of individuals who occupy the positions or ranks identified in paragraph 3 above. Subject to the receipt of a favourable advance income tax ruling, the Company would like to establish the Plan with effect as of XXXXXXXXXX (the "Effective Date"). The main terms and conditions of the Plan can be summarised as follows:
(a) Participation in the Plan will be at the discretion of the Chairman and Chief Executive Officer of the Company. Each selected executive will be invited in writing to participate (the "Executive").
(b) The Executive may contribute up to XXXXXXXXXX% (or such other percentage as may be determined from time to time by the Human Resources and Compensation Committee (the "Committee") of the Board of Directors of the Company) of base annual salary by way of bi-weekly payroll deductions (the "Executive Contributions"). As long as the total annual Executive Contributions do not exceed the determined percentage of base annual salary, the Executive may amend the contribution level at any time in the year upon giving one month's notice of the amended contribution level.
(c ) In addition to payroll contributions, the Executive is permitted one lump sum contribution per calendar year to the Plan, as long as the total amount of Executive Contributions for the year does not exceed the determined percentage of base annual salary. For the current year, an Executive may make a lump sum contribution on the Effective Date which may not exceed XXXXXXXXXX% of base annual salary for the period from XXXXXXXXXX to the Effective Date.
(d) The employer of the Executive will provide a XXXXXXXXXX% matching contribution (the "Employer Contribution") for each dollar of Executive Contribution. Employer Contributions will be made at the same time as Executive Contributions. Where the employer of the Executive is a corporation other than the Company, the employer will make the matching contribution and not the Company.
(e) An Executive may elect to suspend making Executive Contributions by providing one month's notice preceding the intended effective date of the suspension. In this event, both Executive Contributions and Employer Contributions shall cease on such effective date and shall not resume until one month following receipt by the employer of a notice to resume Executive Contributions.
(f) The plan administrator will be a trust company, group of individuals, an insurance company or other agent designated by the Company to hold the assets of the Plan and to administer the Plan (the "Plan Administrator").
(g) The Company will establish a trust (the "Trust") in connection with the Plan and will appoint the Plan Administrator to act as trustee of the Trust (the "Trustee").
(h) The Plan Administrator will establish for each Executive a trust account within the Trust (the "Trust Account") and a separate, personal, custodial account outside of the Trust (the "Personal Account").
(i) Executive Contributions will be paid to the Personal Account and will be used by the Plan Administrator to purchase Shares on the open market to be held in the Personal Account. It should be noted that the Executive is the legal and beneficial owner of all Shares held in his or her Personal Account, including the Shares with restrictions attached as described in paragraph 4(j) below. Thus, all dividends paid on such Shares in the year will be included in the Executive's income for the year as dividend income.
(j) Employer Contributions for an Executive will be paid to the Trust and will be used by the Trustee to purchase Shares on the open market. The Shares purchased for the Trust Account of an Executive will be subject to a holding period restriction as determined by the Committee, which for XXXXXXXXXX is a minimum of XXXXXXXXXX from the date of purchase (the "Restricted Shares"). After purchase, the Trustee will have the share certificates for the Restricted Shares issued in the Executive's name appropriately marked to reflect the restriction. The Executive will own the Shares described in paragraph 4(i) above held in his or her Personal Account and agrees to abide by the terms and conditions of the Plan with respect to the Guidelines (see paragraph 3 above) and will withdraw such Shares in accordance with such Guidelines (see paragraph 4(m) below) as administered by the Plan Administrator
(k) Following their purchase and in any event no later than December 31 of the year, the Trustee shall transfer the Restricted Shares out of the Trust Account and deposit them in the Personal Account of the Executive. The Trustee will allocate an amount to the employer of the Executive in respect of the fair market value of Restricted Shares transferred to the Executive's Personal Account. It is not expected that the Restricted Shares will remain long enough in an Executive's Trust Account to earn any dividends in the Trust Account. As the restriction expires with respect to particular Restricted Shares, the relevant share certificates will be appropriately amended.
(l) The Plan Administrator shall pay all cash dividends paid on Shares held in the Personal Account of an Executive to the Executive as soon as practicable following receipt thereof. Shares held in an Executive's Personal Account shall be voted by the Company, as directed by the Executive, at all shareholders' meetings.
(m) To comply with the Guidelines, an Executive may only withdraw Shares from his or her Personal Account after the Executive has attained the applicable Guideline, and only such number of Shares that are in excess of the Guideline and the withdrawal of which will not reduce the value of the remaining Shares in the Personal Account below the Guideline. Shares to be withdrawn will in any event be limited to Shares purchased with Executive Contributions, as well as Restricted Shares whose restriction has expired.
(n) However, notwithstanding subparagraph 4(m) above, the Executive or the Executive's beneficiary (or estate), as the case may be, shall be entitled to receive all Shares held in the Executive's Personal Account, including Restricted Shares, upon the occurrence of any of the following events, which events are beyond the control of the Executive:
(i) a change of control of the Company, as defined in the Plan,
(ii) dismissal from employment without cause,
(iii) long-term disability, and
(iv) death.
5. The Company shall engage a qualified valuator to determine the amount by which the fair market value of a Share that is not subject to any trading restriction should reasonably be discounted having regard to the minimum holding period restriction imposed on a Restricted Share. The Company shall advise the Trustee of such discounted value which the Trustee shall use for the purposes of the Trust's tax reporting, including the filing of the T4 Summary and issuance of the T4 Supplementary to the Executive in respect of Restricted Shares transferred out of the Trust in the year.
6. It is expected that an Executive will not reduce his or her shareholding in the Company of Shares acquired outside of the Plan prior to achievement of the Guideline applicable to the Executive. Any reductions of Shares acquired through the Plan will have to be approved by the Chairman & CEO of the Company, subject to the requirements of subparagraphs 4(j), (m) and (n) above. As such, it is reasonable to expect that an Executive will hold Shares acquired through the Plan from XXXXXXXXXX (where XXXXXXXXXX is the minimum holding period) to XXXXXXXXXX, depending on the number of years to retirement, the occurrence of an event in subparagraph 4(n) above, or the increase in the value of the Shares.
Purpose of the Proposed Transactions
7. The purpose of the Plan is to encourage the Executives in attaining and maintaining a level of ownership of Shares equal to the Guidelines in order to align their interests with those of the shareholders of the Company. The achievement of the Guidelines is regarded by the Company as an essential requirement for its Executives which will enhance the Company's investment value to current and prospective investors and creditors. The Plan is also intended, through the XXXXXXXXXX% Company match, to provide a significant incentive in attracting and retaining highly qualified individuals for the executive ranks of the Company.
8. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Company or of a person related to the Company;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Company or of a person related to the Company;
(c) is under objection by the Company or by a person related to the Company;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.
Ruling 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 paragraph 4 above, we rule as follows:
A. The Plan will not constitute a "salary deferral arrangement" 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 trust established under the Plan as described in paragraph 4(g) above, for the purpose of receiving the Employer Contributions will constitute an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.
D. We confirm that an amount equal to the fair market value of the Restricted Shares transferred to an Executive's Personal Account, as described in paragraph 4(k) above, will be taxable as income to the Executive under paragraph 6(1)(g) of the Act for the year the Restricted Shares are transferred to the Executive's Personal Account by the Trustee.
E. Where, in accordance with subsection 32.1(2) of the Act, the Trustee of the Plan allocates an amount to the employer of an Executive, as described in paragraph 4(k) above, in respect of the fair market value of the Restricted Shares transferred to the Executives' Personal Account, we confirm that the employer of the Executive will be entitled to deduct the amount under subsection 32.1(1) 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.
This letter does not express or imply, and should not be construed as expressing or implying, that any ruling, opinion, confirmation or approval is being provided in respect of the fair market value of Restricted Shares. As stated in paragraph 15(f) of Information Circular 70-6R3, the Department does not rule in respect of the fair market value of property.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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