1999 Ruling 9928853 - 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: Will the payment of Directors' fees in the form of deferred

share units constitute an SDA for purposes of the Act.

Position: No

Reasons: Exempted under the provisions of paragraph 6801(d) of the Regulations

XXXXXXXXXX
XXXXXXXXXX 992885
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge any information provided during our phone calls.

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

Facts

1. XXXXXXXXXX (the "Company") is a public corporation as defined in subsection 89(1) of the Income Tax Act (the "Act"), the common shares of which are listed on XXXXXXXXXX Stock Exchange. It is a holding company. Its wholly-owned subsidiaries, XXXXXXXXXX, provide investment management services to a broad range of institutional and individual clients across Canada including XXXXXXXXXX.

The address of the Company is XXXXXXXXXX. Its business number is XXXXXXXXXX; its Tax Services Office is XXXXXXXXXX and its Tax Centre is XXXXXXXXXX.

2. The Company's board of directors (the "Board") currently consists of XXXXXXXXXX directors, of which XXXXXXXXXX are neither employees nor full-time officers of the Company or any subsidiary. Such "outside" directors receive an annual retainer, as well as fees in respect of attendance at meetings of the Board and committees of the Board, for acting as a chair of the Board or of a committee of the Board, and for services provided to the Company.

Proposed Plan

3. The Company will establish XXXXXXXXXX (the "Plan"). The Plan will be effective as of the later of XXXXXXXXXX and the date on which an advance income tax ruling in respect of the Plan is received (the "Effective Date").

4. Certain terms are defined for purposes of the ruling request as follows:

a) "Common Share" means a common share in the capital of the Company or any shares of other securities into which such shares may have been changed, reclassified, subdivided, consolidated or converted.

b) "Eligible Director" means a member of the Board who is neither an employee nor a full-time officer of the Company or of any subsidiary of the Company.

c) "Director's Compensation" means all cash compensation which, but for the Plan, would be payable by the Company to the Eligible Director in respect of his or her services as a director, including his or her annual retainer as a director, fees and other compensation payable in respect of attendance at meetings of the Board or a committee of the Board, for acting as chair of the Board or of a committee of the Board and for services provided on the business of the Company (excluding any reimbursement of expenses actually incurred).

d) "Fair Market Value" of a Common Share on a particular date means the average of the closing board lot sale prices per share of Common Shares on XXXXXXXXXX Stock Exchange for the last five days ending on the particular date.

5. The principal features of the Plan are as follows:

a) The Plan will be administered by the Board or a committee selected by the Board (the "Committee"). A notional account will be established for each Eligible Director for the purposes of the Plan.

b) An Eligible Director may elect annually to receive a specified portion from 0% to 100% of his or her Director's Compensation in the form of notional share units ("Deferred Share Units"). An Eligible Director must deliver to the Company an annual written election specifying the percentage of Director's Compensation to be received in Deferred Share Units as follows:

i) for Eligible Directors in office on the Effective Date, the election for the year ending XXXXXXXXXX must be delivered within 30 days after the Effective Date and will apply to that portion of the Director's Compensation earned after the election is received;

ii) for Eligible Directors not in office on the Effective Date, the election for the year ending XXXXXXXXXX is to be delivered within 30 days after the Eligible Director is elected or appointed as a director of the Company and will apply to that portion of Director's Compensation earned after the election is received; and

iii) with respect to each calendar year thereafter, the election is to be made within 30 days prior to the commencement of the year (unless the Eligible Director takes office in that year, in which case the election is to be made within 30 days after the Eligible Director is elected or appointed) and will apply to that portion of Director's Compensation earned after the election is received.

An election may be revoked or changed only with respect to that part of a Director's Compensation earned thereafter.

c) At the end of March, June, September and December, unless other dates are determined by the Committee (each a "Reference Date"), the account of each Eligible Director who has elected to receive Deferred Share Units will be credited with that number of Deferred Share Units as is determined by dividing the amount of the Director's Compensation that has been deferred for the quarter ending on such date by the Fair Market Value of a Common Share on such date.

d) An Eligible Director's notional account will generally be credited with additional Deferred Share Units when dividends are paid on Common Shares. Such additional Deferred Share Units will be determined by dividing the amount of any dividend by the Fair Market Value of a Common Share on the dividend payment date and multiplying the result by the number of Deferred Share Units credited to the Eligible Director's account.

e) An Eligible Director will have no right to receive any amount under the Plan until Termination. "Termination" will be defined as the earliest date on which both of the following conditions are satisfied:

i) the Eligible Director ceases to be a director of the Company by reason of his or her death or retirement or loss of office as a director; and

ii) he or she is neither an employee nor a member of the board of directors of the Company or of any person related to the Company for the purposes of the Act.

Accordingly, if an Eligible Director became an employee or full-time officer of the Company, he or she would cease to be an Eligible Director but, because the second condition of the definition of Termination would not be met, would not be immediately entitled to receive any amount under the Plan.

f) After Termination, an Eligible Director (or his or her legal personal representative) must select a date ("Settlement Date") that is not later than the second last business day of the calendar year following the year in which Termination occurs. If the Eligible Director wishes to receive settlement in respect of all or some of his or her Deferred Share Units in Common Shares, the Eligible Director must also designate a broker.

g) On the Settlement Date, if the Eligible Director has elected to receive settlement of Deferred Share Units in cash, the Company will pay to the Eligible Director an amount equal to the relevant number of Deferred Share Units credited to the Eligible Director multiplied by the Fair Market Value of one Common Share on the Settlement Date less applicable tax withholdings.

h) If the Eligible Director has elected to receive settlement in Common Shares, the broker will purchase on the Settlement Date that number of Common Shares on the open market as is equal to the relevant number of Deferred Share Units credited to the account of the Eligible Director. The Company will pay the broker the purchase price for such shares, plus applicable commissions. The Common Shares so purchased will be delivered to the Eligible Director on the business day following the Settlement Date. The Company may, but is not required to, pay an additional amount to the Eligible Director to reflect the tax payable as a result of the Company paying the applicable commissions. With respect to any fractional Deferred Share Units, the Company will pay that amount to the Eligible Director in cash, net of any applicable tax withholding.

i) If tax is required to be withheld on the payment made by the Company to the broker referred to in 5(h) above, then the broker will purchase only that number of Common Shares as can be purchased with the net amount.

j) Deferred Share Units held in an Eligible Director's account are not transferable or assignable except after the Eligible Director's death by will or the laws of succession to the legal personal representative of the Eligible Director or to a dependant or relation as that term is used in paragraph 6801(d) of the Income Tax Regulations.

k) The Plan will be unfunded. No Eligible Director or other person will have any right to any specific assets of the Company. No assets will be segregated by the Company for purposes of funding its obligations under the Plan. Neither the Company nor the Committee is, or maybe deemed to be, a trustee of any amounts to be paid or distributed under the Plan.

1) The Plan may be amended by the Board in its sole discretion, and without the consent of an Eligible Director, provided that no such amendment may reduce the number of Deferred Share Units credited prior to such amendment. The Board may also terminate the Plan by giving notice thereof. In such event, additional Deferred Share Units will not be credited to the accounts of Eligible Directors except with respect to the payment of dividend equivalents and all amounts distributable under the Plan will be paid to persons entitled thereto on the date on which distributions would have been made had the Plan not been terminated.

Purpose of Proposed Plan

6. The purpose of the proposed Plan is to provide non-executive directors of the Company with a long-term stock based compensation program in order to promote a greater alignment of interests between such directors and the shareholders of the Company.

Additional Information

To the best of your knowledge and the knowledge of the Company, none of the issues involved in this ruling request:

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 tax centre in connection with a previously filed tax 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.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and purpose of the proposed plan, and provided that the terms of the Plan are as described 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. Except for those amounts identified in Rulings D, E, F, and G below, no amount will be included pursuant to subsection 5(1), section 6, paragraph 56(l)(a) or subparagraph 115(l)(a)(i) of the Act in the income of an Eligible Director in respect of the Plan.

D. The amount to be included in the income of a resident Eligible Director under the Plan for the year in which the Settlement Date occurs, where cash is received in satisfaction of the Participant's Deferred Share Units, will consist of the aggregate of the following amounts:

a) under paragraph 6(l)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to the fractional Deferred Share Units as described in 5(h) above;

b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director in order to satisfy the Eligible Director's Deferred Share Units described in 5(g) above; and

c) under paragraph 6(l)(c) of the Act, the amount of the applicable Deferred Share Units tax withholdings withheld by the Company as described in 5(g) above.

E. The amount to be included in the income of a non-resident Eligible Director under the Plan for the year in which the Settlement Date occurs, where cash is received in satisfaction of the Eligible Director's Deferred Share Units, will consist of the aggregate of the following amounts:

a) under paragraph 6(1)(c) and subparagraph 1l5(l)(a) (i) of the Act, the amount, to the extent it is attributable to the services rendered in Canada, paid by the Company to the Eligible Director for the rights related to fractional Deferred Share Units as described in 5(h) above;

b) under paragraph 6(l)(c) and subparagraph 115(l)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director in order to satisfy the Eligible Director's Deferred Share Units described in 5(g) above; and

c) under paragraph 6(l)( c) and subparagraph 115(l)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of the applicable Deferred Share Units tax withholdings withheld by the Company as described in 5(g) above.

F. The amount to be included in the income of a resident Eligible Director under the Plan for the year in which the Settlement Date occurs, where the Eligible Director has received Common Shares of the Company purchased by the designated broker on the open market in satisfaction of the Eligible Director's Deferred Share Units, will consist of the aggregate of the following amounts:

a) under paragraph 6(l)(c) of the Act, the amount paid by the Company to the broker (excluding brokerage commissions) to acquire the Common Shares distributed to the Eligible Director as described in 5(h) above;

b) under paragraph 6(1)(c) of the Act, the amount of Deferred Share Units tax withholdings withheld by the Company as described in 5(i) above;

c) under paragraph 6(1)(a) or paragraph 6(l)(c) of the Act, the amount of brokerage commissions paid by the Company for the acquisition of the particular Common Shares of the Company distributed to the Eligible Director by the broker as described in 5(h) above; and

d) under paragraph 6(1)(c) of the Act, the special cash payment paid by the Company to the Eligible Director to compensate the Eligible Director for the income tax liability in respect of an amount included in an Eligible Director's income in ruling (c) above as described in 5(h) above.

G. The amount to be included in the income of a non-resident Eligible Director under the Plan for the year in which the Settlement Date occurs, where the Eligible Director has received common shares of the Company purchased by the designated broker on the open market in satisfaction of the Eligible Director's Deferred Share Units, will consist of the aggregate of the following amounts:

a) under paragraph 6(1)( c) and subparagraph 115(l)(a)(i) of the Act, the amount; to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director for the rights related to the fractional Deferred Share Units as described in 5(h) above;

b) under paragraph 6(1)(c) and subparagraph 115(l)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Company to the broker (excluding brokerage commissions) to acquire the Common Shares distributed to the Eligible Director as described in 5(h) above;

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 Deferred Share Units tax withholdings withheld by the Company as described in 5(i) above;

d) under paragraph 6(1)(a) or paragraph 6(l)(c) and subparagraph 115(1)(a)(i) of the Act, the amount of brokerage commissions paid by the Company, to the extent it is attributable to services rendered in Canada, for the acquisition of the particular Common Shares of the Company distributed to the Eligible Director by the broker as described in 5(h) above; and

e) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the special cash payment paid by the Company to the Eligible Director to compensate the Eligible Director for the income tax liability in respect of an amount included in an Eligible Director's income in ruling (d) above as described in 5(h) above.

H. The adjusted cost base to the resident Eligible Director of any Common Shares of the Company acquired by the resident Eligible Director on the open market shall be the aggregate of the cost to acquire the shares which was included in the Eligible Director's income in ruling F(a) above, and the brokerage commissions paid by the Company, which were included in the Eligible Director's income in ruling F(c) above.

I. The amount payable by the Company to the estate of an Eligible Director as a result of the death of the Eligible Director will constitute a fight or thing held by the deceased Eligible Director at the time of death for purposes of subsection 70(2) of the Act.

J. 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.

K. Subject to paragraph 18(l)(a) of the Act and section 67 of the Act, any amount referred to in ruling D, E, F or G above that is paid by the Company in a particular year in respect of Eligible Directors, will be deductible by the Company 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 The Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate