1999 Ruling 9929533 - PHANTOM STOCK, DIRECTORS 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: 1) Will the payment of Director fees in the form of deferred share units result in an SDA? 2) Will the issuance of treasury shares in satisfaction of the deferred share units result in the application of section 7 of the Act?

Position: 1) No. 2) Yes

Reasons: 1) 6801(d) satisfied 2) Where treasury shares are issued, section 7 would clearly apply.

XXXXXXXXXX
XXXXXXXXXX 992953
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") 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. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Facts

1. The Company was incorporated under the laws of Canada and its head office is located in XXXXXXXXXX. The Company is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meanings assigned by subsection 89(1) of the Income Tax Act (the "Act").

The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2.

XXXXXXXXXX

The Company's primary business is that of XXXXXXXXXX.

3. The Company's common shares are listed and traded on the XXXXXXXXXX Stock Exchanges.

4. The Company currently pays members of its board of directors (the "Board") an annual retainer. A director is paid one-quarter of his or her annual retainer at the end of each of the Company's quarters ("Quarterly Retainer Fee"). For the year XXXXXXXXXX, the annual retainer that will be paid to each director will be U.S. $XXXXXXXXXX.

Proposed Plan

5. The Company will establish XXXXXXXXXX (the "Plan") for the benefit of Canadian and non-resident directors of the Company. Only non-employee directors are eligible to participate in the Plan.

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

(a) "Annual Retainer" means the annual retainer payable to an Eligible Director in each year as determined by the Board from time to time in its discretion, for service as a member of the Board during a calendar year;

(b) "Applicable Withholding Taxes" means any and all taxes and other source deductions or other amounts which the Company is required by law to withhold from any amounts paid or credited under the Plan;

(c) "Award Date" means each date on which Deferred Share Units are credited to an Eligible Director, which shall be, unless otherwise determined by the Committee, the last business day of each calendar quarter of each year;

(d) "Committee" means the committee of the Board responsible for recommending to the Board the compensation of the Eligible Directors;

(e) "Common Shares" means the common shares of the Company;

(f) "Deferred Share Unit" means a unit equivalent in value to a Common Share, credited to the Eligible Director's notional account on a deferred basis. Under no circumstances shall the Deferred Share Units be considered Common Shares of the Company nor shall they entitle any Eligible Director to exercise voting rights or any other rights attaching to the ownership of the Company's Common Shares;

(g) "Deferred Share Unit Amount" has the meaning given thereto in 7(f) below;

(h) "Dividend Equivalents" means a bookkeeping entry whereby each Deferred Share Unit is credited with the equivalent amount of the dividend paid on a Common Share;

(i) "Eligible Director" means a person who is, at the relevant time, a director or former director of the Company who is not an employee of the Company or any of its subsidiaries;

(j) "Market Value" means the last sale price of a board lot of Common Shares on XXXXXXXXXX Stock Exchange on the last trading day on such exchange prior to the particular date on which there was a trade of a board lot of Common Shares; and

(k) "Redemption Date" means the date upon which an Eligible Director ceases to be a member of the Board.

7. The terms of the Plan are as follows:

(a) The effective date of the Plan will be XXXXXXXXXX or such later date as the Board may determine.

(b) The Plan will be administered by the Board. A notional account will be established for each Eligible Director who participates in the Plan in order to carry out the objectives of the Plan, more particularly described below.

(c) On each Award Date, each Eligible Director will be allocated XXXXXXXXXX% of his or her Quarterly Retainer Fee which would, but for the Plan, be payable by the Company to him or her in cash on the last day of each of the Company's quarters in the form of Deferred Share Units which will be credited to the Eligible Director's notional account. Each Eligible Director will have the right to elect once each calendar year whether such director wishes to receive all of such director's Annual Retainer for the immediately succeeding year in the form of Deferred Share Units. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited as of each Award Date will be determined by dividing (a) the amount of the applicable portion of the Quarterly Retainer Fee to be credited in Deferred Share Units on that Award Date by (b) the Market Value of a Common Share of the Company. An Eligible Director's election will be made by completing, signing and delivering to the Secretary of the Company the election form: (i) in the case of an existing director, by the end of the calendar year preceding the year to which such election is to apply; or (ii) in the case of a new director, as soon as possible after the director's appointment. In each case, the election, when made, shall only apply prospectively with respect to the Eligible Director's Annual Retainer yet to be earned. The award of Deferred Share Units for a calendar year to an Eligible Director will be evidenced by an agreement in writing between the Eligible Director and the Company.

(d) An Eligible Director's account will be credited with Dividend Equivalents in the form of additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid on Common Shares. Such Dividend Equivalents will be computed by dividing: (i) the amount obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of Deferred Share Units recorded in the Eligible Director's account on the record date for the payment of such dividend, by (ii) the Market Value, with fractions computed to three decimal places.

(e) Subject to (k) below, in the event of the declaration of any stock dividend, a subdivision, consolidation, reclassification, exchange, or other change with respect to the Common Shares, or a merger, consolidation, spin-off, or other distribution (other than ordinary course cash dividends) of the Company's assets to its shareholders, the account of each Eligible Director and the Deferred Share Units outstanding under the Plan will be adjusted in such manner, if any, as the Board may in its discretion deem appropriate to reflect the event.

(f) An Eligible Director will be entitled on the Redemption Date to redeem the Deferred Share Units credited to the Eligible Director's account for an amount (the "Deferred Share Unit Amount") equal to the product that results from multiplying (i) the number of Deferred Share Units recorded in the Eligible Director's account on the Redemption Date by (ii) the Market Value of the Common Share. Upon payment in full of the Deferred Share Unit Amount, the Deferred Share Units credited to the particular Eligible Director's account will be cancelled.

(g) An Eligible Director will have the option of having his or her Deferred Share Unit Amount paid in cash or paid in the form of Common Shares of the Company acquired on the open market on the Eligible Director's behalf through an independent broker designated by the Eligible Director (the "Designated Broker"). Notwithstanding an Eligible Director's election to receive Common Shares acquired on the open market, the Company may, in its discretion, (i) pay the Deferred Share Unit Amount, less any Applicable Withholding Taxes, in cash if the Company considers that purchase of Common Shares and delivery thereof to an Eligible Director in a jurisdiction would require the Company to comply with legal requirements of the jurisdiction applicable to the Eligible Director or the Company with respect to the purchase of Common Shares, or (ii) subject to the receipt of any necessary shareholder and regulatory approvals, issue to the Eligible Director such number of Common Shares from treasury as equals the number of Deferred Share Units recorded in the Eligible Director's account on the Redemption Date. If the Company issues Common Shares as aforesaid, such Common Shares will be issued in consideration for the past services of the Eligible Director to the Company and the entitlement of the Eligible Director under this Plan shall be satisfied in full by such issuance of the Common Shares. Where Common Shares are acquired on the open market or issued from the Company's treasury, the Company will make a cash payment, less any Applicable Withholding Taxes, to the Eligible Director with respect to the value of fractional Deferred Share Units standing to the Eligible Director's credit after the maximum number of whole Common Shares has been acquired by the independent broker on the Eligible Director's behalf or has been issued by the Company.

(h) If the Eligible Director has elected, and the Company has determined, that payment of the Deferred Share Unit Amount be made in the form of Common Shares purchased on the open market through a Designated Broker, as described in 7(g) above, the Company will calculate the number of whole Common Shares to be purchased by the Designated Broker on the open market on behalf of and for the benefit of the Eligible Director. The number of Common Shares will be determined by dividing (i) the Deferred Share Unit Amount payable, less any Applicable Withholdings Taxes, by (ii) the Market Value of a Common Share as determined on the Redemption Date. On the Redemption Date or, if the Redemption Date is not a trading date for shares on XXXXXXXXXX Stock Exchange, on the next such trading date, the Company shall advise the Designated Broker of the specified number of whole Common Shares to be purchased on behalf of the Eligible Director. The Designated Broker will purchase the specified number of whole Common Shares as soon as practicable after being notified by the Company. On or before the date of settlement with respect to the purchase of the Common Shares by the Designated Broker, the Company, acting as agent for the Eligible Director, will pay the purchase price of the specified number of Common Shares to the Designated Broker, together with any reasonable brokerage fees or commissions related thereto.

(i) Notwithstanding the preceding paragraphs, if an Eligible Director becomes an employee of the Company or any of its subsidiaries, such Eligible Director's Plan eligibility will be suspended. In such a circumstance, the director will not be eligible to be credited with additional Deferred Share Units (other than Dividend Equivalents credited as described in 7(d) of this ruling on the Deferred Share Units credited to such Eligible Director prior to the date of becoming such an employee) and will not be able to redeem the Deferred Share Units as set out above until the later of the date of cessation of employment with the Company or any of its subsidiaries and the date on which the director ceases to be a member of the Board (the "Separation Date"). The date for redemption of the Deferred Share Units in these circumstances will be the Separation Date and such date will be deemed to be the Redemption Date for purposes of the redemption of the Deferred Share Units.

(j) Upon the death of an Eligible Director prior to the redemption of the Deferred Share Units credited to the account of such Eligible Director under the Plan, the beneficiary, or, in the absence of a valid designation of a beneficiary, the estate of such Eligible Director, will be entitled to redeem the Deferred Share Units in accordance with 7(g) or (h) above. For greater certainty, the Deferred Share Unit Amount payable will be equivalent to the amount which would have been paid to the Eligible Director pursuant to and subject to 7(g) or (h) above, calculated as if the Eligible Director had previously ceased to be a director of the Company on the day prior to his or her death. The beneficiary or estate, as the case may be, will be entitled to select the manner of payment in satisfaction of Deferred Share Units in the same manner as the Eligible Director would have been permitted to do had he or she survived and ceased to be a director of the Company on the day prior to his or her death. Notwithstanding the foregoing, the Company may, in its discretion, (i) pay the Deferred Share Unit Amount, less any Applicable Withholding Taxes, in cash if the Company considers that purchase of the Common Shares and delivery thereof to an Eligible Director's beneficiary or estate, as the case may be, in a jurisdiction would require the Company to comply with legal requirements of the jurisdiction applicable to the beneficiary, the estate or the Company with respect to the purchase of Common Shares, or (ii) subject to the receipt of any necessary shareholder and regulatory approvals, issue from treasury to the beneficiary or estate, as the case may be, such number of Common Shares as equals the number of Deferred Share Units recorded in the beneficiary's or estate's account on the Redemption Date.

(k) No amount will be paid to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Eligible Director to compensate for a downward fluctuation in the price of the Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

8. The Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan. However, any such amendment, suspension, or termination shall not adversely affect the right of any Eligible Director at the time of such amendment, suspension or termination, without the consent of the affected Eligible Director. If the Board terminates the Plan, no new Deferred Share Units will be credited to the account of an Eligible Director, but previously credited Deferred Share Units shall remain outstanding, be entitled to Dividend Equivalents as provided under 7(d) above, and be paid in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Eligible Director receives payment, in cash or Common Shares, in satisfaction of all Deferred Share Units recorded in the Eligible Director's account.

Purpose of the Proposed Plan

9. The Plan will be established to provide Eligible Directors with the opportunity to acquire share equivalent units convertible to cash or Common Shares upon their ceasing to act as directors. Acquiring such units will allow directors to participate in the long-term success of the Company and will promote a greater alignment of interests between the directors and the shareholders.

Additional Information

10. 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 tax 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 plan and purpose of the proposed plan, and provided that the terms of the Plan are as described in 5 through 8 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, G, H and I below, no amount will be included pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of an Eligible Director in respect of the Plan.

D. When cash is received in satisfaction of a resident Eligible Director's Deferred Share Units as described in 7(g) above, the Eligible Director will include the amount paid by the Company, before any Applicable 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 Eligible Director's Deferred Share Units as described in 7(g) above, the non-resident Eligible Director will include the amount, to the extent attributable to services rendered in Canada, paid by the Company, before any Applicable 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 Eligible Director for the year under the Plan, where the Company issues Common Shares from treasury to the Eligible Director in satisfaction of the Eligible Director's Deferred Share Units as described in 7(g) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to fractional shares as described in 7(g) above;

(b) under paragraph 7(1)(a) of the Act, the amount representing the aggregate Market Value of the Company's Common Shares issued to the Eligible Director as described in 7(g) above; and

(c) under paragraph 6(1)(c) of the Act, the amount of Applicable Withholding Taxes withheld by the Company as described in 7(g) above.

G. The amount to be included in the income of a non-resident Eligible Director for the year under the Plan, where the Company issues Common Shares from treasury to the non-resident Eligible Director in satisfaction of the non-resident Eligible Director's Deferred Share Units as described in 7(g) 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 Company to the non-resident Eligible Director for the rights related to fractional shares as described in 7(g) above;

(b) under paragraph 7(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, representing the aggregate Market Value of the Company's Common Shares issued to the non-resident Eligible Director as described in 7(g) above; and

(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 Applicable Withholding Taxes withheld by the Company as described in 7(g) above.

H. The amount to be included in the income of a resident Eligible Director for the year under the Plan, where the Eligible Director has received Common Shares of the Company that were purchased by the Designated Broker on the open market in satisfaction of the Eligible Director's Deferred Share Units as described in 7(g) and (h) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to the fractional shares as described in 7(g) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Designated Broker (excluding brokerage fees) to acquire the particular Common Shares of the Company that will be distributed to the Eligible Director as described in 7(g) and (h) above;

(c) under paragraph 6(1)(c) of the Act, the amount of Applicable Withholding Taxes withheld by the Company as described in 7(g) above; and

(d) under paragraph 6(1)(a) of the Act, the amount of the brokerage fees paid by the Company to the Designated Broker for the acquisition of the Common Shares of the Company distributed by the Designated Broker to the Eligible Director as described in 7(g) above.

I. The amount to be included in the income of a non-resident Eligible Director for the year under the Plan, where the non-resident Eligible Director has received Common Shares of the Company that were purchased by the Designated Broker on the open market in satisfaction of the non-resident Eligible Director's Deferred Share Units as described in 7(g) and (h) 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 Company to the non-resident Eligible Director for the rights related to the fractional shares as described in 7(g) above;

(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 Company to the Designated Broker (excluding brokerage fees) to acquire the particular Common Shares of the Company that will be distributed to the non-resident Eligible Director as described in 7(g) and (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 Applicable Withholding Taxes withheld by the Company from the non-resident Eligible Director as described in 7(g) above; and

(d) 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 the brokerage fees paid by the Company to the Designated Broker for the acquisition of the Common Shares of the Company distributed by the Designated Broker to the non-resident Eligible Director as described in 7(g) above.

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. The amount payable by the Company to the named beneficiary or estate of the Eligible Director as a result of the Eligible Director's death as described in 7(j) above will constitute a right or thing held by the deceased Eligible Director at the time of death for purposes of subsection 70(2) of the Act.

L. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D, E, F(a), F(c), G(a), G(c), H or I 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 Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX. However, these rulings will be binding only in respect of the Plan as described and may not be binding in the event the Plan is amended or suspended as provided for in 8 above.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate