1999 Ruling 9931263 - PHANTOM STOCK PLAN CCPC

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 a plan qualify under 6801(d) where the deferred share units relate to preferred shares?

Position: Yes.

Reasons: 6801(d) conditions are satisfied.

XXXXXXXXXX
XXXXXXXXXX 993126
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 in subsequent correspondence and during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Company, none of the issues involved in the ruling request

(i) is in an earlier return of the Company or a related person,

(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person,

(iii) is under objection by the Company or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

Facts

1. The Company is a taxable Canadian corporation which is controlled by a public corporation. XXXXXXXXXX ("Subco"), a subsidiary wholly-owned corporation of the Company, is a private corporation and a taxable Canadian corporation. The expressions "public corporation" and "taxable Canadian corporation" have the meanings assigned by subsection 89(1) of the Act and the expression "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of 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. The Company and Subco's fiscal year ends on XXXXXXXXXX.

2.

XXXXXXXXXX

3.

XXXXXXXXXX

4. The Company has established a Management Incentive Plan (the "Incentive Plan") for its key employees. Under the terms of the Incentive Plan, certain employees may be eligible for certain cash entitlements that depend on a formula that measures both individual performance against goals set at the beginning of each fiscal year and overall Company results. Employees only become entitled to such cash payments under the Incentive Plan after the end of the Company's fiscal year and upon the approval of the President of the Company.

Proposed Plan

5. The Company proposes to establish the XXXXXXXXXX (the "Plan") as a second performance incentive plan for certain employees (the "Eligible Employees") of the Company.

6. Subco will issue preference shares (the "Preference Shares") to the Company XXXXXXXXXX. The value of each Preference Share for purposes of the Plan (the "Fair Market Value") will be determined in accordance with generally accepted valuation principles. Such Fair Market Value will be determined by a valuation committee of the Company (the "Committee").

XXXXXXXXXX

Subco may declare dividends on the Preference Shares based on the returns earned in respect of investments acquired with the proceeds from the issuance of such Preference Shares. The initial subscription price for the Preference Shares will be $XXXXXXXXXX. The Company will purchase Preference Shares equal to the number of deferred share units credited to the Eligible Employees under the terms of the Plan, as described in 7 below. Subsequent to the initial subscription for a number of Preference Shares equal to the initial deferred share units credited to the Eligible Employees under the terms of the Plan, the Company will acquire Preference Shares for an amount equal to the Fair Market Value of the Preference Shares in accordance with the Plan.

7. The terms of the Plan are as follows:

(a) The Plan will be established in XXXXXXXXXX, subsequent to the receipt of a favourable advance income tax ruling.

(b) The Plan will be administered by an administrator (the "Administrator"). At this time, the Administrator has been designated to be the Chief Executive Officer of the Company, or, if the CEO so designates, the Vice-President Administration of the Company. A notional account will be established for each Eligible Employee who participates in the Plan in order to carry out the objectives of the Plan, more particularly described below.

(c) Each Eligible Employee will be entitled to elect, prior to the date of ratification by the President (at which point the Eligible Employees would become entitled to performance incentive compensation in respect of the fiscal year under the Incentive Plan) to receive all or part of his or her entitlements under the Incentive Plan for that year in the form of a number of units issued by the Company under the Plan to the Eligible Employee on a deferred basis (the "Deferred Share Units"). This election will be made before the Eligible Employee has absolute enjoyment or use of any amount under the Incentive Plan and it will be irrevocable. The number of Deferred Share Units to be credited to an Eligible Employee's notional account will be calculated by dividing the dollar value of the Eligible Employee's entitlements for that particular year under the Incentive Plan that the Eligible Employee has elected to receive on a deferred basis by the Fair Market Value of a Preference Share at the end of the fiscal year to which the election relates. The Fair Market Value of a Preference Share on XXXXXXXXXX will be $XXXXXXXXXX for purposes of the Plan. The portion of the entitlement under the Incentive Plan that an Eligible Employee chooses to receive in cash will be paid on the date that all other payments under the Incentive Plan are made to the Company's employees.

The Company will purchase a number of Subco Preference Shares equal to the total number of the Deferred Share Units credited to the Eligible Employees' notional accounts in respect of the entitlements under the Incentive Plan that have been deferred by the Eligible Employees.

(d) When Subco declares a dividend on the Preference Shares held by the Company, the Eligible Employee's notional account will be credited with dividend equivalents in the form of additional Deferred Share Units on each dividend payment date in respect of which in the ordinary course cash dividends are paid on the Preference Shares. Such dividend equivalents will be computed by dividing the amount obtained by multiplying the amount of the dividend declared and paid per Preference Share by the number of Deferred Share Units recorded in the Eligible Employee's notional account on the record date for the payment of such dividend, by the Fair Market Value of a Preference Share on the most recent fiscal year end, with fractions computed to three decimal places.

The Company will purchase a number of Subco Preference Shares equal to the total whole number of the Deferred Share Units credited to the Eligible Employees notional accounts in respect of the dividend equivalents under the Incentive Plan for that particular year.

(e) In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin-off or other distribution (other than normal dividends) of Subco assets to shareholders, or any other change affecting the Fair Market Value of the Preference Shares, the number of Deferred Share Units credited to an Eligible Employee's notional account may be adjusted to reflect the change in the Fair Market Value of the Preference Shares.

(f) When a Deferred Share Unit is credited to an Eligible Employee's notional account, the Deferred Share Unit will be fully vested in the Eligible Employee.

(g) Eligible Employees will only be entitled to redeem the Deferred Share Units credited to their notional accounts after their termination of employment with the Company or a person related to the Company, their retirement from employment with the Company or a person related to the Company or their death (hereinafter referred to as the "Cessation of Employment"). As a result of the Eligible Employee's Cessation of Employment, the Eligible Employee or, in the event of the Eligible Employee's death, the Eligible Employee's designated beneficiary or legal representative will be entitled to receive a cash payment equal to the fair market value of the Deferred Share Units credited to his or her notional account. The fair market value of a Deferred Share Unit credited to the Eligible Employee's notional account will be equal to the Fair Market Value of a Preference Share at the most recent fiscal year end. The Company will ensure that the Eligible Employee or, in the event of the Eligible Employee's death, the Eligible Employee's designated beneficiary or legal representative is paid the cash payment entitlement, net of withholding taxes, no later than the end of the first calendar year following the date of the Eligible Employee's Cessation of Employment.

(h) For greater certainty, Deferred Share Units will not entitle an Eligible Employee to any shareholder rights, including, without limitation, voting rights, dividend entitlements or rights on liquidation. The purchase of Preference Shares by the Company will not in any way create or secure an Eligible Employee's entitlements under the Plan. There will be no other shares issued, authorized, reserved or sold by the Company (or a related company) at any time in connection with the Deferred Share Units under the Plan.

(i) No amount or benefit will be granted to, or in respect of, an Eligible Employee under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Eligible Employee to reduce the impact of any reduction in the Fair Market Value of the Preference Shares

8. The terms of the Plan will provide that the Company can unilaterally amend or terminate the Plan at any time. However, any such amendment or termination shall not adversely affect the right of any Eligible Employee at the time of such amendment or termination, without the consent of the affected Eligible Employee. If the Plan is terminated by the Board, no new Deferred Share Units will be credited to the account of an Eligible Employee, 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 Employee receives a cash payment in satisfaction of all Deferred Share Units recorded in the Eligible Employee's account.

Purpose of the Proposed Plan

9. The Plan will be established to provide Eligible Employees of the Company, and such of its subsidiaries as may from time to time be designated by the Administrator, with compensation opportunities that are consistent with shareholder interests.

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 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.

B. In respect of an Eligible Employee's participation in the Plan, the Eligible Employee will include the amounts received before the applicable withholding taxes in a particular year, as described in 7(g) above, in his or her income for that particular year under subsection 5(1) of the Act. For greater certainty, in respect of an Eligible Employee's participation in the Plan, 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 Employee whether by reason of implementation of the Plan, the Eligible Employee's election to receive Incentive Plan payments as Deferred Share Units under the Plan, or prior to any payment under the Plan to the Eligible Employee.

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 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 as provided for in 8 above.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate