30 November 1997 Ruling E9820283 - RETIRING ALLOWANCE PAYMENT IN SHARES

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:

Is the proposed arrangement a plan for the payment of retiring allowances?

Position:

Yes. The arrangement is a retiring allowance plan.

Reasons:

Review of terms.

XXXXXXXXXX
XXXXXXXXXX 							982028
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Re: Advance Income Tax Ruling
Executive Leave of Absence Award

This is in reply to your letters of XXXXXXXXXX, in respect of your request for an advance income tax ruling for the above noted plan.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Plan" means the Executive Retirement Leave of Absence Award as described in your submission;

(c) "Employer" means: XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

(d) "Executives" mean employees of the Employer who participate in the Plan,

Relevant Facts

1. The Employer was incorporated under the Canada Business Corporations Act and continued under the Companies Act XXXXXXXXXX). It is a wholly owned subsidiary of XXXXXXXXXX.

2. The Employer currently has the Plan in place as part of each Executives employment contract with the Employer. In general, the Plan is presently designed to provide Executives a cash payment of 12 months salary at the time of retirement. The Plan stipulates that an Executive must stay with the Employer until retirement to be eligible for the award. Retirement is defined as the earlier of 30 years service or 65 years of age. These contracts do not contemplate the replacement of the cash awards under the Plan with an equivalent amount of stock. However the contracts do have a provision allowing general changes to the terms of the Executives' benefits

Proposed Transactions

3. The Employer proposes to amend the methodology used to determine the quantum of awards made under the Plan. The amendment to the Plan will replace the current cash award with a phantom stock unit award. The details of awarding phantom stock units are as follows:

a) a presumption of a retirement date is determined for each Executive;

b) a salary is forecast for each Executive for the year of retirement;

c) the stock value at the date of retirement determined under (a) will be forecast. This forecast will consider current market conditions, trends in the market and forecast performance of the Employer's stock;

d) the projected salary determined under (b) will be divided by the forecasted stock value to determine the number of phantom stock units to be awarded to each Executive;

e) based on the fair market value of the Employer's common shares at the date of retirement and the number of phantom stock units awarded, the Executive will receive on retirement, cash, common shares, if the Executive chooses to receive shares, or an equivalent combination of cash and shares; and

f) if the Executive chooses to receive shares, the Employer will purchase the shares on the open market on behalf of the executive by forwarding cash to an independent broker who will in turn purchase the shares on the open market on behalf of the Executive.

4. To clarify 3(e) above, the Executive will be entitled to receive a cash award based on the fair market value of the Employer's common shares at the date of retirement and the number of units awarded. The Executive will have the option to receive the award in the form of common shares, cash or an equivalent combination thereof. This option will be at the discretion of the Executive.

Purpose of the Plan Amendment

5. The purpose of the Plan amendment is to provide a benefit to each executive which will act as a retention vehicle. The Employer believes that the current cash benefit is no longer consistent with a compensation philosophy that is competitive in the marketplace.

6. Management feels that an executive retirement leave award consisting of phantom stock units will result in executive members who are focused on the long-term success of the Employer. A retirement based award that is tied into the Employer's stock value adds a component of ownership and accountability which is absent from the current plan. The Employer's industry is rapidly changing and the Employer is continually looking at new business opportunities. In light of this business environment, should the Employer exceed or fall short of its growth targets, the proposed Plan will compensate the Executives accordingly.

7. The purpose of the current Plan and the amended Plan is to retain executives on a long term basis. While the Plan stipulates that an Executive must stay with the Employer until retirement to be eligible for the award and the Plan defines "retirement" as the earlier of 30 years service or 65 years of age, this provision may vary for specific Executives. For example it would not be practical from a business perspective to hire an executive at age 64 and include the leave of absence award as part of the Executives contract.

Additional Information

8. To the best of your knowledge and that of the Employer and Executives, the issues related to this request:

a) have not previously been reported in the Employer's, or any related party's prior income tax returns:

b) are not being considered by a tax services office in connection with any of the Employer's or a related party's prior income tax return;

c) are not under objection by the Employer or a related person;

d) are not before the courts; and

e) are not the subject of a ruling previously issued to the Employer by this Directorate

Rulings

Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:

A. Subject to paragraph 18(1)(a) and subsection 67 of the Act, the Employer will be entitled to a deduction under section 9 of the Act for amounts paid under the Plan in a particular year; and

B. The proposed payments under the Plan will qualify as a "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (the "Act"), and the amount received under the plan either in the form of common shares, valued at their fair market value at the time of payment, cash or a combination of cash and shares (including any applicable withholdings) will be included in the Executives income in the year of receipt under subparagraph 56(1)(a)(ii) of the Act.

C. No amount will be included in an Executives' income pursuant to section 5 or 6 of the Act solely as a consequence of the proposed amendment of the Plan.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada Taxation, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch