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.
Principal Issues: Will proposed amendments to an existing deferred stock unit plan to add a new class of units based on XXXXXXXXXX shares that track a limited partnership investment fund, result in the plan ceasing to satisfy the conditions in ITR 6801(d)?
Position: The amendment will not, in and of itself, affect the plan for purposes of the conditions in ITR 6801(d).
Reasons: The XXXXXXXXXX shares fall within the parameters of ITR 6801(d) and, in particular, the post-amble to the Regulation. The Plan provides, and the taxpayer's representative has confirmed, that no action may be taken to reduce the impact of any downward fluctuation in the fair market value of the XXXXXXXXXX shares or of the fund itself.
XXXXXXXXXX 2008-028764
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "taxpayer")
This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in various correspondence in XXXXXXXXXX and during various telephone conversations (XXXXXXXXXX ).
To the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) dealt with in an earlier tax return of the taxpayer or a person (a "specified person") who is a person related to the taxpayer or a Participant in the Plan referred to below;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a specified person;
(iii) under objection by the taxpayer or a specified person;
(iv) before the courts, or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued by the Directorate, other than Ruling 2003-0040931 dated XXXXXXXXXX and Ruling 2007-0246431 dated XXXXXXXXXX .
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"). Unless a contrary intention appears, any term or expression used in this letter has the meaning assigned for the purposes of the Act.
Our understanding of the relevant definitions, the facts, the proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX . ("ACO") is a taxable Canadian corporation as that term is defined in subsection 89(1) of the Act. ACO's Business Number is XXXXXXXXXX . ACO files its tax returns at the XXXXXXXXXX Tax Services Office and deals with that office. The head office of ACO is XXXXXXXXXX . Prior to XXXXXXXXXX , the legal name of ACO was XXXXXXXXXX .
2. XXXXXXXXXX ("BCO") is also a taxable Canadian corporation as that term is defined in subsection 89(1) of the Act. BCO is a subsidiary of ACO and the two corporations are related to each other for purposes of the Act and, in particular, for purposes of paragraph 6801(d) of the Income Tax Regulations (the "Regulations").
3. The XXXXXXXXXX Shares of ACO and the XXXXXXXXXX Shares of BCO are listed on the XXXXXXXXXX
The Fund
4. In XXXXXXXXXX , ACO launched a new XXXXXXXXXX fund, the XXXXXXXXXX , (the "Partnership"). The Partnership is a XXXXXXXXXX exempted limited partnership. Investors in the Partnership are XXXXXXXXXX . The Partnership will invest in certain XXXXXXXXXX and XXXXXXXXXX related assets.
5. The Partnership has a general partner ("GP") and an investment manager (the "Manager") both of which are controlled by ACO.
6. ACO and its affiliates are committed to making a minimum $XXXXXXXXXX investment. ACO's investment will be made through a parallel investment vehicle, XXXXXXXXXX which is also a XXXXXXXXXX exempted limited partnership (the "Parallel Investment Vehicle"). The Parallel Investment Vehicle will invest alongside the Partnership on the same terms and conditions as the Partnership.
7. The main purpose for ACO investing through the Parallel Investment Vehicle is that, unlike the Partnership, it will not pay management fees and will not provide for carried interest distributions (a share of investment profits that is paid to ACO once certain investment returns have been satisfied), i.e. ACO will not pay itself management fees and carried interest distributions on the money it invests.
8. Collectively, the Partnership and the Parallel Investment Vehicle constitute the "Fund".
9. Under the Fund Agreements, all capital calls must be made contemporaneously to all investors in the Fund. Therefore ACO will be required to fund its capital calls whenever other investors in the Fund are required to do so.
10. The Fund had its first closing on XXXXXXXXXX and a second closing on XXXXXXXXXX . Thereafter, the Fund will hold additional closings. The final closing will be no later than XXXXXXXXXX months from the anniversary of the initial closing (the "Final Closing"). After the Final Closing, generally, no new partners may invest in the Fund.
11. The Fund will be dissolved XXXXXXXXXX years from the date of the Final Closing but may be extended for up to XXXXXXXXXX additional XXXXXXXXXX periods by the GP to allow for the orderly liquidation of investments.
12. The net profits and losses of the Fund generally will be allocated among the partners in a manner that reflects the economic interests of the partners and is consistent with the requirements of the Internal Revenue Code of 1986, as amended.
13. Investment proceeds available for distribution of the Fund will consist of cash proceeds realized on the disposition of investments, cash dividends, interest and other income realized on investments, net of reserves and amounts necessary to pay Fund expenses. Investment proceeds will be apportioned among the partners participating in the investment in proportion to their relative capital contribution to such investment in accordance with the Fund Agreements.
14. Certain senior employees of ACO and or its subsidiaries or affiliates will be responsible for providing the investment management services being provided by the Manager including sourcing, negotiating and overseeing investments (the "Employees").
The Plan
15. ACO has established a deferred compensation plan (the "Plan") for designated senior officers of ACO, as well as designated senior officers of its subsidiaries and affiliates, including the Employees ("Participants").
16. The Plan is administered by the XXXXXXXXXX (the "Committee") of the Board of Directors of ACO.
17. Under the Plan the following awards may be made to Participants:
(a) Deferred stock units in respect of a XXXXXXXXXX Share of ACO ("ACO DSUs"); and
(b) Deferred stock units in respect of a XXXXXXXXXX share of BCO ("BCO DSUs");
collectively referred to as the DSUs.
In addition, the Plan allows for the award of Restricted stock units in respect of a XXXXXXXXXX Share of ACO ("RSUs"). However, no RSUs have been issued since XXXXXXXXXX .
18. The number of DSUs allocated to a Participant and the value of those DSUs is recorded in a notional account ("Account") for each Participant. The Plan is not funded.
19. A Participant has no legal ownership of or beneficial interest in the shares by virtue of the allocation of the DSUs. For greater certainty, the DSUs do not entitle a Participant to any shareholder rights vis à vis ACO or BCO, including without limitation, voting rights, dividend entitlements or rights on liquidation.
20. The DSUs are non-transferable.
21. DSUs cannot be redeemed until the year the Participant retires, terminates employment or dies ("Retirement"), whichever is the earliest to occur. Upon Retirement, a Participant's Account will be redeemed with all benefits being distributed within XXXXXXXXXX days of that date.
22. The redemption value of a Participant's Account (disregarding any RSUs) will be the total of:
(a) The number of vested ACO DSUs credited to the Participant's Account multiplied by the closing price of the ACO XXXXXXXXXX Share on the XXXXXXXXXX on the Retirement Date; and
(b) The number of vested BCO DSUs credited to the Participant's Account multiplied by the closing price of a BCO XXXXXXXXXX Share on the XXXXXXXXXX on the Retirement Date.
23. The redemption value of the Account will be cash settled, less withholding taxes. Alternatively, the Participant may direct that the net after tax proceeds from the redemption of ACO DSUs be used to purchase XXXXXXXXXX Shares of ACO or, in the case of BCO DSUs, XXXXXXXXXX shares of BCO, on the open market from a designated broker. Such direction would be made prior to the Participant's Retirement.
24. The Plan provides that no amount is to be paid, to or in respect of a Participant, under the Plan or pursuant to any other arrangement and no additional Units can be granted to such Participant, as compensation for a downward fluctuation in the fair market value of an ACO XXXXXXXXXX Share and/or a BCO XXXXXXXXXX Share, nor will any other form of benefit be conferred upon or in respect of a Participant for such purpose.
25. While the Plan has been the subject of two previous Advance Tax Rulings 2003-004093, dated XXXXXXXXXX , and 2007-024643, dated XXXXXXXXXX , the Plan has never been ruled on in its entirety by this Directorate. However, ACO confirms that the Plan (other than the RSU portion) has, at all times from the time it was established in XXXXXXXXXX to the time immediately before the time it will be amended in the manner described below, satisfied the conditions in paragraph 6801(d) of the Regulations.
Proposed Transactions
26. ACO is proposing to amend the Plan to permit a third class of DSUs ("XXXXXXXXXX DSUs") to be offered on shares of a wholly owned subsidiary of ACO ("Investco").
27. Investco will be incorporated under the laws of XXXXXXXXXX and its legal name will be XXXXXXXXXX . The authorized and outstanding share capital of Investco will consist of an unlimited number of XXXXXXXXXX shares ("XXXXXXXXXX Shares") and an unlimited number of non-voting XXXXXXXXXX shares, issuable in series ("the XXXXXXXXXX Shares").
28. The XXXXXXXXXX Shares will have the following attributes:
(a) voting;
(b) dividends at the discretion of the Board of Directors of Investco; and
(c) no fixed or preferential liquidation entitlement, that is the XXXXXXXXXX Shares will share pro-rata with the XXXXXXXXXX Shares in any assets remaining on liquidation of Investco.
29. The XXXXXXXXXX Shares will have the following attributes:
(a) non-voting;
(b) no fixed or preferential liquidation entitlement, that is the XXXXXXXXXX Shares will share pro-rata with the XXXXXXXXXX Shares in any assets remaining on liquidation of Investco;
(c) dividends at the discretion of the Board of Directors of Investco, but will not exceed the distributions it receives from the Fund; and
(d) redeemable and retractable for an amount equal to the fair market value of Investco's investment in the Fund, determined in accordance with the Fund's valuation policy, plus any accrued but unpaid dividends.
30. Investco will be contractually committed to make capital contributions to the Fund in an amount equal to $XXXXXXXXXX , which is part of ACO's overall commitment to the Fund. Like ACO, Investco will invest through the Parallel Investment Vehicle. Investco will fund its capital calls whenever ACO and other investors in the Fund are required to do so.
31. Initially, Investco will be capitalized with $XXXXXXXXXX by ACO subscribing for XXXXXXXXXX Shares at a price of $XXXXXXXXXX per share.
32. With respect to future capital calls, ACO will enter into a subscription agreement with Investco which will require ACO to subscribe to additional XXXXXXXXXX Shares whenever a capital call is made. The subscription price will be equal to the then current value of an XXXXXXXXXX Share based on the then current value of Investco's investment in the Fund, determined in accordance with the Fund's valuation policy, at the time the capital call is made. Thus, Investco will use the proceeds received from the issue of XXXXXXXXXX Shares to satisfy its capital commitments.
33. The Plan will be amended to permit XXXXXXXXXX DSUs to be awarded to Participants as determined by the Committee. One XXXXXXXXXX DSU will notionally represent one XXXXXXXXXX Share. The XXXXXXXXXX DSUs will be subject to the terms and conditions set out in paragraphs 18 to 23 of this letter that apply in respect of ACO DSUs and BCO DSUs. In this regard, the redemption value of a Participant's Account relating to XXXXXXXXXX DSUs will be equal to the number of vested XXXXXXXXXX DSUs credited to the Participant's Account multiplied by the fair market value of an XXXXXXXXXX Share on the Retirement Date.
34. The Plan will be amended to extend the provision of the Plan that gives effect to the statements made in paragraph 24 of this letter so that the provision applies in respect of XXXXXXXXXX DSUs. Further, ACO confirms that no action of any kind will be taken that would protect the XXXXXXXXXX Shares from a decline in value that, but for the action, would otherwise occur due to a decline in value of the Fund.
35. The Plan will be amended to permit Participants, who provide key services in respect of the Fund, to convert a portion of their ACO DSUs or BCO DSUs into XXXXXXXXXX DSUs and vice-versa. The number of such DSUs to be converted by Participants will be determined by the Committee. On wind-up of the Fund, all XXXXXXXXXX DSUs shall automatically be converted into ACO DSUs or BCO DSUs. In no event, will any conversion result in reducing the impact, in whole or in part, of any reduction in the fair market value of an ACO XXXXXXXXXX Share, a BCO XXXXXXXXXX Share or an XXXXXXXXXX Share.
36. You have provided the following example to illustrate how the Plan would operate in respect of the XXXXXXXXXX DSUs. For these purposes, it is assumed that the capital committed to the Fund is $XXXXXXXXXX (including commitments made through the Parallel Investment Vehicle) and that Participants are required to notionally invest $XXXXXXXXXX through XXXXXXXXXX DSUs.
(a) As noted above, Investco will have, in aggregate, a $XXXXXXXXXX commitment to the Fund, ACO will similarly have a commitment to acquire up to $XXXXXXXXXX of XXXXXXXXXX Shares of Investco whenever Investco receives a capital call from the Fund.
(b) Assume there is an aggregate capital call for all of the partners in the Fund of $XXXXXXXXXX or XXXXXXXXXX % of aggregate commitments. Investco would be required to make a capital contribution to the Fund of $XXXXXXXXXX (XXXXXXXXXX % of its aggregate commitment).
(c) ACO would acquire XXXXXXXXXX Shares at a price of $XXXXXXXXXX per share and Investco would use the proceeds to make its required $XXXXXXXXXX capital contribution.
(d) At the same time, the Participants would convert $XXXXXXXXXX worth of ACO DSUs (XXXXXXXXXX of their notional investment commitment of $XXXXXXXXXX ) into XXXXXXXXXX DSUs. Assuming that ACO DSUs were worth $XXXXXXXXXX , then the Participants would convert XXXXXXXXXX ACO DSUs in exchange for XXXXXXXXXX DSUs.
(e) Assume that the value of the Fund increased by XXXXXXXXXX % and there is then a second capital call of another $XXXXXXXXXX , Investco would be required to make a further capital call of another $XXXXXXXXXX . As the value of XXXXXXXXXX Shares would have risen to $XXXXXXXXXX per share, ACO would acquire an additional XXXXXXXXXX Shares. As a result, Investco's interest would increase to $XXXXXXXXXX . Similarly, Participants would convert another $XXXXXXXXXX of ACO DSUs. Assume that the ACO DSU is still worth $XXXXXXXXXX , then the Participants would convert another XXXXXXXXXX ACO DSUs in exchange for XXXXXXXXXX DSUs.
37. Vesting of any XXXXXXXXXX DSUs received on the conversion of DSUs will continue on the original DSU vesting schedule. Any other XXXXXXXXXX DSUs awarded to a Participant will be subject to such vesting conditions as determined by the Committee.
38. Dividend equivalents will also be awarded in the form of additional XXXXXXXXXX DSUs as follows. Investco will declare and a pay a dividend on the XXXXXXXXXX Shares in respect of distributions it receives from the Fund. The number of additional XXXXXXXXXX DSUs allocated to Participants will be determined by dividing the dollar value of the notional dividends by the fair market value of the XXXXXXXXXX Share.
Purpose of the Proposed Transactions
39. Institutional investors generally demand that the senior employees who are responsible for the management of an investment fund personally invest, directly or indirectly, in the vehicle itself or a parallel investment vehicle so that they have a personal interest in the investment that is at risk. As the Participants, who will be providing services in respect of the Fund, already hold a substantial investment in ACO through ACO DSUs, ACO will require the Participants to notionally invest by converting their ACO DSUs (and/or BCO DSUs) into XXXXXXXXXX DSUs.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions and the purpose of the proposed transactions, and the proposed transactions are completed in the manner described above, we rule as follows:
A. The proposed amendments to the Plan as described above will not, in and of themselves, result in the Plan ceasing to meet the conditions in paragraph 6801(d) of the Regulations.
B. No amount will be included in a Participant's income under subsection 5(1) or paragraph 6(l)(a) of the Act solely as a consequence of the grant of XXXXXXXXXX DSUs or the conversion of ACO DSUs or BCO DSUs into XXXXXXXXXX DSUs.
This ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA, provided that the proposed amendments to the Plan described above are made on or before six months after the date of this letter.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination on:
(a) whether the Plan in its entirety meets the conditions in paragraph 6801(d) of the Regulations; or
(b) the fair market value of any property referred to in this letter.
This letter is based solely on the facts and proposed transactions described above. The documentation submitted with your request that is not described above does not form part of the facts and proposed transactions and any references to the documentation are provided solely for the convenience of the reader.
Yours truly,
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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