2008 Ruling 2008-0271191R3 - Deferred share unit plan: 6801(d)

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 the proposed deferred share unit plan be excluded from the salary deferral rules?

Position: Yes.

Reasons: The proposed plan meets the requirements of paragraph 6801(d) of the Regulations.

XXXXXXXXXX 						2008-027119

XXXXXXXXXX , 2008

Dear Sir/Madam:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of March 3, 2008, wherein you requested an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge additional information you provided to us during various telephone conversations (XXXXXXXXXX ) and the various correspondence received in connection with your ruling request.

We understand that, to the best of your knowledge and that of ACO, none of the issues involved in this ruling request are:

(i) dealt with in an earlier return of ACO or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of ACO or a related person;

(iii) under objection by ACO or a related person;

(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, nor

(v) the subject of a previous ruling issued to ACO or a related person by the Income Tax Rulings Directorate.

DEFINITIONS:

In this letter, unless otherwise expressly stated, the following terms have the meanings specified hereunder:

(a) "ACO" means XXXXXXXXXX , a corporation incorporated under the Canada Business Corporations Act (R.S.C., 1985, c. C-44). ACO's offices are located at XXXXXXXXXX . ACO is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre. ACO's business number is XXXXXXXXXX ;

(b) "Act" means the Income Tax Act, R.S.C. 1985, c. l (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, paragraph or subparagraph is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(c) "BCO" means XXXXXXXXXX , a company incorporated under XXXXXXXXXX . BCO's offices are located at XXXXXXXXXX . BCO is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre. BCO's business number is XXXXXXXXXX ;

(d) "CCO" means XXXXXXXXXX , a corporation incorporated under XXXXXXXXXX . CCO's offices are located at XXXXXXXXXX . CCO is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre. CCO's business number is XXXXXXXXXX ;

(e) "CRA" means the Canada Revenue Agency;

(f) "Mr. A" refers to XXXXXXXXXX ;

(g) "Private Corporation" has the meaning assigned by subsection 89(1);

(h) "Regulations" means the Income Tax Regulations;

(i) "Taxable Canadian Corporation" ("TCC") has the meaning assigned by subsection 89(1);

(j) "TSO" means a CRA tax services office.

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

FACTS:

1. ACO is controlled by Mr. A.

2. ACO's taxation year-end is XXXXXXXXXX .

3. ACO is a Taxable Canadian Corporation and a Private Corporation.

4. ACO's business activities consist of XXXXXXXXXX .

5. XXXXXXXXXX . ACO does not provide its employees with any deferred compensation plans.

6. BCO is a wholly-owned subsidiary of ACO.

7. BCO's taxation year-end is XXXXXXXXXX .

8. BCO is a Taxable Canadian Corporation and a Private Corporation.

9. BCO's business activities consist of XXXXXXXXXX .

10. CCO is a wholly-owned subsidiary of ACO.

11. CCO's taxation year-end is XXXXXXXXXX .

12. CCO is a Taxable Canadian Corporation and a Private Corporation.

13. CCO's business activities consist of XXXXXXXXXX .

PROPOSED TRANSACTIONS

14. ACO proposes to establish a deferred compensation plan ("Plan") for eligible employees of ACO, BCO and CCO. The Plan will be effective on or after the date the advance income tax ruling is granted.

15. The Plan will be administered by the board of directors of ACO (the "Board").

16. An employee will be eligible to participate in the Plan for a particular year if he or she is selected by the Board in its sole and absolute discretion.

17. Eligible employees ("Participants") will not be entitled to defer any portion of their annual employment remuneration under the Plan. Under the Plan, units will only be granted to Participants at a time and in such number as the Board may determine from time to time in its sole and absolute discretion.

18. ACO will amend its articles of incorporation to authorize the issuance of one Class C share ("Class C Share"). The Class C Share will be redeemable, retractable, XXXXXXXXXX Immediately before the Plan is made effective, Mr. A will subscribe the one Class C Share.

19. Under the Plan, deferred share units ("DSUs") will be credited to a Participant's notional account and each DSU will be valued based on the fair market value of the issued Class C Share at the particular time. Under no circumstances will any adjustment to the number of DSUs credited to a Participant's account be made to compensate the Participant for a downward fluctuation in the value of his or her DSUs.

20. DSUs credited to a Participant will not entitle the Participant to any shareholder rights vis-à-vis ACO, BCO or CCO, including without limitation, voting rights, dividend entitlements or rights on liquidation.

21. If and when dividends are paid by ACO on its Class A or Class B common shares, additional DSUs will be credited to the Participants. The number of additional DSUs so credited as a result of the dividend payment will be equal to the amount determined by the product of: (i) the amount of the dividend paid per Class A and Class B common share divided by the fair market value of the Class C Share, and (ii) the number of vested DSUs recorded in the Participant's account on the dividend payment date. Should a dividend in kind be paid, the Board will adjust the number of DSUs credited to each Participant to reflect the effect of the dividend in kind.

22. In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin-off or other distribution affecting the fair market value of the Class C Share, the number of DSUs credited to a Participant's notional account will be adjusted accordingly.

23. In the event of the death of a Participant, his or her legal representative(s) will be appointed to receive amounts under the Plan.

24. DSUs allocated to a Participant under the Plan will vest in XXXXXXXXXX % increments over a XXXXXXXXXX -year period starting with the end of the first XXXXXXXXXX -month period following the date of grant. Accelerated vesting will occur where there is a change in control. However, Participants will not have any right to receive any benefit under the Plan until their employment has ceased as a result of retirement, death, voluntary or involuntary termination without cause, or permanent disability (the "Termination"). Cessation of employment as a result of any other event will cause all DSUs, whether vested or not, to immediately become forfeited.

25. All vested benefits under the plan will be distributed to a Participant (or to the Participant's legal representative in the event of death) in one or two installments at the Participant's discretion provided an election is filed prior to the Termination date and also provided the elected date(s) are administratively and economically practicable for ACO. In the absence of a valid election, ACO will distribute vested benefits in two equal installments, the first on the date of Termination and the second one year thereafter or in each case, so soon thereafter as administratively and economically practicable for ACO. Under no circumstances will the last installment be paid after XXXXXXXXXX following the year in which the Termination occurred. The amount payable to a Participant will depend on the value of the vested DSUs in his or her notional account as of his or her Termination. The payout of the DSUs will be in cash, net of applicable withholdings. In no event shall ACO satisfy Plan awards by the issuance of treasury shares of ACO or of a related corporation.

26. ACO will pay all costs and expenses associated with establishing and administering the Plan.

27. The Plan may be amended or terminated by ACO at any time. However, no such amendment or termination may adversely affect the DSUs allocated to the Participants' notional account and furthermore, such may not accelerate payment of the benefits to the Participants.

28. As long as there are unpaid benefits outstanding under the Plan, the Class C shareholder, Mr. A will undertake not to exercise his retraction right vis-à-vis the Class C Share and ACO will also undertake not to redeem it.

29. The Plan will be unfunded.

PURPOSE OF THE PROPOSED TRANSACTIONS

30. The purpose for establishing the Plan is to attract, motivate and encourage the retention of employees of ACO, BCO or CCO who are key to the long-term success of the group.

RULINGS GIVEN

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be excluded from the definition of a "salary deferral arrangement", as that term is defined in subsection 248(1).

B. Provided that the Plan remains unfunded, the Plan will not constitute a "retirement compensation arrangement", as that term is defined in subsection 248(1).

C. No amount will be included in the income of a Participant pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) solely as a result of the allocation of DSUs to the Participant's notional account.

D. Amounts received under the Plan, by a Participant who is a resident of Canada at the time of the receipt, including any amounts withheld therefrom, will be included in the income of the Participant pursuant to subsection 5(1) in the year the amount is received.

E. All amounts payable under the Plan as a result of a Participant's death will constitute a right or thing held by the deceased Participant at the time of death for the purposes of subsections 70(2) and 70(3).

F. Subject to section 67 and paragraph 18(1)(a), payments out of the Plan to a Participant by ACO, BCO or CCO will be deductible in computing their income, as the case may be, in accordance with section 9 in the year in which the payments are made.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Plan is implemented by XXXXXXXXXX . The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch