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 6801(d) apply where a director elects to receive all or part of the director’s annual retainer and meeting fees in deferred share units?
Position: Yes.
Reasons: Plan meets conditions in 6801(d).
XXXXXXXXXX 972988
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Re: XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named client.
FACTS
1.The Company is a corporation amalgamated under the laws of XXXXXXXXXX, a resident of Canada, and a public corporation as defined in subsection 89(1) of the Income Tax Act (the "Act"). Shares of the Company are listed on XXXXXXXXXX. It has a fiscal year end of XXXXXXXXXX.
2.The Company's head office is located at XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.
3.The Company carries on in Canada the business of XXXXXXXXXX.
4.The Company currently has a board of directors (the "Board") consisting of XXXXXXXXXX directors.
5.For the current term of office, the Company will pay directors the following amounts:
a) an annual retainer of $XXXXXXXXXX for executive directors;
b) an annual retainer of $XXXXXXXXXX for non-executive directors;
c) a fee of $XXXXXXXXXX for each Board and committee meeting attended;
d) a fee of $XXXXXXXXXX to committee chairmen for each committee meeting attended: and
e) a fee of $XXXXXXXXXX for each Board and committee meeting attended by telephone.
6.It is common among public companies to pay a portion of each director's compensation in the form of shares, phantom shares or stock appreciation rights instead of cash, to attract talented directors and to provide directors with a greater interest in the performance of the companies they serve. Accordingly the Company wishes to establish a stock-based compensation plan as described below.
PROPOSED PLAN
7.The Company will establish the Plan for the benefit of directors of the Company ("Eligible Directors"). Although currently all Eligible Directors are residents of Canada for purposes of the Act, the Company intends to extend the Plan to anyone who becomes a director and is not a resident of Canada for purposes of the Act.. The principal features of the Plan will be as follows:
a) the Plan will be administered by the Compensation Committee of the Board (or a subcommittee thereof) (the "Committee") or such other persons as may be designated by the Board;
b) each Eligible Director will be allocated 50% of his or her annual retainer and meeting fees (see 5 above) in the form of deferred share units ("Units") of the Company (as described in greater detail below). Subject to paragraph (c) below, the remaining 50% of the directors' annual retainer and meeting fees will be paid in cash (the "Cash Portion"); and
c) each Eligible Director may elect to receive the remaining 50% of his or her annual retainer and meeting fees in the form of Units. The portion of the Plan described in paragraph 7(b) above and herein, is referred to below as the "Deferred Unit Plan".
8.The Plan will become effective on the date that is five days after the Company receives a favorable advance income tax ruling from Revenue Canada (the “Effective Date”). Eligible Directors will be entitled to receive 50% (100% if they so elect within 30 days of the Effective Date) of their annual retainer for the 1998 fiscal year of the company that is payable after the effective date, and 50% (100% if they so elect within 30 days of the Effective Date) of their meeting fees payable in respect of meetings held during the 1998 fiscal year after the Effective Date, in Units.
9.After the 1998 fiscal year of the Company, the election contemplated by 7(c) above must be made in writing, within 30 days after the later of the commencement of the fiscal year during which the director will be an Eligible Director and the beginning of the director's term if that term commences after the beginning of the fiscal year.
10.If in a fiscal year an Eligible Director does not make an election and no other election remains effective, the director will be deemed to have elected to be paid the annual retainer and the meeting fees payable to him 50% in Units and 50% in cash.
11.The following rules will apply with respect to Units:
a)The number of Units allocable to an Eligible Director will be equal to the quotient obtained when the portion of the annual retainer or meeting fees, as the case may be, expressed in dollars, that the Eligible Director is to receive in the form of Units is divided by the value as defined below (the "Value") of one Common Share on the Purchase Date. For these purposes, the Value on a Purchase Date is the mean between the high and low prices of the Common Shares on that date as reported on the principal Canadian securities exchange on which the Common Shares are listed or admitted to trading (or if such exchange is not open on such date, the immediately preceding date on which such exchange is open) or, if the Common Shares are not so listed or traded, the mean between the closing bid price and the closing asked price as quoted on the National Association of Securities Dealers Automated Quotation System on that date, or such other market in which such prices are regularly quoted or, if there have been no published bid or asked quotations with respect to the Common Shares, the Value shall be the value established by the Committee in good faith on that date. The Purchase Date is, (i) in respect of an annual retainer payable to an Eligible Director for a fiscal year of the Company, the date that is three days after the date on which the Company's results for the fiscal year are released and (ii) in respect of a meeting fee, the date that is three days after the date of the meeting in respect of which the meeting fee is payable.
b)Units will be credited with dividend equivalents when dividends are paid on the Common Shares and such dividend equivalents will be converted into additional Units based on the Value on the date dividends are paid.
c)On a date determined by the Committee (the "Settlement Date") which is after the date (the "Termination Date") on which an Eligible Director ceases to be an employee of the Company but no later than the last business day in January of the first calendar year commencing after the Termination Date, the Company will pay to the Eligible Director an amount in cash, equal to the product obtained when the number of Units credited to the Eligible Director's account as at the Termination Date is multiplied by the Value (as defined in 11(a) above) as at the Termination Date (the "Settlement Amount"), less applicable withholdings. For greater certainty, in no case will the Value as at the Termination date be other than the fair market value of the common shares at any time within the period that commences one year before the Termination Date and ends on the Settlement Date.
12.Units are not transferable or assignable other than by will or the laws of descent and distribution.
13.The Board may amend the Plan as it deems necessary.
14.The Company will neither make contributions to another person in respect of the Plan nor set aside or hold in trust any property in respect of the Plan.
PURPOSE OF THE PROPOSED PLAN
15.The purpose of the Plan is to enhance the Company's ability to attract and retain talented individuals to serve as members of the Board and to promote a greater alignment of interests between members of the Board and the shareholders of the Company.
16.To the best of your client's knowledge, none of the issues relevant to this ruling request are being considered by a Tax Services Office or Taxation Centre in connection with any tax return already filed by your client or a related person and none of the issues involved are under objection or appeal.
RULINGS GIVEN
Provided the above statement of facts and proposed plan are accurate and constitute a complete disclosure of all the relevant facts, and the Plan is implemented as described in paragraphs 7 through 12 and 14 above, we rule as follows:
A.The Plan will constitute neither an "employee benefit plan" nor a "retirement compensation arrangement" as those terms are defined in subsection 248(1) of the Act;
B.The Deferred Unit Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations;
C.The amount to be included in the income of an Eligible Director for a taxation year under the Plan will consist of the aggregate of the following amounts:
a)under paragraph 6(1)(c) of the Act, the Cash Portion, the amount if any, paid by the Company to the Eligible Director in the year; and
b)under paragraph 6(1)(c) of the Act, the Settlement Amount as described in 11(c) above, paid by the Company to the Eligible Director in the year that includes the Settlement Date under the Deferred Unit Plan.
D.The amount to be included in the income of a non-resident Eligible Director for a taxation year under the Plan 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 Cash Portion, if any, to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director in the year; and
b)under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the Settlement Amount as described in paragraph 11(c) above, to the extent it is attributable to services rendered in Canada, paid by the Company to the Eligible Director in the year that includes the Settlement Date under the Deferred Unit Plan.
E.Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C and D above that are paid by the Company in a particular year will be deductible by the Company in accordance with section 9 of the Act.
The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the proposed plan is implemented on or before XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation
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