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.
XXXXXXXXXX 961894
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the aforementioned corporation. In your letter of XXXXXXXXXX, you informed us of additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed transactions is as follows:
Facts
XXXXXXXXXX is a public corporation and a taxable Canadian corporation. The expressions "public corporation" and "taxable Canadian corporation" have the meanings assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX has established a comprehensive benefit program which includes a registered pension plan, insurance plans, medical programs and a stock purchase plan. XXXXXXXXXX has concluded that these plans do not provide a major short term incentive for employees nor do they completely fulfil the corporate objectives of properly rewarding and retaining the most productive XXXXXXXXXX However, XXXXXXXXXX has decided that it will maintain these programs as employee morale would be adversely affected if the plans were terminated.
Proposed Transactions
XXXXXXXXXX proposes to establish an additional incentive program in the form of a deferred bonus plan (the "Plan").
Under the proposed arrangement, XXXXXXXXXX will be eligible to receive a bonus if XXXXXXXXXX will be eligible to receive a bonus if XXXXXXXXXX that meets the eligibility requirements (hereinafter referred to as a "Participant") will automatically participate in the Plan. The amount of the bonus to be paid to a Participant will be XXXXXXXXXX
XXXXXXXXXX
The bonus will be in addition to and not in lieu of regular compensation received by each Participant for the year.
Prior to the end of its fiscal year, XXXXXXXXXX will estimate its liability under the Plan and deposit the funds in a trust (the "Trust"). Shortly after the end of the year, the remaining amount, if any, needed to fund the bonus will be paid into the Trust. The trustees of the Trust (the "Trustees") will use the funds to purchase in the open market previously issued shares of the common stock of XXXXXXXXXX The Trustees will have no discretion to use the funds contributed to the trust for any other purpose and none of the shares acquired in the open market will be acquired from XXXXXXXXXX or any other related person.
The Trustees of the Trust will consist of XXXXXXXXXX individuals, a majority of whom will be resident in Canada. The Trustees will be appointed from time to time by XXXXXXXXXX
The Trust will hold the shares until such time as a Participant's rights to the shares vest or the shares are forfeited in accordance with the terms of the Plan. The Trustees will maintain a separate account for each Participant participating in the Plan.
Unless the Participant forfeits his or her entitlement to the shares, title in the shares will vest in the Participant on XXXXXXXXXX following the year in which the services were rendered and the conditions relating to the entitlement to a bonus were satisfied. The vested shares will be distributed by the Trust to each Participant at that time. In the event of a change of control of the XXXXXXXXXX or the Participant becoming disabled, the vesting of the shares can be accelerated. In the event of the death of the participant, the shares will vest immediately prior to his or her death and the shares will be distributed to his or her estate.
A Participant's entitlement to the bonus will be forfeited if:
the Participant resigns and accepts employment with a competitor, XXXXXXXXXX or
the Participant's employment is terminated as a result of conduct unbecoming an individual XXXXXXXXXX
All forfeited shares will either be retained within the Trust and used to reduce XXXXXXXXXX future funding requirements or transferred to XXXXXXXXXX to be disposed of in the open market in accordance with the relevant corporations law.
All dividends paid by XXXXXXXXXX prior to the vesting of the shares will be paid to the Trust and the Trustees will exercise the voting rights attached to the shares held by the Trust.
XXXXXXXXXX will be the income beneficiary of the Trust. All dividends received by the Trust will be paid to the income beneficiary by the end of the calendar year in which the Trust received the dividends.
XXXXXXXXXX will pay a sum XXXXXXXXXX to the Participants participating in the Plan equal to the dividends received in respect of the shares held in the individual Participant's account.
XXXXXXXXXX will pay all costs of administering the Plan, including legal and accounting fees and brokerage costs.
Purpose of the Proposed Transaction
The purpose of establishing the Plan is to encourage the XXXXXXXXXX.
To the best of your knowledge and the knowledge of XXXXXXXXXX none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the proposed transactions are carried out as described above, we rule as follows:
The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.
The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.
The Plan will constitute an employee benefit plan as that term is defined in subsection 248(1) of the Act.
XXXXXXXXXX contributions to the Trust under the Plan will be deductible by XXXXXXXXXX to the extent provided in subsection 32.1(1) of the Act. For the purposes of paragraph 32.1(2)(a) of the Act, payments out of or under the Plan in a particular year will be equal to the fair market value of the shares distributed by the Trust to the Participants in that year under the Plan.
The amount to be included in the income of a Participant for a year under the Plan will consist of the aggregate of the following amounts:
under paragraph 6(1)(g) of the Act, the fair market value of the common shares of XXXXXXXXXX distributed by the Trust to the Participant in the year in which the shares are distributed as described in paragraph 12 above. The fair market value of the shares will be determined as of the day on which the shares are distributed; and
(b)under paragraph 6(1)(a) of the Act, any amounts paid in the year to the Participants by XXXXXXXXXX, as described in paragraph 17 above, as a substitute for the dividends received by the Trust which were distributed to XXXXXXXXXX, as described in paragraph 16 above.
Subject to any determination by the Minister pursuant to subsection 153(1.1) of the Act, the amounts included in a Participant's income as a result of the participation in the Plan will be subject to withholding tax in accordance with paragraph 153(1)(a) of the Act.
Provided the designation in subsection 104(19) of the Act is properly made, the amount of any dividends received by the Trust in a year and paid to XXXXXXXXXX in the year will be included in XXXXXXXXXX income under subsection 104(13) of the Act as a taxable dividend and XXXXXXXXXX will be entitled to a deduction in computing its taxable income in respect of such amounts to the extent permitted by subsection 112(1) of the Act.
The following will be the consequences under the Act to the Trust and to XXXXXXXXXX in respect of any forfeited shares distributed to XXXXXXXXXX by the Trust and sold on the open market by XXXXXXXXXX.
The Trust will be deemed under subparagraph 107.1(b)(i) of the Act to dispose of the forfeited shares for proceeds of disposition equal to their cost amount and, accordingly, no gain or loss will be realized by the Trust.
XXXXXXXXXX will be deemed under subparagraph 107.1(b)(ii) of the Act to have acquired the shares for an amount equal to the greater of their fair market value and the adjusted cost base to it of its interest in the Trust.
XXXXXXXXXX will be deemed under paragraph 107.1(c) of the Act to have disposed of its interest in the Trust for proceeds of disposition equal to its adjusted cost base of the interest and thus will not realize any gain or loss.
With respect to forfeited shares transferred to XXXXXXXXXX in accordance with paragraph 14 above, the amount received by XXXXXXXXXX for the purposes of paragraph 12(1)(n.1) of the Act will be equal to the fair market value of the shares at the time of transfer.
You requested a ruling that any gain realized (or loss sustained) by XXXXXXXXXX on the disposition of the XXXXXXXXXX shares on the open market would be included (deductible) in computing its income under section 9 of the Act. We are unable to provide the requested ruling because whether or not such a transaction is on account of income or capital is a question of fact on which we do not rule. In this regard, we refer you to paragraph 14(e) of Information Circular 70-6R2.
Except as provided in ruling E above, no amount will be included in the income of a particular Participant under any of subsection 5(1), paragraph 6(1)(a) or section 7 of the Act by virtue of his or her participation in the Plan.
Subject to paragraph 18(1)(a) and section 67 of the Act, all costs referred to in paragraph 18 above that are incurred by XXXXXXXXXX in the administration of the Plan, and any amounts referred to in paragraph 17 above that are paid to the Participant in a particular year, will be deductible by XXXXXXXXXX in accordance with section 9 of the Act.
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 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise, and Taxation provided the Plan is established within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1995
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