2003 Ruling 2002-0174693 - DEFERRED SHARE UNIT PLAN

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will the payment of a percentage of annual compensation in the form of deferred share units result in an SDA?

Position: No.

Reasons:

The conditions of paragraph 6801(d) of the Regulations are satisfied. Two out of the ordinary issues in this ruling have previously been accepted, i.e., the use of preferred shares and the ability to use deferred share units as security for an employer loan.

XXXXXXXXXX 								2002-017469

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") (XXXXXXXXXX)

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation. We also acknowledge receipt of your letter dated XXXXXXXXXX, which amended your XXXXXXXXXX letter, and the information provided in our telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge, and that of the Corporation, none of the items involved in this ruling request is:

a) in an earlier return of the Corporation or a related party;

b) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the Corporation or a related person;

c) under objection by the Corporation or a related person;

d) before the courts; nor

e) the subject of a ruling previously issued to the Corporation by the Directorate.

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

Facts

1. The Corporation is a taxable Canadian corporation. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (Canada)(the "Act").

2. The Business Number of the Corporation is XXXXXXXXXX. The Corporation files its tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. The head office of the Corporation is located at XXXXXXXXXX.

3. The cash component of compensation paid to employees of the Corporation and certain companies that do not deal at arm's length with the Corporation (the "Related Companies", each a "Related Company") consists of salary and, for certain individuals, a performance bonus.

Proposed Plan

4. The Corporation proposes to establish a phantom stock plan (the "Plan") for certain eligible employees of the Corporation and certain Related Companies. The Plan will be effective from XXXXXXXXXX but will only be implemented after the advance tax ruling is granted. The Plan has not yet been established.

5. The Corporation will establish a committee (the "Committee") to oversee the administration of the Plan.

6. An employee will be eligible to participate in the Plan for a particular year if selected by the Committee as being eligible to participate in the Plan (the "Participant"). A Participant will not be entitled to any amounts or allocations under the proposed Plan prior to the issuance of the advance tax ruling. Initially, the Plan will be offered to a small group of senior executives. However, the company reserves the right to extend the Plan to a broader group of employees.

7. The Corporation will establish a subsidiary corporation ("Subco") and subscribe to the common stock of Subco.

8. The articles of Subco will authorize the issuance of unlimited series of a special class of non-cumulative redeemable and retractable preferred shares ("Special Shares"). Each year, for which units are issued, a new series of Special Shares will be issued.

XXXXXXXXXX

In no case will adjustments be made to protect or guarantee the fair market value of the Special Shares from a downward fluctuation.

All shares of Subco will be held by the Corporation.

9. Under the Plan, the Corporation will issue phantom stock units. Each class of phantom stock unit will correspond to a series of the Special Shares. The value of a phantom stock unit will equal the fair market value of the Special Share to which it corresponds.

10. Each Participant will be allocated phantom stock units when they join the Plan.

11. A Participant will have no legal ownership of or beneficial interest in the Special Shares of Subco by virtue of the allocation of phantom stock units. For greater certainty, a phantom stock unit will not entitle a Participant to any shareholder rights vis à vis Subco, including without limitation, voting rights, dividend entitlements or rights on liquidation.

12. The phantom stock units allocated to the Participant and the value of those units will be recorded on the books of the Corporation, or a Related Company, as appropriate.

13. In the event of a Participant's death, the Participant's estate shall be the beneficiary of any entitlement.

14. The units will fully vest at the earliest of the employee attaining age XXXXXXXXXX, the death or disability of the employee, the sale of all or substantially all of the business or assets of the Corporation to a purchaser with whom the Corporation is dealing at arm's length, or a time determined by formula as provided for in the Plan. Prior to that time, the units may partially vest.

15. Despite the vesting provisions above:

a) if the employee terminates employment at any time before the units have fully vested, the unvested units will be forfeited;

b) if the individual becomes an employee of or provides services to a competitor of the Corporation, all units will be forfeited;

c) if the individual makes a substantial investment in a competitor of the Corporation, all units will be forfeited;

d) if the employee attempts to hire away other employees of the Corporation or a Related Company, all units will be forfeited;

e) if the employee discloses or divulges confidential or proprietary information concerning the Corporation and its business programs all units will be forfeited; or

f) if the employee refuses a reasonable offer of employment from a purchaser of the assets of the Corporation, all units will be forfeited.

16. All benefits under the Plan will be distributed to a Participant (or to the Participant's beneficiary in the event of death) in cash and no later than the end of the calendar year immediately following the year in which the employee retires, terminates employment or dies. The Participant will not be entitled to any benefits under the Plan until the Participant retires, terminates employment or dies. The amount of the benefits payable to a Participant will depend on the value of his or her phantom stock units, determined at some time in the period commencing one year before the employees' retirement, termination of employment or death and ending with the date of payment. In no case will any amount be paid prior to retirement, termination of employment or death of the Participant.

17. Subject to the Committee's prior approval, Participants may be permitted to borrow from the Corporation or a Related Company using their interest in the Plan as collateral. The maximum amount that may be borrowed is XXXXXXXXXX% of their interest in the Plan. The interest rate on the loan will either be at the normal commercial rate or a discounted rate generally available to employees of the Corporation and Related Companies. The use of the Participant's interest in the Plan as collateral will only be available in circumstances of financial hardship attributable to the following events:

a) Death or disability of a spouse;

b) Termination of a spouse's employment;

c) Purchase of a home;

d) Post-secondary education expense for children;

e) Divorce or marriage breakdown;

f) Medical expenses; or

g) Such other circumstances as the employer of the individual may from time to time establish.

The Participant's units in the Plan will be pledged as security for the loan. The Participant will have to prove to the Corporation or Related Company that he or she requires the loan because of one of the events described above. If the loan remains unpaid, amounts distributed from the Plan on termination, retirement or death will be first used to satisfy the outstanding loan.

18. Except for the provisions of 17 above, the phantom stock units may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution.

19. The Corporation and the Related Companies will pay all costs and expenses associated with establishing and administering the Plan.

20. The Plan may be amended or terminated by the Corporation at any time.

Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously satisfies the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations"), or any successor provision thereto.

21. The Plan will be unfunded.

22. In the event of a downward fluctuation in the value of any Special Shares of Subco, no amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement and no additional phantom stock units will be granted to such Participant as compensation for the decline in value, nor, will any other form of benefit be conferred upon or in respect of a Participant for such purpose.

Purpose of the Proposed Plan

23. The purpose for establishing the Plan is to encourage the retention of employees of the Corporation and certain Related Companies who are believed to contribute significantly to the financial success of the Corporation and to align their interests with the interests of the owners of the Corporation. Further, the Plan is intended to provide Participants with retirement income that is linked to the Corporation's profitability over their careers.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed Plan and purpose of the proposed Plan, and provided that the terms of the Plan are as described above, we rule as follows:

A. The Plan will constitute a prescribed plan or arrangement as defined in paragraph 6801(d) of the Regulations and will therefore be excluded from the definition of salary deferral arrangement as contained in section 248(1) of the Act.

B. The Plan will not constitute an investment contract as defined in subsection 12(11) of the Act, and the allocation of phantom stock units to a Participant will not constitute interest income from an investment contract pursuant to subsection 12(4) of the Act.

C. No amount will be included in the income of a Participant as a result of allocating phantom stock units to the Participant by virtue of subsection 5(1) or paragraph 6(1)(a) of the Act.

D. All payments under the Plan to a Participant will be taxable to the Participant in the year the payment is received as employment income under section 5 of the Act.

E. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments in the year under the Plan, referred to in Ruling D, in respect of services provided by a Participant to the Corporation, and any costs incurred by the Corporation in the year in establishing the Plan, will be deductible in the year the payments are made or the costs are incurred, respectively, in computing the Corporation's income in accordance with section 9 of the Act.

F. Subject to paragraph 18(1)(a) and section 67 of the Act, the payments in the year under the Plan, referred to in Ruling D, in respect of services provided by a Participant to a Related Company, and any costs incurred by a Related Company in the year in establishing the Plan, will be deductible in the year the payments are made or the costs are incurred, respectively, in computing the Related Companies' income in accordance with section 9 of the Act.

G. All amounts payable under the plan to the beneficiary of a Participant, as described in 13 above, 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) 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 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX. Nothing in this ruling should be construed as implying that the CCRA has reviewed or is making a determination in respect of the fair market value of any share referred to herein.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate