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 a phantom stock plan for directors be excluded from the salary deferral arrangement rules by paragraph 6801(d)?
Position: Yes
Reasons: The conditions in paragraph 6801(d) of the Regulations are satisfied.
XXXXXXXXXX 2002-016989
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer 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 not expired, and
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person;
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed plan and the purpose of the proposed plan is as follows:
Facts
1. XXXXXXXXXX (the "Corporation") is a mutual fund corporation incorporated under the laws of the Province of XXXXXXXXXX. The expression "mutual fund corporation" has the meaning assigned by subsection 131(8) of the Act.
2. The Corporation deals with the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Tax Centre. The head office of the Corporation is XXXXXXXXXX
3. The Corporation is managed by XXXXXXXXXX ("ManageCo"), a wholly-owned subsidiary of XXXXXXXXXX, ("Parent"), a XXXXXXXXXX company.
4. At this time, the Corporation has XXXXXXXXXX classes of shares authorized, each of which may be divided into an unlimited number of series. An unlimited number of shares for each series may be issued. XXXXXXXXXX.
5. The Corporation has a board of directors (the "Board") that has the responsibility of corporate governance. The Board consists of XXXXXXXXXX Canadian resident individuals. The same XXXXXXXXXX individuals are directors of XXXXXXXXXX ("SisterCo") and are members of the XXXXXXXXXX ("Advisory Board").
6. The compensation paid to the members of the Board consists of an annual retainer for duties relating to the Corporation ("Retainer Compensation") and a fee for attending each meeting of the Board or of any committee of the Board ("Attendance Compensation")(collectively referred to as "Compensation"). Meetings of the Board, of the directors of SisterCo and of the Advisory Board are held jointly and concurrently. The Corporation may adjust the quantum of the Compensation from time to time.
7. XXXXXXXXXX of the members of the Board are also senior officers of ManageCo and receive remuneration for their services as officers in addition to their Compensation.
Proposed Plan
8. The Corporation proposes to establish a deferred compensation plan for the members of the Board (the "Plan"). The Plan will be effective XXXXXXXXXX.
9. Each member of the Board, other than individuals who are officers or otherwise employed by ManageCo, the Corporation or a related corporation will be eligible to participate in the Plan for each particular year the person is a director of the Corporation. An eligible director may be required to participate in the Plan if 11 below applies or an eligible director may elect to participate in the Plan under 12 below. These eligible directors will be referred to as "Participants."
10. Under the Plan, a XXXXXXXXXX of phantom stock units ("PSUs") will be created. XXXXXXXXXX. The value of a PSU will equal the fair market value of the underlying share of the Corporation to which it corresponds.
11. Each director is strongly encouraged to own, directly or indirectly, any number of shares of the Corporation, PSUs, units of a mutual fund trust managed by an affiliate of the Parent or any combination thereof having a cost base or fair market value (whichever is higher) of at least $XXXXXXXXXX ("Minimum Holdings"). Until the Minimum Holdings requirement is satisfied the Participants must defer their Retainer Compensation and have it converted to PSUs. This restriction does not apply to a Participant's Attendance Compensation, which can be received as cash or in the form of PSUs or as a combination of cash and PSUs.
12. A Participant must elect in writing whether or not to defer any of his or her Attendance Compensation and, once the Minimum Holdings is reached, his or her Retainer Compensation. XXXXXXXXXX. Elections must be made within the time limit established by the Corporation and filed with the Corporation annually. An election may be revoked or changed only with respect to the period in the year for which PSUs have not yet been credited. The election must be made in advance of when the Participant would otherwise be entitled to receive the Compensation.
13. Each Participant will be allocated PSUs (including fractional PSUs) under the Plan. The PSUs allocated to a Participant under the Plan will vest immediately upon allocation. The PSUs will be credited to a notional account ("Notional Account") established for the Participant. XXXXXXXXXX.
14. A Participant will have no legal ownership of or beneficial interest in the shares XXXXXXXXXX of the Corporation by virtue of the allocation of PSUs. For greater certainty, a PSU will not entitle a Participant to any shareholder rights vis à vis the Corporation, including without limitation, voting rights, dividend entitlements or rights on liquidation.
15. XXXXXXXXXX.
16. If a distribution on an underlying share corresponding to a PSU occurs, a Participant's Notional Account shall be credited with additional PSUs. The number of such additional PSUs will be calculated by dividing the total amount of the distribution that would have been paid to such Participant if the PSUs in the Participant's Notional Account had been the corresponding underlying shares of the Corporation by the fair market value of such share on the date on which the distribution occurs.
17. In the event of any stock dividend, stock split, combination or exchange of shares, consolidation, spin off or other cash distribution affecting the fair market value of the shares, the number of PSUs credited to a Participant's Notional Account will be adjusted accordingly.
18. A Participant may appoint a beneficiary ("Beneficiary") to receive amounts under the Plan in the event of the Participant's death. For this purpose, the Beneficiary must be a dependent, related person, or the estate of the Participant.
19. At a time to be determined by the Corporation, all benefits under the Plan will be distributed to a Participant (or to the Participant's Beneficiary in the event of death). The benefits will not be distributed until after the later of (1) the Participant ceases to be a Director of the Corporation or of a corporation with which the Corporation does not deal at arm's length and (2) the Participant ceases to be an employee of the Corporation or of a corporation with which the Corporation does not deal at arm's length (the "Triggering Event"). The benefits will be distributed by the end of the calendar year following the year in which the Triggering Event occurs. The amount of the benefits payable to a Participant will depend on the value of the PSUs in his or her Notional Account, determined at some time in the period commencing one year before the Triggering Event and ending with the date of payment. The Corporation may satisfy its obligations on the payment date by paying cash or other assets, net of any applicable withholding taxes. The Corporation will not issue treasury shares in satisfaction of its obligations under the Plan.
20. A committee of persons appointed by the Corporation will administer the Plan. The Corporation will pay all costs and expenses associated with establishing the Plan. An annual fee based on the value of the units allocated in the year to a Participant's Notional Account may be charged to each Participant's Notional Account thus reducing the amount ultimately received by the Participant. This fee may be altered from time to time by the Corporation.
21. No amount will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement, and no additional PSUs will be granted to such Participant to compensate for a downward fluctuation in the value of any shares of the Corporation nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.
22. The terms of the Plan will provide that the Corporation can unilaterally amend or terminate the Plan at any time except with respect to rights that have accrued to a Participant at the date of the amendment or termination. Notwithstanding the foregoing, any amendment or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations (the "Regulations").
23. The Plan will be unfunded. The amounts credited to the Notional Accounts shall be recorded as a book reserve of the Corporation. The Corporation's obligation constitutes a general, unsecured obligation, payable solely out of its general assets, and no Participant or other person has any right to specific assets of the Corporation.
Purpose of the Proposed Plan
24. The purpose for establishing the Plan is to reward and retain members of the Board of the Corporation by more closely aligning their compensation with the interests of the shareholders.
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. Provided that the Plan remains unfunded, the Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.
B. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Regulations and will therefore be exempted from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act. The Plan will not constitute an investment contract, as that term is defined in subsection 12(11) of the Act, and the allocation of PSUs to a Participant's Notional Account 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 any Participant pursuant to subsection 5(1), section 6 or paragraph 56(1)(a) of the Act solely as a result of a grant of PSUs under the Plan to the Participants.
D. When cash is paid by the Corporation in satisfaction of some or all of a Participant's PSUs as described in paragraph 19, above, the Participant or Beneficiary will include the amount paid by the Corporation, before any applicable withholding taxes, in respect of the portion of the Participant's PSUs paid by the Company in cash in his, her or its income under subsection 5(1) of the Act. When other property is distributed by the Corporation in satisfaction of some or all of a Participant's PSUs as described in paragraph 19, above, the Participant or Beneficiary will include the fair market value of the property distributed by the Corporation, together with any withholding taxes remitted on the Participant's behalf, in respect of the portion of the Participant's PSUs paid by the Company in other property in his, her or its income under subsection 5(1) of the Act.
E. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in Ruling D above that is paid by the Corporation in respect of any Participants in a particular year and any costs paid by the Corporation in respect of the implementation of the Plan will be deductible by the Corporation in calculating its income in respect of the year in which the payment is made, under section 9 of the Act.
The above advance income tax rulings, which are based on the Act and Regulations in their 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 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed Plan is implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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