2000 Ruling 2000-0003223 - DIRECTOR PHANTOM STOCK 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 Department.

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

Principal Issues: Will the payment of Director fees in the form of deferred share units result in an SDA?

Position: No.

Reasons: 6801(d) satisfied

XXXXXXXXXX
XXXXXXXXXX 2000-000322
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

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

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Company, none of the issues involved in the ruling request

(i) is in an earlier return of the Company or a related person,

(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person,

(iii) is under objection by the Company or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (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 purpose of the proposed plan is as follows:

Facts

1. The Company was incorporated under the laws of Canada and its head office is located in XXXXXXXXXX. The Company is a taxable Canadian corporation and a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Act.

The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. The Company is in the business of XXXXXXXXXX. The Company's fiscal year ends on XXXXXXXXXX.

3. The Company's common shares are listed and traded on the XXXXXXXXXX Stock Exchange.

4. The Company's board of directors is currently made up of XXXXXXXXXX members. The board of directors is made up of Canadian resident members and non-resident members. The Company currently pays each member of its board of directors an annual retainer and various other additional fees relating to committee membership, meeting attendance, travel fees and teleconference meeting fees. A director is paid one-quarter of his or her annual retainer at the end of each of the Company's quarters. The annual retainer that will be paid to each director for the year 2000 has not yet been established by the Company's board of directors.

Proposed Plan

5. The Company will establish "XXXXXXXXXX" (the "Plan") for the benefit of Canadian and non-resident directors of the Company. Only non-employee directors are eligible to participate in the Plan.

6. Certain terms are defined in the Plan as follows:

(a) "Annual Compensation" means the compensation to be paid to Eligible Directors for their membership on the Board and attendance at meetings of the Board and standing committees of the Board consisting of the following:

(i) an annual retainer ("Annual Retainer");

(ii) with respect to the chairman of a standing committee, a committee chairman retainer ("Committee Chairman Retainer");

(iii) with respect to members of a standing committee, a committee member retainer ("Committee Member Retainer");

(iv) a fee for attendance at each meeting of the Board ("Board Meeting Fee");

(v) a fee for attendance at each meeting of a standing committee of the Board ("Committee Meeting Fee");

(vi) a fee for attendance at each teleconference meeting of the Board or a standing committee of the Board ("Teleconference Meeting Fee");

(vii) a travel fee if a meeting of the Board or a standing committee of the Board is held outside of the City in which the Eligible Director is resident ("City Travel Fee");

(viii) a travel fee if a meeting of the Board or a standing committee of the Board is held outside of the continent in which the Eligible Director is resident ("Continent Travel Fee");

(ix) an annual award of common share options ("Annual Option Award");

(x) an annual award of Deferred Share Units ("Annual DSU Award");

(xi) for newly elected or appointed Eligible Directors, an additional annual award of common share options in each of the first five years of the Eligible Director's term as Director of the Company ("Initial Common Share Option Award"); and

(xii) for newly elected or appointed Eligible Directors, an award of a number of Deferred Share Units as determined by the Committee and approved by the Board from time to time ("Initial DSU Award").

(b) "Board" means the board of directors of the Company.

(c) "Cash Compensation" means the sum of the Annual Retainer, the Committee Chairman Retainer, the Committee Member Retainer, the Board Meeting Fee, the Committee Meeting Fee, the Teleconference Meeting Fee, the City Travel Fee and the Continent Travel Fee.

(d) "Common Shares" means the common shares of the Company.

(e) "Committee" means the Governance Committee of the Board.

(f) "Deferred Share Unit" means a unit equivalent in value to a Common Share, credited to the Eligible Director's notional account on a deferred basis in accordance with an election made by an Eligible Director. Under no circumstances shall the Deferred Share Units be considered Common Shares of the Company nor shall they entitle any Eligible Director to exercise voting rights or any other rights attaching to the ownership of the Company's Common Shares.

(g) "Dividend Equivalents" means a bookkeeping entry whereby each Deferred Share Unit is credited with the equivalent amount of the dividend paid on a Common Share.

(h) "Eligible Director" means any member of the Board who is not an employee or officer of the Company.

(i) "Fair Market Value" of the Common Shares on any date means the weighted average price per share at which board lots of Common Shares have traded on the day preceding such date (or if there were no board lots traded on that day, then on the most recent day on which a board lot has traded on the XXXXXXXXXX Stock Exchange). The weighted average price per Common Share shall be determined by dividing the aggregate sale price of board lots of Common Shares sold on the XXXXXXXXXX Stock Exchange on the applicable date by the total number of Common Shares sold.

(j) "Purchase Date" means the date on which Deferred Share Units are credited to the Eligible Director's notional account pursuant to the Plan.

(k) "Termination of Board Service" means any situation where a person ceases to be a member of the Board, including retirement, death, separation or other means.

7. The terms of the Plan are as follows:

(a) The Plan will become effective subsequent to the receipt of an advance income tax ruling.

(b) The Plan will be administered by the Committee. A notional account will be established for each Eligible Director who participates in the Plan in order to carry out the objectives of the Plan, more particularly described below.

(c) Each Eligible Director will provide the Company with an irrevocable written election by no later than XXXXXXXXXX of each year to advise the Company how to pay his or her Cash Compensation for the following fiscal year. The election will advise the Company as to whether the Cash Compensation will be paid in cash, Deferred Share Units or a combination thereof. If no election is received by the Company, then the Eligible Director's Cash Compensation will be paid in cash, net of the applicable withholding taxes. An Eligible Director appointed to the Board shall make the written election not later than 30 days after the date of his or her appointment to the Board. Upon receipt of an advance income tax ruling, Eligible Directors will be able to make an election for the current year. In each case, the election, when made, shall only apply prospectively with respect to the Eligible Director's Annual Retainer yet to be earned. The award of Deferred Share Units for a calendar year to an Eligible Director will be evidenced by an agreement in writing between the Eligible Director and the Company.

(d) On each date that Cash Compensation is payable by the Company, the number of Deferred Share Units (including fractional Deferred Share Units) to be credited to an Eligible Director's notional account as of each Purchase Date will be determined by dividing (a) the amount of the Cash Compensation that the Eligible Director elected to have credited in Deferred Share Units on that Purchase Date by (b) the Fair Market Value of a Common Share of the Company on that Purchase Date. The Eligible Director's notional account will also be credited with additional Deferred Share Units under the Annual DSU Award and the Initial DSU Award portions of the Eligible Director's Annual Compensation.

(e) An Eligible Director's account will be credited with Dividend Equivalents in the form of additional Deferred Share Units on each dividend payment date in respect of which ordinary course cash dividends are paid by the Company on its Common Shares. Such Dividend Equivalents will be computed by dividing (a) the amount obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of Deferred Share Units recorded in the Eligible Director's account on the record date for the payment of such dividend, by (b) the Fair Market Value of a Common Share of the Company on the date the dividend is paid by the Company, with fractions computed to three decimal places.

(f) In the event of the declaration of any stock dividend, a subdivision, consolidation, reclassification, exchange, or other change with respect to the Common Shares, or a merger, consolidation, spin-off, or other distribution (other than ordinary course cash dividends) of the Company's assets to its shareholders, the notional account of each Eligible Director and the Deferred Share Units outstanding under the Plan will be adjusted in such manner, if any, as the Board may in its discretion deem appropriate to reflect the event. However, no amount will be paid to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Eligible Director to compensate for a downward fluctuation in the price of the Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

(g) Following an Eligible Director's Termination of Board Service on the Board where the Eligible Director is not at that time an employee of the Company or any related company, the Eligible Director will be entitled to redeem the Deferred Share Units credited to his or her notional account by December 31 of the year following the year in which the Termination of Board Service occurred. An Eligible Director shall give the Company a written direction specifying the particular date that they wish to receive either:

(i) cash equal to the product that results from multiplying (i) the number of Deferred Share Units recorded in the Eligible Director's account as of the date indicated in the written direction by (ii) the Fair Market Value of the Common Share on that date, net of any applicable withholding taxes; or

(ii) Common Shares of the Company. The number of Common Shares will be determined by taking the number of Deferred Share Units credited to the Eligible Director's notional account as of the day previous to the date indicated in the written direction multiplied by the Fair Market Value of a Common Share on that previous day and reducing this amount by the applicable withholding taxes then dividing the remaining amount by the Fair Market Value of a Common Share on that previous day. The Company will have an independent broker acquire the Common Shares on the Eligible Director's behalf on the open market. The Company will pay the independent broker for the cost of acquiring the shares for the Eligible Director and it will also pay any commissions in respect of the purchase of such shares. The independent broker will deliver the shares to the Eligible Director within 10 business days of their purchase. Any fractional shares will be paid in cash based on the Fair Market Value of a Common Share on that previous day.

If an Eligible Director fails to provide written direction to the Company, the Eligible Director will be deemed to have elected to receive cash on December 31 of the year following the year in which Termination of Board Service occurred. For greater certainty, the date specified in any written direction provided by Eligible Director will be within the period commencing on the date of the Eligible Director's Termination of Board Service and December 31 of the year following his or her Termination of Board Service. Upon payment in full of the Deferred Share Unit Amount, the Deferred Share Units credited to the particular Eligible Director's account will be cancelled.

(h) Notwithstanding the preceding paragraphs, if an Eligible Director becomes an employee of the Company or of any related Company, such Eligible Director's Plan eligibility will be suspended. In such a circumstance, the Eligible Director will not be eligible to be credited with additional Deferred Share Units (other than Dividend Equivalents credited as described in 7(e) of this ruling on the Deferred Share Units credited to such Eligible Director prior to the date of becoming such an employee) and will not be eligible to redeem the Deferred Share Units as set out above until the later of the date of cessation of employment with the Company or any of its related companies and the date on which the Eligible Director ceases to be a member of the Board (the "Separation Date"). The date for redemption of the Deferred Share Units in these circumstances will be the Separation Date.

(i) Upon the death of an Eligible Director prior to the redemption of the Deferred Share Units credited to the account of such Eligible Director under the Plan, the beneficiary, or, in the absence of a valid designation of a beneficiary, the estate of such Eligible Director, will be entitled to redeem the Deferred Share Units in accordance with 7(g) above. For greater certainty, the Deferred Share Unit Amount payable will be equivalent to the amount which would have been paid to the Eligible Director pursuant to and subject to 7(g) above, calculated as if the Eligible Director had previously ceased to be a director of the Company on the day prior to his or her death. The beneficiary or estate, as the case may be, will be entitled to select the manner of payment in satisfaction of Deferred Share Units in the same manner as the Eligible Director would have been permitted to do so had he or she survived and ceased to be a director of the Company on the day prior to his or her death.

(j) No amount will be paid to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, and no Deferred Share Units will be granted to such Eligible Director to compensate for a downward fluctuation in the price of the Common Shares, nor will any other form of benefit be conferred upon, or in respect of, an Eligible Director for such purpose.

8. The Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan. However, any such amendment, suspension, or termination shall not adversely affect the right of any Eligible Director at the time of such amendment, suspension or termination, without the consent of the affected Eligible Director. For greater certainty, if the Board terminates the Plan, no new Deferred Share Units will be credited to the account of an Eligible Director, but previously credited Deferred Share Units shall remain outstanding, be entitled to Dividend Equivalents as provided under 7(e) above, and be paid in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Eligible Director receives payment, in cash or Common Shares, in satisfaction of all Deferred Share Units recorded in the Eligible Director's account.

Purpose of the Proposed Transactions

9. The Plan will be established to enhance the Company's ability to attract and retain high quality 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.

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 in 5 through 8 above, we rule as follows:

A. The Plan will not constitute an employee benefit plan, as that term is defined in subsection 248(1) of the Act.

B. The Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.

C. Except for those amounts identified in Rulings D, E, F and G below, no amount will be included pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act in the income of an Eligible Director in respect of the Deferred Share Units credited to an Eligible Director's notional account under the Plan.

D. When cash is received in satisfaction of a resident Eligible Director's Deferred Share Units as described in 7(g) above, the Eligible Director will include the amount paid by the Company, before any withholding taxes, in his or her income under paragraph 6(1)(c) of the Act.

E. When cash is received in satisfaction of a non-resident Eligible Director's Deferred Share Units as described in 7(g) above, the non-resident Eligible Director will include the amount, to the extent attributable to services rendered in Canada, paid by the Company, before any withholding taxes, in his or her income under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act.

F. The amount to be included in the income of a resident Eligible Director for the year under the Plan, where the Eligible Director has received Common Shares of the Company that were purchased by the independent broker on the open market in satisfaction of the Eligible Director's Deferred Share Units as described in 7(g) above, will consist of the aggregate of the following amounts:

(a) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the Eligible Director for the rights related to the fractional shares as described in 7(g) above;

(b) under paragraph 6(1)(c) of the Act, the amount paid by the Company to the independent broker (excluding brokerage fees) to acquire the particular Common Shares of the Company that will be distributed to the Eligible Director as described in 7(g) above;

(c) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Company as described in 7(g) above; and

(d) under paragraph 6(1)(a) of the Act, the amount of the brokerage fees paid by the Company to the independent broker for the acquisition of the Common Shares of the Company distributed by the independent broker to the Eligible Director as described in 7(g) above.

G. The amount to be included in the income of a non-resident Eligible Director for the year under the Plan, where the non-resident Eligible Director has received Common Shares of the Company that were purchased by the independent broker on the open market in satisfaction of the non-resident Eligible Director's Deferred Share Units as described in 7(g) above, 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 amount, to the extent it is attributable to services rendered in Canada, paid by the Company to the non-resident Eligible Director for the rights related to the fractional shares as described in 7(g) above;

(b) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, paid by the Company to the independent broker (excluding brokerage fees) to acquire the particular Common Shares of the Company that will be distributed to the non-resident Eligible Director as described in 7(g) above;

(c) under paragraph 6(1)(c) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of applicable withholding taxes withheld by the Company from the non-resident Eligible Director as described in 7(g) above; and

(d) under paragraph 6(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, of the brokerage fees paid by the Company to the independent broker for the acquisition of the Common Shares of the Company distributed by the independent broker to the non-resident Eligible Director as described in 7(g) above.

H. The adjusted cost base to the resident Eligible Director of any Common Shares of the Company acquired by the Eligible Director through the independent broker on the open market, as described in 7(g) above, shall be the aggregate of the cost to acquire those shares which was included in the Eligible Director's income in ruling F(b) above and the brokerage fees paid by the Company which were included in the Eligible Director's income in ruling F(d) above.

I. The Plan will be a prescribed plan or arrangement as described in paragraph 6801(d) of the Income Tax Regulations and will therefore be exempted from the definition of a "salary deferral arrangement", as contained in subsection 248(1) of the Act.

J. The amount payable by the Company to the named beneficiary or estate of an Eligible Director as a result of the Eligible Director's death will constitute a right or thing held by the deceased Eligible Director at the time of death for purposes of subsection 70(2) of the Act.

K. Subject to paragraph 18(1)(a) and section 67 of the Act, any amount referred to in rulings D, E, F and G above that are paid by the Company in a particular year in respect of Eligible Directors will be deductible by the Company 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 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX. However, these rulings will be binding only in respect of the Plan as described and may not be binding in the event the Plan is amended as provided for in 8 above.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch