30 November 1997 Ruling 9819383 - PHANTOM STOCK PLAN, DIRECTORS

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 a phantom stock plan for non-employee directors be excluded from SDA rules under 6801(d)?

Position: Yes.

Reasons: Standard plan that is being implemented by most public companies..

XXXXXXXXXX
XXXXXXXXXX 							981938
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX and your facsimiles 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).

Our understanding of the facts and proposed transactions is as follows:

FACTS

1. XXXXXXXXXX (the “Corporation”) is a company continued under the laws of XXXXXXXXXX, a resident of Canada and a public corporation. Corporation’s common shares are listed on XXXXXXXXXX Stock Exchange. The expression “public corporation” has the meaning assigned by subsection 89(1) of the Income Tax Act (the “Act”).

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

2. The Corporation was incorporated in XXXXXXXXXX. As of XXXXXXXXXX beneficially owns and controls approximately XXXXXXXXXX% of the issued and outstanding common shares of the Corporation.

3. The Corporation is a XXXXXXXXXX based management holding company engaged through its subsidiaries in XXXXXXXXXX. The Corporation's head office is located XXXXXXXXXX.

4.

XXXXXXXXXX

Subco is a subsidiary controlled corporation, within the meaning assigned by subsection 248(1) of the Act, of the Corporation. Subco became a subsidiary of the Corporation onXXXXXXXXXX. Subco was incorporated under the laws of XXXXXXXXXX.

5. The Board of Directors (the “Board”) of each of the Corporation and Subco is composed of XXXXXXXXXX directors.

6. For the upcoming term of office, the Corporation will pay to each its directors and the directors of Subco that are not otherwise employed by the Corporation or its subsidiaries (other than being a director) the following amounts:

a) an annual retainer fee of $XXXXXXXXXX;

b) a fee of $XXXXXXXXXX for each board and committee meeting attended;

c) a fee of $XXXXXXXXXX for each Committee chaired; and

d) a fee of $XXXXXXXXXX for the Board Chair.

Subco will reimburse the Corporation for all amounts paid by the Corporation in respect of its Board.

7. A recent trend among leading public companies is to pay a portion of each director's compensation in shares of stock instead of cash, thereby facilitating and encouraging the acquisition of a greater ownership interest in the company. In response to that trend, the Corporation is contemplating the establishment of a stock compensation plan, more particularly described below.

PROPOSED TRANSACTIONS

8. The Corporation will establish "XXXXXXXXXX" (the "Plan”) for the benefit of Canadian and non-resident directors of the Corporation and Subco (the "Participants"). Directors of the Corporation and Subco who receive employment income, other than director's fees, from the Corporation or from one of its subsidiaries will not be eligible to participate in the Plan. The principal features of the Plan are as follows:

(a) The Plan will be administered by the committee which is currently responsible for compensation related matters (the “Committee”), currently the Resources Committee of the Board of the Corporation. A notional account will be established for each Participant in order to carry out the objectives of the Plan, more particularly described below. The administrator of the notional accounts is referred to herein as the "Administrator".

(b) A Participant may elect to participate under the Plan and be allocated 100% of his or her annual retainer fee in the form of phantom share units representing common shares of the Corporation. A Participant may also elect to defer any other fees (Committee Chair, Board Chair and Meeting Fees) payable to him or her by the Corporation. The election must be made in writing by the Participant within thirty (30) calendar days of the Participant first being elected to the Board at the annual general meeting of the Corporation or Subco, and on or before January 31 of each year thereafter.

(c) Subco will reimburse the Corporation for its share of deferred fees that are eventually paid under the Plan and its share of expenses incurred by the Corporation in relation to the Plan.

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

(a) "Market Value" on a particular day means the market value of one common share and shall be the closing price for a board lot of common shares on XXXXXXXXXX Stock Exchange, on that day, or if at least one board lot of common shares shall not have been traded on that day, on the immediately preceding day for which at least one board lot was so traded. If, at any time, the Corporation’s common shares are no longer listed on XXXXXXXXXX Stock Exchange then the market value shall be calculated on the basis of the closing price, on the aforesaid day, for a board lot of common shares on the stock exchange on which the Corporation’s common shares are listed and had the greatest volume of trading on that particular day.

(b) "Quarter" means any of the four quarters, of any financial year of the Corporation. Currently, the corporation’s Quarters end on March 31, June 30, September 30 and December 31.

(c) "Quarterly Retainer Fee" means the amount representing twenty-five percent of the annual retainer fee which would, but for the Plan, be payable by the Corporation in cash on the last day of each Quarter to a Participant. With respect to a Participant that has served as a member of the Board for a number of days that is less than the full Quarter, the amount expressed in dollars, which is the product of: (i) the quotient determined by dividing (A) the number of days in the particular Quarter during which the Participant served as a member of the Board, and (B) the aggregate number of days in the particular Quarter; and (ii) the amount, expressed in dollars, of the Quarterly Retainer Fee which would otherwise have been payable for such Quarter had the Participant served as a member of the Board for the full Quarter.

(d) "Reference Date", with respect to any Quarter, means the date which shall be used to determine, on a quarterly basis, the Market Value of a common share of the Corporation for purposes of determining the number of Share Units to be credited, for such Quarter, to a Participant's notional account. The date shall be, unless otherwise determined by the Committee and approved by the Board of the Corporation, the last trading day of such Quarter on which the Market Value of a common share may be determined or, if a Participant's Termination of Board Service occurs during the Quarter prior to such last trading date, the date of Termination of Board Service of the Participant, provided that if the date of Termination of Board Service is not a trading day on which the Market Value of a common share of the Corporation may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value may be determined.

(e) "Termination of Board Service" means, in respect of a Participant, the latest of the following two dates:

(i) the date on which the Participant ceases to be a member of the Board of the Corporation or Subco for any reason whatsoever; and

(ii) the date on which the Participant ceases to be employed by the Corporation or a person related to the Corporation.

10. Pursuant to the Plan, the following rules will apply on the last trading day of each Quarter and where a Participant's Termination of Board Service occurs prior to the last trading day of the Quarter, on the date of the Termination of Board Service:

(a) The number of common shares of the Corporation allocated to a Participant on a deferred basis ("Share Units") with respect to any Quarter shall be determined by dividing the Quarterly Retainer Fee by the Market Value of a common share of the Corporation on the Reference Date for that Quarter. For greater certainty, no cash payment by the Corporation or purchase of common shares of the Corporation shall take place on the Reference Date in respect of the Quarterly Retainer Fee; instead, the appropriate number of Share Units (including any fractional units) will be credited to the notional account maintained by the Administrator for this purpose.

(b) A Participant's notional account will be credited with dividend equivalents when dividends are paid on the common shares of the Corporation and such dividend equivalents will be converted into additional Share Units based on the Market Value of the common shares of the Corporation on the date dividends are paid by the corporation.

(c) Except as set forth in Section 8 of the Plan, the entitlement date ("Entitlement Date") of a Participant with respect to whom Termination of Board Service has occurred shall be the end of the month immediately following the Participant's Termination of Board Service. A Participant shall be entitled to receive no later than the end of the first calendar year commencing after the Termination of Board Service, in satisfaction of the Share Units recorded in the Participant's notional account, on the Entitlement Date a number of common shares of the Corporation equal to the nearest whole number of Share Units (rounded down) credited to the Participant's notional account, net of applicable withholdings. The Corporation will have the option to satisfy its obligation by issuing treasury shares or having a broker acquire the shares on the open market on behalf of the Participant. In the case of shares acquired on the open market, the Corporation shall notify the broker of the number of common shares of the Corporation to be purchased by the broker on the Participant's behalf. The broker will purchase the common shares of the Corporation as soon as practical after receiving the Corporation's notice and, for greater certainty, the broker shall effect such purchase no later than the last day of the first calendar month commencing after the Participant's Termination of Board Service. The broker will deliver the common shares of the Corporation to the Participant or his or her estate. In addition, regardless of whether or not treasury shares or market shares are used to satisfy the Participants Share Units, the Corporation will make a cash payment, to the Participant in an amount equal to the fair market value on the Entitlement Date of any fractional shares net of applicable withholdings. The corporation will pay all brokerage fees arising in connection with the acquisition of the common shares of the Corporation by the broker on the open market and may make a special cash payment to the Participant in an amount sufficient to cover any income tax liability of the Participant as a consequence of the payment of such brokerage fees by the Corporation.

(d) In cases of Participants who are citizens or residents of a country other than Canada, the Corporation has the right, in its sole discretion, to pay entirely in cash the value, as computed under the Plan, of a Share Unit entitlement (less any applicable withholdings), should it deem the regulatory or other requirements of the applicable foreign jurisdiction associated with the purchase of, or payment in, common shares of the Corporation too onerous to it or the Participant.

11. The Board of Directors of the Corporation may from time to time amend, suspend or terminate the Plan in whole or in part. However, any such amendment, suspension or termination shall not adversely affect the rights of any Participant under any agreement existing at the time of such amendment, suspension or termination without the consent of the affected Participant.

PURPOSE OF THE PROPOSED TRANSACTIONS

12. The purpose of the proposed transactions is to provide non-employee directors of the Corporation and Subco with a long term stock based compensation program.

ADDITIONAL INFORMATION

13. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Corporation or of a person related to the Corporation;

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

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

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the terms of the Plan are as described in paragraphs 8, 9 and 10 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. The amount to be included in the income of a resident Participant for a year under the Plan will consist of the aggregate of the following amounts:

(a) under paragraph 6(1 )(c) of the Act, the amount paid by the Corporation to the Participant for the rights related to fractional shares as described in subparagraph 10(c) above;

(b) under paragraph 7(1 )(a) of the Act, the amount representing the aggregate market value of the Corporation’s treasury shares issued to the Participant as described in subparagraph 10(c) above;

(c) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in subparagraph 10(c) above;

(d) under paragraph 6(1)(c) of the Act, the amount of applicable withholding taxes withheld by the Corporation as described in subparagraph 10(c) above;

(e) under paragraph 6(1)(a) of the Act, the amount of brokerage fees paid by the Corporation for the acquisition of the particular common shares of the Corporation distributed to the Participant by the broker as described in subparagraph 10(c) above; and

(f) under paragraph 6(1)(c) of the Act, the amount paid by the Corporation to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling (e) above as a consequence of the payment of such brokerage fees by the Corporation.

D. The amount to be included in the income of a non-resident Participant for a 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 amount, to the extent it is attributable to services rendered in Canada, paid by the Corporation to the Participant for the rights related to fractional shares as described in subparagraph 10(c) above;

(b) under paragraph 7(1)(a) and subparagraph 115(1)(a)(i) of the Act, the amount, to the extent it is attributable to services rendered in Canada, representing the aggregate market value of the Corporation’s treasury shares issued to the Participant as described in subparagraph 10(c) 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, paid by the Corporation to the broker (excluding brokerage fees) to acquire the particular shares distributed to the Participant as described in subparagraph 10(c) above;

(d) 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 Corporation as described in subparagraph 10(c) above;

(e) 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 brokerage fees paid by the Corporation for the acquisition of the particular common shares of the Corporation distributed to the Participant by the broker as described in subparagraph 10(c) above; and

(f) 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 Corporation to the Participant to compensate the Participant for the income tax liability in respect of an amount included in the Participant's income in ruling (e) above as a consequence of the payment of such brokerage fees by the Corporation.

E. The adjusted cost base to the Participant of any common shares of the Corporation acquired by the resident Participant shall:

(a) in the case of shares issued from the Corporation’s treasury, include, pursuant to paragraph 53(1)(j) of the Act, the amount included in income as described in ruling C(b) above; or

(b) in the case of the common shares acquired on the open market, the aggregate of:

(i) the cost to acquire the shares which was included in the Participant's income in ruling C(c) above; and

(ii) the brokerage fees paid by the Corporation, which were included in the Participant's income in ruling C(e) above.

F. 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.

G. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings C and D above, other than amounts referred to in rulings C(b) and D(b) above, that are paid by the Corporation in a particular year in respect of Participants that are directors of the Corporation will be deductible by the Corporation in accordance with section 9 of the Act.

H. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in Rulings C and D above, other than amounts referred to in rulings C(b) and D(b) above, that are paid by the Corporation and reimbursed by Subco in a particular year in respect of Participants that are directors of Subco will be deductible by Subco in accordance with section 9 of the Act.

The above rulings, which are based on the Act in its present form and does not take into consideration 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 Revenue Canada provided that the Plan is implemented 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