Principal Issues: Will a proposed amendment to allow deferred share units (DSUs) to be used as collateral for a loan from a financial institution that is unrelated to the employer, result in a particular plan no longer satisfying the conditions of 6801(d) of the Regulations?
Position: The amendment, in and of itself, will not affect the plan for purposes of the conditions as described in paragraph 6801(d) of the Regulations.
Reasons: Wording of the Act
XXXXXXXXXX 2007-024643
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our various telephone conversations XXXXXXXXXX and your subsequent submission of XXXXXXXXXX .
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 tax return of the taxpayer or a related person;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts or,
(v) the subject of a ruling previously issued by the Directorate, other than Ruling document 2003-0040931R3 dated XXXXXXXXXX in relation to specific amendments to the original benefit plan, to the taxpayer or a related person.
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 definitions unless otherwise indicated.
Our understanding of the facts, the proposed amendment, and the purpose of the proposed amendment is as follows:
FACTS
1. XXXXXXXXXX ("Corporation A"), XXXXXXXXXX , is a taxable Canadian corporation as that term is defined in subsection 89(1) of the Act.
2. The head office of Corporation A is located at XXXXXXXXXX . It files its tax returns and deals with the XXXXXXXXXX Tax Services Office.
3. XXXXXXXXXX ("Corporation B") is also a taxable Canadian corporation as that term is defined in subsection 89(1) of the Act.
4. Corporation A and Corporation B are both publicly traded companies. XXXXXXXXXX shares of Corporation A and the XXXXXXXXXX shares of Corporation B trade on the XXXXXXXXXX .
5. Corporation B is a subsidiary of Corporation A and are related persons for purposes of the Act and, in particular, for purposes of paragraph 6801(d) of the Income Tax Regulations (the "Regulations").
6. Corporation A established a deferred compensation plan under the name of "Deferred Share Unit Plan" (the "Plan") for designated senior officers of Corporation A, as well as designated senior officers of its subsidiaries, including Corporation B ("Participants"). The Plan has been in place since XXXXXXXXXX and has never been ruled on by the Directorate; however, Corporation A is satisfied that the Plan meets the conditions of paragraph 6801(d) of the Regulations to the Act.
7. The Plan is administered by the XXXXXXXXXX of the Board of Directors of Corporation A (the "Board").
8. The Board may award the following to Participants under the Plan:
(a) deferred stock units in respect of a XXXXXXXXXX share of Corporation A; and
(b) deferred stock units in respect of a XXXXXXXXXX share of Corporation B; collectively knows as deferred stock units ("DSUs").
9. A Participant has no legal ownership of or beneficial interest in XXXXXXXXXX Shares of Corporation A or XXXXXXXXXX shares of Corporation B by virtue of the allocation of DSUs. For greater certainty, the DSUs do not entitle a Participant to any shareholder rights with respect to Corporation A or Corporation B, including without limitation, voting rights, dividend entitlements or rights on liquidation.
10. The DSUs are non-transferable except to the extent that rights may pass to a beneficiary or legal representative of a Participant at the time of their death, or in circumstances expressly approved by the Board. Further, the Plan does not allow DSUs to be pledged as collateral.
11. A notional account is established for each Participant ("Account"). The number of DSUs allocated to a Participant and their value is recorded in the Account.
12. The Plan may be amended or terminated by the Board at any time. However, no such amendment or termination can adversely affect the DSUs allocated to a Participant's Account without his or her consent.
13. The Plan is not funded.
14. No amount is to be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement and no additional units can be granted to such Participant as compensation for a downward fluctuation in the value of a XXXXXXXXXX Share of Corporation A and/or a XXXXXXXXXX share of Corporation B, nor will any other form of benefit be conferred upon or in respect of a Participant for such purpose.
15. DSUs cannot be redeemed until the year the Participant retires, terminates employment or dies ("Retirement"). Upon Retirement, a Participant's Account will be redeemed with all benefits being distributed within XXXXXXXXXX days of that date.
PROPOSED AMENDMENT
16. Corporation A is proposing to amend the Plan such that DSUs will be allowed to be pledged by Participants as security for a loan from a financial institution in Canada ("Financial Institution").
17. The Financial Institution will deal at arms length with Corporation A and its related companies and the loans will be offered to Participants at normal commercial lending terms.
18. Neither the Participant nor the Financial Institution is able to redeem DSUs prior to Retirement in order to satisfy any loan.
19. Corporation A and its related companies have not, and will not, pledge any of its assets or act as a guarantor for any Participant in relation to any loan agreement.
PURPOSE OF THE PROPOSED AMENDMENT
20. The purpose of the Plan amendment is simply to allow Participants to pledge their DSUs as collateral with an arms length lender where normal commercial lending terms are offered.
RULIN GIVEN
Provided that the Plan as established in XXXXXXXXXX satisfies the conditions of paragraph 6801(d) of the Regulations and the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendment and purpose of the proposed amendment, we rule as follows:
A. Provided that the Financial Institution deals at arms length with Corporation A and the loans are offered to Participants at normal commercial lending terms, the proposed amendment as described in 16 above, will not, in and of itself, result in the Plan ceasing to meet the conditions of paragraph 6801(d) of the Regulations.
COMMENTS
The above income tax ruling is based solely on the facts and proposed amendment described above and does not depend on any other information made available to the Canada Revenue Agency ("CRA"), whether such information was provided by way of additional documentation submitted with the ruling request or otherwise. Any reference in this letter to such other information is made solely for the convenience of the reader.
Whether or not the terms of the particular loan agreement with the any financial institution would be considered at 'normal commercial lending terms' and independent of the Plan itself is a question of fact.
Further, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed amendment described above other than those specifically described in the ruling.
The above advance income tax ruling, which is based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CRA provided that the proposed amendment is completed by XXXXXXXXXX .
Yours truly,
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch