W.E. Douglas (613) 995-0051
June 23, 1986
Dear Mr. Hayhurst:
Re: XXXX Management Incentive Programmes
This is in reply to your letter of March 11, 1986 concerning the following situation. We apologize for any inconvenience caused to your client because of the delay in answering your request.
XXXX has two deferred compensation programmes - one based on annual profits target and the second which did not commence until XXXX based on a 4 year profits target - to provide incentives and reward for its senior employees who make significant contributions to the success of the company. Each of the programmes provides for:
1. a mandatory deferral of 10% of the award otherwise determined until such time as the employee retires, dies or is terminated;
2. an optional deferral of any portion of or all of the balance of the award (the deferral election, which is irrevocable, is made on an annual basis at least 6 months before the end of the year and any amounts so deferred will be paid to the employee or his beneficiaries at the same time the mandatory deferral amounts are paid); and
3. the accrual of interest on a quarterly basis on the outstanding balance of each participant's "Deferred Cash Award Account".
As you requested, we have reviewed the Department's position concerning the application of subsection 12(4) of the Income Tax Act (the "Act") to the accrued interest on the above programmes. We regret to inform you that the Department's views as set out in our Minister's letter of June 27, 1985 are unchanged and that we are not in a position to accept the compromise assessing position suggested in your letter. To reiterate, it is the Department's view that:
A. Subsection 12(4) of the Act is applicable to the accrued interest computed in respect of:
(i) all amounts deferred under the 4 year incentive programme;
(ii) all amounts of mandatory deferral awarded under the annual incentive programme where the employee was not a member of the programme before November 13, 1981; and
(iii) all optional amounts deferred under the annual incentive programme (whether the employee was a member of the programme before November 13, 1981 or not).
B. Subsection 12(4) of the Act is not applicable to interest on the mandatory deferral of 10% of the award under the annual incentive programme provided that the employee was a member of that programme before November 13, 1981.
We regret that our reply could not have been more favourable.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch