Kevin Bianchini, Reuben Abitbol, "Taxation of Stock Appreciation Rights", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24 No. 8, 2015, p.1655

Summaries

Description of SARs (p. 1655)

[T]he executive is granted units or stock appreciation rights ("SARs") over a period of time often referred to as the Vesting Period. The amount of SARs granted will depend on whether the company is able to meet pre-determined hurdles. …

Once fully vested, these units or SARs grant the executive a right to receive payment equal to the difference between the share's fair market value and its original price at the plan's inception.

CRA listing of SAR requirements (p. 1656)

In order to constitute a SAR, the following attributes are generally required:

a) Each SAR has a nil value at the date of the grant;2

b) Each SAR provides its holder with the right to receive the appreciation in value of one share in the capital stock of the employer (or related) corporation from the grant date to the date of payment; and

c) Payment is to be made at a fixed future date, i.e., the employee will not have the ability to obtain payment at an earlier date. Without such restrictions, concerns regarding constructive receipt (discussed below) may arise.

Safe harbour until SAR vesting (p. 1656)

[T]he CRA has taken the position that until the employee has a right to exercise and cash in the SARs, the SDA rules would not apply. [f.n…. 9422835 …]

In other words, once the SAR units become fully vested it would have be determined whether the executive is postponing the exercise of the SARs in order to avoid the immediate tax consequences (i.e., the employment income). As stated by the CRA, this is a question of fact… .

Alternative application of constructive receipt (“CR”) at time of vesting (p. 1657)

[I]n the context of the recognition of employment income, the Canadian jurisprudence has yet to develop guidance with respect to the doctrine of CR

…[T]he CRA addressed its position with respect to CR in the context of SDAs in… 1999-0007315… .

…As can be seen…the CRA adopts a very broad approach and leaves open the possibility that even if the SDA main purpose test is met, the rules with respect to the doctrine of CR may still be rendered applicable. Hence, in light of the above-mentioned, it seems likely that the SARs would be taxed at the moment they become fully vested regardless of when exercise occurs.

Safe harbour until SAR vesting (p. 1656)

[T]he CRA has taken the position that until the employee has a right to exercise and cash in the SARs, the SDA rules would not apply. [f.n…. 9422835 …]

In other words, once the SAR units become fully vested it would have be determined whether the executive is postponing the exercise of the SARs in order to avoid the immediate tax consequences (i.e., the employment income). As stated by the CRA, this is a question of fact… .

Alternative application of constructive receipt (“CR”) at time of vesting (p. 1657)

[I]n the context of the recognition of employment income, the Canadian jurisprudence has yet to develop guidance with respect to the doctrine of CR

…[T]he CRA addressed its position with respect to CR in the context of SDAs in… 1999-0007315… .

…As can be seen…the CRA adopts a very broad approach and leaves open the possibility that even if the SDA main purpose test is met, the rules with respect to the doctrine of CR may still be rendered applicable. Hence, in light of the above-mentioned, it seems likely that the SARs would be taxed at the moment they become fully vested regardless of when exercise occurs.