CRA considers that s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance

A magnanimous reader provided copies of CRA’s written answers to the 2016 APFF Roundtable questions. We will be uploading translations thereof (together with brief summaries of the questions) over the next week. We are starting with Q.21 and working our way backwards.

CRA considers that where a Canadian-controlled private corporation has agreed in writing “to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares” equal in value to the bonus amount, then the value of the shares generally will not be included in the employee’s income when issued by virtue of ss. 7(3)(a) and 7(1.1). In addition, although an arrangement in which the employer has full discretion as to whether to award the bonus or as to the mode of payment will not come within the s. 7 rules, such a discretionary arrangement could become a qualifying one if, for example, “after the first year, the employer exercises its discretion and sets the amount of the bonus at [say] 75 shares, which is payable in shares at the end of the year if the employee is still employed by the employer.” The right of the employee to elect to be paid in cash does not detract from this analysis if that right is not exercised.

The paid-up capital of the shares issued generally could be equal to their value.

Neal Armstrong. Summaries of 7 October APFF Roundtable, Q. 21 under s. 7(3)(a) and s. 84(1)(b).