Structuring RSUs and DSUs requires careful attention to the SDA and constructive receipt rules
Observations on restricted and deferred share units plans (RSUs and DSUs) and other executive compensation arrangements include:
- Given the CRA view that receipt under ss. 5 and 6(1)(a) includes constructive receipt, a cash bonus plan should only be converted into RSU entitlements prior to the payable date for the bonus. Similarly, the decision to take cash, or compensation in the form of DSUs, should be made prior to the date that the annual bonus or the director fees become payable.
- An RSU plan that provides for payment to be made on the third anniversary of the award date (as opposed to the service year) can fall outside the three year period permitted under para. (k) of the salary deferral arrangement definition where the service year pre-dates the award date.
The CRA is attuned to these distinctions. As a practical matter, some companies view the RSU as a bonus in respect of services rendered in the prior year, while others take the view that the RSU is granted in respect of services rendered in the year in which the grant occurs and the public company disclosure may support either position.
- The supposed 3-year limitation under para. (k) can be busted if the RSU is structured to come within the s. 7 rules, i.e., satisfying the RSUs only by issuing treasury shares.
- Some corporations will match the amounts contributed by their employees through payroll deductions. Where the employer matching contributions are used to acquire shares from treasury, deductibility to the corporate employer likely will be denied pursuant to s. 7(3)(b), whereas if the shares are acquired on the market, the employer should generally be entitled to claim a deduction in respect of its cash contributions to the plan.
Neal Armstrong. Summaries of Dov Begun “Equity Based Compensation and Stock Options,” 2017 Annual CTF Conference draft paper under s. 5(1), s. 248(1) – salary deferral arrangement, para. (k), s. 7(3)(b) and s. 110(1.8).