CRA indicates that charges made to Canco by its non-resident parent equaling the FMV of shares distributed out of a trusteed PSP by the parent to Canco employees likely were deductible

Employees of a Canadian subsidiary participated in a performance share plan (“PSP”) under which the non-resident public parent (Parentco) contributes funds to a non-resident trust, which purchases shares of Parentco on the open market, and distributes shares (within approximately three years) to the group employees as the shares vest in accordance with the performance conditions of the PSP. After finding that the arrangement was an employee benefit plan (EBP), Headquarters concluded that payments made by Canco to Parentco under a “recharge” agreement, equalling the fair market value of shares that were distributed to the Canco employees at the time they vested, were not deductible under s. 32.1, stating:

To be deductible under section 32.1, Canco’s reimbursement payment to Parentco would have to be considered to be a contribution to the EBP by Canco. Given the potentially significant differences in both the amount and timing of the reimbursement payment as compared to the actual contributions made by Parentco … the reimbursement payments are not equivalent to Parentco’s contributions to the EBP, and thus cannot be considered to be a proxy for those contributions.

However, Headquarters went on to find that the payments were deductible under s. 9, except to the extent that they related to periods during the vesting period that the employees had been employed by affiliates rather than by Canco.

Canco originally filed its returns without claiming a deduction for the reimbursement payments but, following the Transalta decision, filed requests (“TPRs”) for adjustments to its returns to allow such a deduction. Before noting that the PSP might not have been a s. 7 plan (in which case, the prohibition on deductions under s. 7(3)(b) would not have applied even before Transalta), Headquarters stated that whether the TPRs should be allowed:

depends, in part, on whether the TPRs are due to an error or are due to a change in position resulting from the Transalta decision. If it is determined that the TPRs were due to an error … the TPRs for all of the taxation years could be accepted. However, if due to a change in position, we understand that only those TPRs for income tax returns originally filed after the Transalta decision (April 4, 2012) could be accepted.

Neal Armstrong. Summaries of 1 August 2019 Internal T.I. 2018-0781951I7 under s. 7(3)(b), s. 32.1(1), s. 248(1) – employee benefit plan, s. 18(1)(a) – income-producing purpose and s. 152(4).