CRA will no longer issue SDA rulings on formula-based incentive plans for employees

CRA got cold feet about ruling that formula-based incentive plans are not salary deferral arrangements after considering, and rejecting, a proposed plan under whose units’ value on their redemption date would be based on changes in EmployerCo’s retained earnings between the grant and redemption date plus dividends paid over the same period – so that the units’ value would have increased over the duration of the vesting period even if EmployerCo’s net earnings remained stable over the period (as had been the case in prior years).

The Directorate explained that it has now developed a concern “that the financial metrics that underlie formula-based appreciation plans may be susceptible to manipulation … [which] can be used to obfuscate the fact that a formula-based appreciation plan’s underlying purpose is to defer tax,” and in that regard has announced: that it:

will no longer consider any ruling requests pertaining to whether any given formula-based appreciation plan is a SDA, unless:

i) the plan is of a type described in ATR-45 …; or

ii) the ruling request pertains to whether one of the enumerated exceptions listed in the definition of SDA apply to the plan.

… [S]hare appreciation rights (“SAR”) plans … described in ATR-45 … [have] the following characteristics:

  • The unit has no intrinsic value at the date of grant;
  • The value of a unit is not guaranteed and may have a negative value after the date of grant; and
  • The value of each unit at any particular time is determined by subtracting the FMV of a share of the employer at the date of grant from the FMV of a share of the employer at that particular time.

… [O]ur decision to no longer consider ruling requests for formula-based appreciation plans does not mean that the CRA now considers all such plans to be SDAs.

Neal Armstrong. Summary of 10 July 2020 Internal T.I. 2020-0850281I7 under s. 248(1) – SDA.