CRA denies a deduction for the employer’s source deduction payment for s. 7 RSU benefits where that payment is funded by reducing the RSU shares issued
An employee who otherwise would be entitled to receive, say, 30 shares of the employer’s parent (ParentCo) as a result of restricted share units (“RSUs”) vesting, instead is only issued 18 shares to reflect that the employer (EmployerCo) will make a cash payment to the Receiver General on behalf of the employee on account of the required income tax withholding on the taxable benefit under s. 7(1) arising in the year of issuance.
In finding that s. 7(3)(b) prohibited EmployerCo from claiming a deduction for this payment in computing its income, CRA stated:
[A] portion of the rights of the employee under the RSU Plan is considered to have been disposed of by the employee in exchange for EmployerCo paying the required income tax withholdings arising from the issuance of shares of ParentCo under the RSU Plan. Consequently, the employee is deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted by EmployerCo on behalf of the employee.
Since the benefit … arises from the issuance of shares, paragraph 7(3)(b) precludes a deduction by EmployerCo in respect of that benefit.
This analysis seems to implicitly treat the 30 shares that were agreed to be issued as having been issued for s. 7(3)(b) purposes even though, in fact, only 18 are issued.
Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0840681E5 under s. 7(3)(b).