CRA announces an OECD-inspired hybrid methodology for apportioning the source of RSU benefits between countries

CRA has announced its approach (which it indicates is generally informed by that in the OECD Commentary to allocating cross-border stock option benefits) on the allocation of RSU benefits between Canada and a foreign jurisdiction:

The following methodology generally applies [after 2020] in sourcing RSU Benefits between Canada and foreign jurisdictions (the “Hybrid Methodology”):

i. Separate the “in the money” portion of RSU Benefits at the date of grant (the “ITM Portion”) and the portion of RSU Benefits relating to the increase in fair market value of the underlying shares from date of grant to date of vesting (the “FMV Portion”).

ii. The ITM Portion at the date of grant generally pertains to past services, and is sourced to the jurisdiction in which the employment services were rendered in the year in which the RSUs were granted (if multiple jurisdictions, in proportion to the employment period exercised in each jurisdiction in that year).

iii. The FMV Portion generally pertains to services rendered during the vesting period, and is sourced according to the OECD Guidance (that is, in proportion to the employment period exercised in each jurisdiction from date of grant to date of vesting).

For example, an employee, who was resident and exercised his employment in a foreign country (“FC”) up until December 31, 2021 and thereafter was resident in and exercised his employment in Canada, was granted 300 RSUs (to be settled in employer shares) on December 31, 2020, when his employer’s shares were trading at $10. The RSUs vest 1/3 each on December 31 of 2021, 2022, and 2023.

Focusing, for instance, on December 31, 2023, when he receives 100 shares with an FMV of $34 each, the ITM Portion for those shares, of $1,000, is sourced to FC (where his services were performed before the grant date); and the FMV Portion, of $2,400, is sourced 1/3 to FC and 2/3 to Canada (in proportion to the respective periods of employment in each country during the vesting period).

The individual recognizes an employment benefit of $3,400 in 2023 under s. 7(1)(a) (assume no Treaty). However, he is entitled to claim a foreign tax credit under s. 126(1) for any income tax paid to FC on the portion of the employment benefit that is sourced to FC (i.e., $1,800 = $1,000 + $800).

Neal Armstrong. Summary of 20 January 2021 Internal T.I. 2019-0832211I7 under s. 126(1).