CRA finds that the para. (k) SDA exception did not apply where RSUs were granted early in Year 1 and vested 36 months later

Under an RSU plan established by the U.S. public-company parent (“USCo”) of CanCo, awards of RSUs are made to participants, including CanCo employees, each February. The RSUs vest on a pro-rata basis over a three-year period and are payable upon vesting in common shares of USCo, except that USCo may, in its discretion, settle RSUs in cash. CanCo reimburses (including through advance payments) USCo for the value of the shares issued or cash paid out by it under the RSUs.

CRA indicated that the Plan likely was a salary deferral arrangement, given that it seemed to flunk the para. (k) three-year bonus exception. In particular, since the RSUs were granted early in Year One, when they had a positive value (subject only to vesting conditions which do not carry a substantial risk of forfeiture), it was “likely that they would be granted partly in respect of past services rendered to CanCo prior to Year One.” Since the relevant services year was the prior year rather than Year One, vesting in February of Year Four did not meet the three-year test in para. (k).

CRA also indicated that the discretion of USCo to settle in cash meant that s. 7(3)(b) did not prohibit the deduction by CanCo of the recharge payments. It cited Transalta for the proposition that “a discretionary arrangement that does not give employees the right to require that equity-based compensation be paid in the form of shares rather than cash is not an agreement to sell or issue shares for purposes of section 7.” That said, since the plan was an SDA, s. 18(1)(o.1) generally prohibited a deduction.

Neal Armstrong. Summaries of 13 November 2020 Internal T.I. 2020-0864831I7 under s. 248(1) – SDA, s. 7(3)(b) and s. 15(1).