Income Tax Severed Letters

Principal Issues: 1. Does the CRA’s general position on the non-application of the SDA rules to SAR plans apply where the plan provides for dividend equivalents? 2. Will the payment of dividend equivalents on an annual cash basis, rather than by way of additional units, cause the plan to fall outside of the CRA’s general position on SARs? 3. If so, will the plan be an SDA? 4. Is subsection 6(14) applicable to such an offside plan so as to provide partial relief for the main component of the plan?

Position: 1. Yes, provided that the dividend equivalents are credited in the form of additional units, and the eventual settlement is on the same basis and timeline as the whole of the unit. 2. Yes. 3. Question of fact, but not if the plan is exempt by virtue of the exception for three-year bonus plans in paragraph (k) of the SDA definition. 4. No.

Reasons: 1. The grant of the units is still considered to be solely for future services. 2. The right to an accelerated payment results in the award not being considered solely for future services. 3. A SAR unit with an accelerated dividend equivalent feature can be considered to be a bonus or similar payment and thus excluded from the SDA definition under paragraph (k) if paid within the 3-year window. 4. The dividend equivalent component is not separate enough from the main component to be a plan or arrangement in its own right.