15 April 2003 External T.I. 2003-0001905 - RESTRICTED STOCK UNITS SDA RULES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will we consider a restricted share unit (RSU) plan to be a salary deferral arrangement (SDA)?

Position:

Probably an SDA since the FMV of the share underlying the RSU is paid to the employee rather than an amount representing the increase in value from the grant date to the cash out date. However, it will be a question of fact which should be the subject of an Advance Ruling request.

Reasons: General information provided.

2003-000190
XXXXXXXXXX Renée Shields
(613) 948-5273
April 15, 2003

Dear XXXXXXXXXX:

Re: Employee incentive plan and the salary deferral arrangement (SDA) rules

This is in response to your letter of February 6, 2003 inquiring whether an SDA would be created by the terms of the specific employee incentive plan described in your correspondence.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

In general terms, the employee incentive plan you describe involves awarding restricted stock units (RSUs) to employees. The RSUs will vest 50% on the third anniversary and 50% on the seventh anniversary of the grant. On those dates, subject to certain terms and conditions, the employee will receive a cash payment in respect of each vested RSU which is equal to the closing price of the employer's common shares on the Toronto Stock Exchange on the vesting date.

As was stated in the Round Table Response to Question 26 at the 1988 Canadian Tax Foundation Conference, it is the CCRA's general view that where, on a specific date, the value of the RSU on that date will be paid to the employee, the plan will be considered an SDA. The CCRA has observed that where the amount paid to an employee is based on the full value of the specified share, the RSUs have generally been granted in respect of the employee's past services.

An arrangement will normally not be an SDA where the cash payment is equal to the difference between the fair market value (FMV) of the underlying share on the payment date and the FMV on the grant date. In such a situation, since the amount to be paid to the employee is based on the future increase, if any, in the value of the Employer's shares, the amount cannot relate to the value of services rendered but can only relate to the value of services to be rendered. This position is reflected in ATR-45, "Share Appreciation Rights Plan."

The determination of whether a specific plan would constitute an SDA is a question of fact. If you feel that the general views expressed above should not apply to a specific proposed employee incentive plan, we recommend that you submit a request for an advance income tax ruling.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch