Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] What are the tax consequences (to the employer and the employees) of a plan or arrangement that the employer wants to put in place for the benefit of employees?
Position: None
Reasons: Issue that requires a review of all the facts including relevant agreements.
XXXXXXXXXX 2004-008556
A. St-Amour, CA
October 19, 2004
Dear Madam,
Subject: Share appreciation rights scheme
This is in response to your letter of July 14, 2004, asking about the tax consequences of a plan or arrangement that an employer wishes to put in place for the benefit of its employees.
In your letter, you stated that the plan or arrangement will provide that the phantom shares will have a zero value at the time they are granted to employees. Employees will be entitled to receive the increased value of the phantom shares only upon termination of employment. However, you indicated that immediately prior to that time, the employee will have the option of either cashing out the entire amount or having the employer acquire an annuity contract under which the employee will be the annuitant.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Our Comments:
The situation described in your letter appears to us to be an actual situation involving taxpayers. Given the diversity and the large number of plans and arrangements that provide for various types of payments to employees in a variety of circumstances, each arrangement brought to our attention is always judged on its own facts. For this reason, we are not in a position to provide the tax consequences to the employer and employee in the situation you have outlined. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings. We can, however, offer the following general comments, which we hope you will find useful. These comments may not apply to your particular situation in certain circumstances.
Whether a plan or arrangement is a salary deferral arrangement ("SDA") within the meaning of subsection 248(1) can only be determined after a review of all the facts, including the related agreements. A SDA is defined as follows:
…in respect of a taxpayer, means a plan or arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under this Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year (including such a right that is subject to one or more conditions unless there is a substantial risk that any one of those conditions will not be satisfied), but does not include…
In our view, where a plan or arrangement is an SDA, it is not necessary for an amount to be received or deemed to be received for an amount to be included in a taxpayer's income. Simply, it is sufficient that an agreement provides an arrangement for deferring the payment of tax otherwise payable at that time on an amount in respect of salary or wages for services rendered in the year or a preceding year. However, the definition of a SDA in subsection 248(1) specifically provides for certain exclusions. In addition, as you noted in your letter, there are other exclusions as well, for example, the position of the Canada Revenue Agency ("CRA") as stated in Question 26 of the 1988 Canadian Tax Foundation Conference. This position states that a stock appreciation rights plan, which normally provides that an employee is only entitled to receive the increase in value of the phantom shares granted to the employee, is not an SDA because at the time the phantom shares are granted to the employee, the amount to be paid is not dependent on the value of the services rendered but only on the value of the services to be rendered.
We wish to bring to your attention that our interpretation of the term "right … to receive" in the definition of SDA is very broad and therefore includes any plan or arrangement that may give a taxpayer the right to receive amounts in the future. For example, where at maturity of a stock appreciation rights plan, the plan provides for a vested right to receive the increase in value of the phantom shares (either immediately through a lump sum payment or by payments deferred over a number of years through the purchase of an annuity), it is our view that the plan could at that time become a SDA if the plan beneficiary elects to defer the amount, because there will be the creation of a "right to receive an amount after the year". In our view, the right to receive the appreciation may represent an amount accruing to the beneficiary as salary or wages for services rendered in the year or a preceding taxation year.
On the other hand, the determination of whether the primary purpose of creating the right will be to defer the payment of taxes otherwise payable can only be made at the time the plan matures (e.g., at the time the employee leaves employment). In general, it can be assumed that, except in special circumstances, where a portion of an employee's salary or wages is deferred pursuant to an agreement, one of the primary purposes is to delay the payment of taxes.
In conclusion, we are of the view that the fact that a plan or arrangement gives an employee the choice of receiving the appreciation in value of shares in a lump sum or in instalments (via the purchase of an annuity) does not, in and of itself, preclude the plan or arrangement from otherwise being an SDA, at the time the election is made.
An expense incurred or made under a SDA is not deductible pursuant to paragraph 18(1)(o.1) except as specifically provided in paragraphs 20(1)(oo) and (pp).
These comments are not advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on the CRA. However, we hope you find them of assistance. If you have any questions, please do not hesitate to contact us.
Best regards,
Ghislain Martineau
Manager
Financing and Plans Section
Financing and Plans Division
Policy and Planning Branch
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