20 March 2015 External T.I. 2014-0526941E5 - RSU Plan-Cash Dividend Equivalents

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.

Principal Issues: In an RSU plan where the restricted stock units provide an employee with the right to acquire a share of the employee's employer, the employer would like to pay cash dividend equivalents on the RSUs held by employees. Would the addition of cash dividend equivalents cause problems for purposes of the SDA rules?

Position: The payment of cash dividend equivalents on RSUs held by employees would not be excluded by virtue of paragraphs (a) to (l) of the SDA definition in subsection 248(1) of the Act. It would be a question of fact whether one of the main purposes of adding the cash dividend equivalents to the plan was to postpone the payment of tax.

Reasons: SDA definition in 248(1).

XXXXXXXXXX
2014-052694
G. Allen

March 20, 2015

Dear XXXXXXXXXX:

Re: Restricted Stock Unit ("RSU") Plan – Cash Dividend Equivalents

This is in reply to your email sent to us on April 7, 2014 concerning the tax implications of cash dividend equivalent payments being made under a restricted stock unit (RSU) plan. You describe a situation where an employer grants RSUs to employees that provide employees with the right to be issued an employer share. The RSUs vest over a XXXXXXXXXX year period and the employer would like to add dividend equivalent rights to the RSUs. Dividend equivalent rights would be notionally credited in respect of RSUs when dividends are declared in respect of the underlying shares that reflect the value of the RSU. Dividend equivalent rights would vest at the same time as the corresponding RSU and would be settled in cash ("cash payment") when shares are issued in respect of the vested RSU. The cash payment would be withheld by the employer to satisfy the employer's withholding obligations as a result of shares being issued in respect of a vested RSU.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

In general, an agreement to issue shares as described in section 7 of the Act will not be considered a salary deferral arrangement (SDA) as defined in subsection 248(1). Generally, an RSU that provides an employee with the right to acquire a share of an employer, subject to certain vesting conditions, would be subject to section 7 of the Act.

An SDA is defined, in general, as a plan or arrangement where a taxpayer has a right to receive an amount after a year where the amount is on account of salary or wages for services rendered in the year or a preceding year by the taxpayer and one of the main purposes for the creation of the right is to postpone tax payable. This right includes a right subject to conditions, unless there is a substantial risk that any of the conditions will not be satisfied. Paragraphs (a) to (l), inclusive, of the SDA definition describe certain plans or arrangements that are excluded from being an SDA for purposes of the Act.

The notional crediting of dividend equivalents and subsequent cash payment to an employee in respect of vested dividend equivalents, would not, in our view, be excluded from the SDA definition by virtue of the paragraphs (a) to (l) exclusions. In particular, the exclusion under paragraph (k) of the SDA definition would not apply as a dividend equivalent payment is not in respect of an employee's right to receive a bonus or a payment similar to a bonus. Nor would the dividend equivalent cash payments fall within the parameters of section 7 of the Act. Accordingly, the dividend equivalent cash payments made to an employee in respect of vested RSUs may be a salary deferral arrangement, where one of the main purposes for the creation of the dividend equivalents is to postpone tax payable. Such a determination would be a question of fact.

We trust that our comments will be of assistance.

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch