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: Can units credited under a 3-year bonus plan (RSUs) that satisfies the conditions of paragraph (k) of the definition of "salary deferral arrangement" in subsection 248(1) be converted to units under a 6801(d) plan (DSUs) and vice-versa? Can a DSU plan provide for payments to be made in accordance with the permissible distribution events in section 409(A) of the Internal Revenue Code and still comply with the requirements of paragraph 6801(d)?
Position: No. No.
Reasons: The provisions of paragraph (k) of the definition of SDA will not be satisfied where RSUs are converted to DSUs and the provisions of 6801(d) will not be satisfied where DSUs are converted to RSUs. The timing of payments under 409(A) can be earlier than the timing of a factual loss of office or employment required under 6801(d).
Question 2: Salary deferral arrangement rules
Amounts deferred under a salary deferral arrangement (“SDA”) are included in income under paragraph 6(1)(a), by virtue of subsection 6(11), in the year they are earned.
An SDA is defined in subsection 248(1) as being a plan or an arrangement under which any person has a right, in a taxation year, to receive an amount in a subsequent 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 the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages for services rendered by him or her in the year or a preceding taxation year.
There are a number of types of plans that are expressly exempted from being an SDA, these include:
- a three-year bonus plan described in paragraph (k) and
- a prescribed plan under paragraph (l) that is a deferred share unit (“DSU”) plan designed to fit within the parameters of paragraph 6801(d) of the Regulations.
Paragraph (k) requires the bonus to be paid by the end of the third calendar year following the taxation year in which the services to which the bonus relates were rendered. Paragraph 6801(d) requires that payment be made only after a participant’s death, retirement or loss of office or employment.
(a) Conversion of units in a three-year bonus plan to units in a DSU plan
In the past, the CRA has provided rulings where units of a 3-year bonus plan that satisfied the conditions of paragraph (k) in the definition of SDA could be converted, without realizing tax, to units of a DSU plan that satisfied the conditions of paragraph 6801(d) of the Regulations. Why has the CRA discontinued providing such rulings?
When considering the conditions that must be satisfied under paragraph (k) of the definition of SDA and paragraph 6801(d), a conversion of rights under a 3-year bonus plan to rights under a DSU plan, or vice versa, will not satisfy the conditions under either paragraph (k) or 6801(d). In such circumstances, the conversion of rights under what was a 3-year bonus plan could effectively permit the payment of an amount after the third calendar year, and the conversion of rights under what was a DSU plan could result in the payment of an amount prior to death, retirement or termination of employment. Accordingly, we are of the view that the operation of these provisions does not permit the terms of a plan to provide a taxpayer with the flexibility to subsequently convert those rights under a paragraph (k) plan for rights under a paragraph 6801(d) plan or vice-versa. Therefore, the terms of a plan cannot under any circumstance provide a taxpayer with conversion rights.
(b) Interaction between Regulation 6801(d) and section 409A of the Internal Revenue Code
Where a DSU plan includes participants who are subject to income taxation in the United States, the plan must meet the requirements of section 409A of the Internal Revenue Code in addition to those of paragraph 6801(d). Can a DSU plan provide for payments to be made in accordance with the permissible distributions events in section 409A and still comply with the requirements of paragraph 6801(d)?
The timing of payments under section 409A can be earlier than the timing of a factual loss of office or employment required under paragraph 6801(d). For example, section 409A permits payments to be made as a result of a reduction in service to less than 20% of the previous level, a change in control of the employer or an unforeseeable emergency.
Consequently, it is our view that a DSU plan could not provide for the full range of distribution events permitted by section 409A with respect to participants who are subject to both Canadian and U.S. taxation, and still comply with paragraph 6801(d).
(c) Effective date of positions in (a) and (b)
When do these revised positions become effective?
Advance income tax rulings provided in respect of 3-year bonus plans and DSU plans that contained terms permitting conversions or payments described in (a) or (b) above are in the process of being revoked. The revocation will not apply to any units credited on or before the date specified in the revocation letter (including units with unexercised conversion rights on that date) or to additional units credited at any time in respect of those units, for example, dividend equivalents and proportional adjustments due to stock splits or corporate reorganizations.
We understand that some taxpayers established 3-year bonus plans and DSU plans that relied on the positions reflected in these published rulings but did not themselves obtain a ruling. The CRA will continue to apply the positions in these published rulings to any units credited on or before November 24, 2015 (including units with unexercised conversion rights on that date), as well as to additional units credited at any time in respect of those units, for example, dividend equivalents and proportional adjustments due to stock splits or corporate reorganizations.
November 24, 2015
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