7 March 2022 External T.I. 2021-0895571E5 - Clarification of Comments in 2020-086483

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: Clarification of prior comments in CRA technical interpretation 2020-0864831I7 regarding a grant of restricted share units with intrinsic value at the date of grant to an employee early in the taxation year of the employer and the availability of the three year bonus exception in paragraph (k) of the definition of salary deferral arrangement.

Position: Question of fact; clarification provided.

Reasons: There is a rebuttable presumption that restricted share units with intrinsic value at the date of grant are in respect of past services rendered prior to that date. Regard will be given to any relevant documentation or agreement in ascertaining when the services were rendered. However, such documentation or agreement, in and of itself, would not be determinative. The fiscal year of the hypothetical employer in technical interpretation 2020-0864831I7 coincided with the calendar year.

XXXXXXXXXX									2021-089557
										Kah Foo, Koh

March 7, 2022

Dear XXXXXXXXXX:

Re: Clarification of 2020-0864831I7

This is in reply to your inquiries from April and May 2021 and other correspondence we have received requesting clarification of certain comments made in our technical interpretation dated November 30, 2020 to the Tax Avoidance Division (CRA Document 2020-0864831I7) regarding the application of paragraph (k) of the definition of a “salary deferral arrangement” (an “SDA”) in subsection 248(1). (footnote 1)

Background

In CRA Document 2020-0864831I7, we commented on whether a particular hypothetical equity award plan (the “Plan”) under which full-value restricted share units (“RSUs”) (i.e., RSUs with intrinsic value at the date of grant) was an SDA. Under the Plan, employees of a Canadian corporation (“Canco”) would be granted RSUs of Canco’s parent in February of each year. These RSUs would vest on a pro-rata basis over a three-year period and would be payable immediately upon vesting. As a result, if an award of RSUs was granted in Year 1 (the “Grant Year”), 1/3rd of those RSUs would vest in February of Year 2, a further 1/3rd would vest in February of Year 3 and the final 1/3rd would vest in February of Year 4.

We reiterated the CRA’s longstanding view that where the amount to be paid to an employee under an RSU plan is based on the full value of the relevant shares, the RSUs have generally been granted in respect of the employee’s past services and the arrangement will be considered an SDA, unless section 7 or one of the specific exceptions in the SDA definition applies. We noted, however, that this presumption may be rebutted if all the facts and circumstances established that the grant was wholly unrelated to past services. We then concluded that it was likely that the RSUs would be granted partly in respect of past services rendered to Canco prior to the Grant Year. If the RSUs were settled in the third year after the Grant Year, this would be more than three years after the end of the year in which the services had been rendered, with the result that the paragraph (k) exception would not apply and the Plan would be an SDA.

Request for Clarification

We have been asked about the circumstances under which the CRA would consider a grant of full-value RSUs to not be in respect of services rendered by the grantee employee prior to the grant date. We have also been provided with a set of hypothetical scenarios that ostensibly rebut the presumption that a grant of full-value RSUs would be in respect of past services.

It has also been noted that equity award plans under which employees are awarded RSUs with a three-year vesting period have generally been accepted by the CRA as being outside the ambit of the SDA rules, even if the RSUs are not governed by section 7 of the Act. In essence, we have been asked if the comments in CRA Document 2020-0864831I7 signified a change in the CRA’s position regarding the paragraph (k) exception to the SDA definition.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax 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 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

As a preliminary matter, it should be noted that CRA Document 2020-0864831I7 omitted the key factual assumption that Canco’s fiscal year was also a calendar year. Consequently, any grant made under the Plan in February would occur early in Canco’s new fiscal year. In tandem with our general and longstanding presumption that a grant of full-value RSUs are in respect of the grantee’s past services, the relatively short passage of time between Canco’s fiscal year end and the Grant Date increased the likelihood that the grant of RSUs would be in respect of past services rendered by the grantee in the year prior to the Grant Year.

As we had assumed in CRA Document 2020-0864831I7 that the hypothetical Canco’s fiscal year was a calendar year, we did not intend to change our longstanding position regarding deferred bonuses (such as full-value RSUs) payable by a corporate employer with an off-calendar fiscal year. Our view continues to be that such bonuses will be excluded from the SDA definition by virtue of paragraph (k) if the arrangement provides that the bonus will be paid before the end of the third calendar year following the calendar year containing the end of the corporate fiscal year in which the services were rendered. For example, if a deferred bonus is granted in respect of services rendered in a corporate fiscal year ending on November 30, 2021, it would have to be paid on or before December 31, 2024 in order to satisfy the paragraph (k) exception. This applies regardless of whether the grant is made in December 2021 or early in 2022.

Since the service period, the employer’s fiscal year-end date and the grant date are all important variables in ascertaining the application of the SDA rules, it cannot simply be assumed as a matter of fact that a grant of full-value RSUs that vest within three years from the end of the Grant Year will automatically fall within the paragraph (k) exception to the SDA definition in subsection 248(1).

We have also been asked to identify circumstances in which a grant of full-value RSUs might be considered to be solely in respect of services to be rendered after the grant date (i.e., future services only). We acknowledge that there are certainly circumstances in which this might be the case. For example, it is not inconceivable that a signing bonus for a new employee would be solely in respect of services to be rendered in the year in which the relevant employment agreement was executed. A similar conclusion may also apply to a bonus awarded to an existing employee for accepting an overseas assignment. Ultimately, it is a question of fact as to the specific time periods during which an employee has rendered, or will render, the services underlying a grant of full-value RSUs. It is difficult to provide more definitive and precise guidance and examples on this determination due to the highly factual nature of the inquiry.

Even if a grant of full-value RSUs was related to past services, it is also still possible that those past services were rendered solely in the Grant Year. Full-value RSUs awarded to an employee might be considered to relate solely to services rendered in the Grant Year if, for example, the facts and documents established that the grant was made in recognition of a performance accomplishment (such as a large sale) that occurred earlier in the Grant Year. Again, an examination of the specific circumstances in which the award of full-value RSUs was made and the details of the relevant incentive plan would be required.

It should be noted, however, that while plan documents and agreements will be relevant in determining the service periods to which a grant of full-value RSUs is attributable, such documentation will not be determinative if there is other evidence supporting the conclusion that the grant was made in respect of services rendered in a calendar year prior to the Grant Year. We would of course be pleased to consider the application of the SDA rules to a grant made under a particular RSU plan in the context of an advance income tax ruling request.

We trust our comments will be of assistance.

Yours truly,

Helen Ferrigan
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 All legislative references in this letter are to the Income Tax Act (Canada).