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: Whether penalties under subsection 162(7) would be imposed for an employer's failure to file an information return and notify employees with respect to non-qualified securities, 50% of the benefits from which cannot be deducted by the employee under paragraph 110(1)(d).
Position: Part of larger issue under consideration by Department of Finance.
Reasons: Given the policy objectives underlying the new employee stock options rules, the question raises the larger issue of whether securities to be sold or issued under an agreement that would never entitle the recipient employee to a deduction under paragraph 110(1)(d) should even reduce, or count towards, the employee’s $200,000 annual vesting limit under these new rules.
2022 International Fiscal Association Conference
Question #11 - Employee Equity Incentive Notice Requirements Under New Non-Qualified Securities Rules
Under the recent amendments to the employee stock options rules in section 110, if a non-resident corporation agrees to issue securities to its Canadian employees or employees of a Canadian subsidiary, the new non-qualified securities rules in section 110 will generally apply if the issuer is a specified person because the $500 million gross revenue threshold is exceeded.
Under these new rules, the employee deduction under paragraph 110(1)(d) is subject to the $200,000 annual vesting limit and in certain cases an issuer may be eligible for a deduction under paragraph 110(1)(e) in respect of the non-deductible portion of the benefit realized by the employee. These rules also contain employee and Minister of National Revenue notice requirements in subsection 110(1.9).
“If a security to be issued or sold under an agreement between an employee and a qualifying person is a non-qualified security, the employer of the employee shall (a) notify the employee…and (b) notify the Minister…”
If the employer does not comply with the notice requirements, then no employer deduction can be claimed because of subparagraph 110(1)(e)(vi).
If a non-resident corporation (or any other specified person) issues restricted stock units to an employee that can only be settled for shares, and therefore are effectively treated as section 7 stock options with no exercise price, and the shares to be issued are non-qualified securities, one could argue that in policy terms, the non-resident corporation should not have to comply with the notice requirements in subsection 110(1.9) because no deduction can be claimed under paragraph 110(1)(e). However if the non-resident corporation does not comply with the notice requirements, there is arguably a risk of penalty under the general non-compliance provision in subsection 162(7).
The question: Will the CRA provide administrative relief to the subsection 110(1.9) notice requirements if no amount is deductible under 110(1)(d) or (e)?
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
In the interim, employers can avoid this problem by designating securities that do not give rise to a paragraph 110(1)(d) deduction as non-qualified securities under subsection 110(1.4). This would exclude the securities from the annual vesting limit with respect to any options that are subsequently issued to the employee with the same vesting year. However, pursuant to paragraph (b) in variable D of the formula in subsection 110(1.31), such designation must be made prior to the issuance of the subsequent options.
Kah Foo Koh
May 17, 2022
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