19 October 1998 External T.I. E9821425 - CONSTRUCTIVE RECEIPT, PHANTOM STOCK PLAN

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Would constructive receipt exist where an employee elects not receive property prior to the employee having the right to receive the property.

Position: Generally not.

Reasons: Question of fact but if no right to an amount then how could there be constructive receipt.

XXXXXXXXXX 				982142
M. P. Sarazin
Attention:  XXXXXXXXXX 

October 19, 1998

Dear Sirs:

Re: Constructive Receipt and a Deferred Stock Bonus Plan

This is in reply to your letter of August 17, 1998, wherein you requested an opinion as to whether constructive receipt could be said to exist where the terms of a Deferred Stock Bonus Plan (the "Plan") provide for an accelerated vesting of rights at the election of the participants in the case of a merger or similar transaction and, prior to the finalization of the transaction, the participant so elects to accelerate the vesting.

The determination of whether constructive receipt exists in a specific situation is a question of fact. The Department's general views in respect of the concept of constructive receipt can be found in its response to question 13 at the Revenue Canada Round Table published in the 1984 Conference Report wherein it states:

"The Department considers an amount to have been received by an employee upon the earlier of the date upon which payment is made and the date upon which the employee has constructively received a payment. Constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without being subject to any restriction concerning its use. The position is the same following termination of employment, retirement, or death. An election to receive payment in installments must be made before the amounts become available to the employee."

Similar comments on the principle of constructive receipt, in the context of employee benefit plans, are contained in paragraphs 10 and 11 of IT-502, Employee benefit plans and employee trusts. Of particular note is the first sentence in paragraph 10 which states "Where the terms of an employee benefit plan provide that an employee entitled to benefits thereunder may elect to defer the receipt of a lump-sum amount payable on death, retirement or other termination of employment, it is the Department's view that the amount so deferred would normally be taxed in the year of actual receipt provided the election to defer is made prior to the termination of employment."

It is our opinion that the principle recounted above would be the same with regards to rights to receive shares under a deferred stock bonus plan that is an employee benefit plan (and not a salary deferral arrangement). In general, a plan will provide for payment at a certain point in time or upon the occurrence of certain events. Consequently, where an employee has a right to determine when an amount becomes payable to him or her and, in advance of when the amount would otherwise become available or payable chooses a different payment schedule, the employee will not normally have an income inclusion either at the time the new payment schedule is chosen or at the time the amount would otherwise become available or payable, but would be taxed in the year of actual receipt.

We trust these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch