Relating awards to non-qualifying services (pp.1587-1588)
The inquiry is thus to determine whether any benefits to be provided by the trust relate to a single service that is non-qualifying service.
Typically, "services" are considered as relating to awards being granted by the employer, as opposed to particular assets held in a trust. For example, if an employee is granted a restricted share unit ("RSU") award that vests and pay our in three years, and the award is for future (as opposed to pre-grant) services, the services rendered during the period from the grant of an award to the vesting of an award are generally treated as the "services" to which the award relates. This may not necessarily correspond to any benefits to be distributed for that award by a trust.
Determining when services are non-qualifying (p. 1588)
If so, then the services rendered for an award may be partly "qualifying" and partly non-qualifying services. For example, an employee may be granted a new three-year vesting RSU award in the fourth year of his or her Canadian residency. The first two years of service following the date of grant may represent qualifying services (as they are within the 60-month holiday), but the portion of the benefit related to the period after the 60th month of Canadian residency is presumably attributable to a non-qualifying service, and would thus disqualify the trust from this exemption. On the other hand, if the award is to be viewed for services rendered in the year prior to the year of grant (with the three-year vesting period being merely a deferral), then the whole award should be treated as relating to qualifying services, even if the vesting occurs after the 60th month of Canadian residency.
Predominantly single country requirement (p.1586)
Paragraph (g) of the definition of "exempt foreign trust" in subsection 94(1) of the Act provides an exemption for trusts operated exclusively for the purpose of administering or providing pension benefits that are primarily in respect of services rendered in the particular country (where the trust is resident) by non-resident persons. Such an exemption may cover many U.S. qualified plans (such as 401(k) plans) that are primarily for the benefit of U.S. employees. However, it may not cover many U.K. retirement plans that are established in Jersey or Guernsey for legitimate U.K. tax reasons, Further, it may also not cover, for example, French retirement plans of French multinational companies, where the French employees represent only 49% of the total worldwide employee population.
Mobile employees/deficits and surpluses (p. 1589)
In many cases, however, mobile employees are providing services for the benefit of different employers during their career. They may be granted awards while under the direction and control of a Canadian employer, and then be transferred to the direction and control of a non-Canadian-related entity, Presumably, only the portion of an award related to services rendered to the Canadian entity, as determined under the sourcing principles discussed above, would form part of the "resident portion".
Even with respect to employees who only provide services to one (Canadian) entity, the challenge here is that specific contributions to the trust are not necessarily traceable to particular assets of the trust, not to particular (Canadian employee) beneficiaries of the trust. Some trusts may have surplus funding, so that the contributions exveed the eventual distributions to beneficiaries. Other trusts may have deficit funding, so that the contributions are vastly below what is required to fund the distributions to beneficiaries, Therefore, if we merely determined a "resident portion" by looking at the beneficial interests of the Canadian employee versus other beneficiaries at any particular time, such ratio may not reflect the actual contributions that have gone into the trust.
Valuation discount where risk of forfeiture (p. 1589)
As well, are all beneficial interests equal? If there are non-Canadian employee participants whose interest has vested, and is just awaiting distribution, and there are Canadian employee participants who have just received the grants, and who still have a significant risk of forfeiture, should there not be a discount for the risk that the Canadian employees may not receive a full distribution on their awards.
Indirect provision of benefits for employment services provided to Canadian employees (p.1585)
As discussed, the NRT rules only apply if there is a resident contributor, That would certainly be the case where a Canadian subsidiary of a foreign parent has made contributions to a global EBP trust for the benefit of its employees. However, the rules extend the concept to (Canadian) employers where transfers are made (by any person) to the trust with the purpose or effect that may be reasonably considered to be to provide benefits (where immediate or future, absolute or contingent, or conditional or discretionary) for services rendered as an employee to a Canadian employer. For this purpose, the Canadian employer does not even have to bear any costs of the contributions to the trust (for example, through a reimbursement of the transferor under a recharge agreement).
Foreign employee seconded to Canada (p.1585)
Where the employee is seconded or transferred to the direction and control of the Canadian company; in such a case, it makes sense to treat the individual as providing services as an employee of the Canadian entity, even if he or she is still formally employed by, or even continues to be on the payroll of, the foreign entity.[f.n. 1...CRA...has adopted the "direction and control" test in other contexts... .]
In determining whether the actions of the employee trigger a permanent establishment in Canada for the foreign entity, or whether the costs borne by the Canadian entity through the recharge constitute "remuneration" for purposes of exempting the non-resident employee from Canadian tax under the personal (dependent) services provision (generally, Article 15) of a tax treaty.
Determining relationships between transfer rule and Canadian employee benefits (p.1586)
The deeming provision of paragraph 94(2)(k.1) of the Act requires a relationship between the transfers made (by any person) to a trust and the benefits to be provided to an employee of a Canadian person.
Say that a foreign parent has made contributions to a global EBP trust in 2010, at a time in which there were no awards made to employees of any Canadian entity. In 2013, an award is made to an employee of a Canadian entity, with the possibility of such award being satisfied by the assets of the trust, some of which may derive from assets contributed in 2010. As there was a contingent possibility in 2010 that the contributions may be used to satisfy awards to Canadian employees, does the Canadian employer become a resident contributor in 2010?
Allocation where treasury share funding obligation (p.1586)
Another factor complicating the analysis is that many global deferred compensation plans maintain a great deal of flexibility as to how awards will be settled, For example, many U.K. plans provide the foreign parent with the flexibility to settle any award through either newly issued or treasury shares delivered directly by the parent to the employee, or by shares (usually, but not always, acquired in the market) held by a trust, or by cash paid by the local employer entity.
For example, if the current value of all awards to a firm's global employees is $1,000,000, with say, the Canadian employees representing 1% of the total global employees at a particular time, and the trust only holds assets worth $200,000, who is to say which portion of that $200.000 will be used to satisfy the Canadian awards, if at all.
Distinguishing trust from agency (p.1584)
The NRT rules only apply to non-resident trusts. They thus presumably do not apply to other relationships, such as agency or nominee arrangements.
One possible test for distinguishing the two types of arrangements is the notion that "trusts" involve employer contributions whereas "agencies" involve employee contributions.
Hybrid trust/ custodial plan (p.1584)
Many UK sharesave plans have both a share purchase plan component (where the employee acquires ("investment" or "participating") shares on a monthly basis through a custodian, and receive dividends and voting rights immediately, with the ability of withdrawing such shares at any time), and a matching share component (where shares, together with dividend and voting rights, are only transferred to the employee at a later vesting date). …
It may be reasonable to view the custodian's holding of investment shares as an agency or bare nominee arrangement, and its holding of matching shares as more closely resembling that of a trust.
Jurisdiction without trust law (p.1585)
All of these issues are compounded when the foreign parent company, as well as the custodian, are residing in a jurisdiction that does not share the same concept of "trust".
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