Overview of SDA rules (p. 2)
If an arrangement constitutes an SDA, the following consequences result:
- Subsection 6(11) deems an amount equal to the deferred amount, for the purposes of paragraph 6(1)(a), to have been received by the taxpayer as a benefit in the year. Thus, the deferred amount is required to be taxed immediately rather than upon actual receipt in the subsequent year.
- Subsection 6(12) applies to the interest element accruing on a deferred amount by deeming "any interest or other additional amount that accrued . . . to the end of the year" to be a deferred amount for purposes of subsection 6(11).
- There is no further taxation to the employee in the year the deferred amount is received. In the event the deferred amount is forfeited, paragraph 8(1)(o) provides the taxpayer with a deduction in respect of the deferred amount previously included in the taxpayer's income in the year of forfeiture.
- Paragraph 20(1)(oo) permits the employer a deduction for deferred amounts included in the taxpayer's income under paragraph 6(1)(a); in other words, the employer deduction is timed to the employee's taxation.
Attributes of a “good” SAR plan (p. 6)
[A] SAR plan with the following attributes would not constitute an SDA:
- each SAR has a nil value at the date of grant;
- each SAR entitles the holder to receive the appreciation in value of one share of the capital stock of the company from the date of grant of the SAR to the date of payment; and
- payment is to be made at a fixed future date, with no ability for the holder to obtain payment at an earlier date. This restriction should eliminate any constructive receipt concern as well as SDA risk.
Need to avoid constructive receipt under a phantom plan (p. 4)
The CRA … interprets the word “received” in the ITA as referring to amounts constructively received as well as actually received…. [1984 CTF Roundtable, Q.13] ...
[E]ven if a particular incentive plan fits within an exception to the SDA definition, if the employee has the ability to request payment or the amount is available for the employee's use prior to the date normally fixed for payment, the CRA could require the employee to include the amount in income in a year earlier than the year in which payment is actually received. Accordingly, as a general matter, it is advisable to ensure that a participant in a phantom equity incentive plan is not entitled to demand payment at the time of their own choosing but rather the timing of the payment is either elected at the outset, or determined by some external factor outside the control of the participant.
Issue of when service year falls (p. 5)
A plan that provides for payment to be made on the third anniversary of the award date (as opposed to the service year) may actually fall outside the three year period allowed in paragraph (k) of the SDA definition in situations where the service year pre-dates the award date. The CRA is attuned to these distinctions. As a practical matter, some companies view the RSU as a bonus in respect of services rendered in the prior year, while others take the view that the RSU is granted in respect of services rendered in the year in which the grant occurs and the public company disclosure may support either position.
Ability to convert bonus plan into RSUs prior to payable date (p. 5)
Some RSU plans allow an employee to convert a cash based bonus payment into RSUs, which can be attractive to the employee because it allows them to participate in the future growth of the corporation and its share value. Where a company's equity plan includes such a conversion right, it is important to ensure that the employee exercises this conversion right in advance of the date the bonus becomes payable in order to minimize constructive receipt concerns.
Adjusting RSUs for dividend equivalents (p. 6)
Very generally, when dividends are declared and paid on the underlying shares, holders of RSUs are entitled to receive additional RSUs having a value equal to the value of the cash dividends paid on the corresponding shares. It has generally been accepted that compensating RSU holders in this manner for dividends paid on the shares should not be considered to cause the existing RSUs to be off-side the 3 year rule and contravene the SDA rules.
Avoiding 3-year limitation by issuing treasury shares under RSU (p. 18)
In situations where the RSU plan provides for the issuance of new shares by the corporation to the employee at a future date, (as opposed to satisfying the RSUs with shares acquired on the market or from a third party) section 7 should apply to the grant of RSUs. Accordingly, the grant of such an RSU would not give rise to any immediate tax consequence to the employee and it is only upon the issuance of the shares to the employee in settlement of the RSUs that the tax liability will arise. The fair market value of the shares issued to the employee will be income from employment to the employee in the year of issue. Similar to the more immediate issuance of shares for a bonus payment, no paragraph 110(1)(d) deduction would be available as the employee does not pay any amount for the shares and the requirements for the deduction in paragraph 110(1)(d) will not have been met. An important benefit of issuing RSUs which settle only in newly issued shares is the ability to extend the settlement date of the RSUs beyond the three year limitation which would otherwise apply if the RSUs could be settled in cash or market purchased shares in order to avoid the application of the SDA rules.
Need to avoid constructive receipt under a phantom plan (p. 4)
The CRA … interprets the word “received” in the ITA as referring to amounts constructively received as well as actually received…. [1984 CTF Roundtable, Q.13] ...
[E]ven if a particular incentive plan fits within an exception to the SDA definition, if the employee has the ability to request payment or the amount is available for the employee's use prior to the date normally fixed for payment, the CRA could require the employee to include the amount in income in a year earlier than the year in which payment is actually received. Accordingly, as a general matter, it is advisable to ensure that a participant in a phantom equity incentive plan is not entitled to demand payment at the time of their own choosing but rather the timing of the payment is either elected at the outset, or determined by some external factor outside the control of the participant.
Timing of election under DSU and dividend equivalents (p. 7)
In order to avoid the risk of constructive receipt, it is generally advised that the election to either take the cash or compensation in the form of DSUs should be made prior to the date that the annual bonus or the director fees, as the case may be, become payable. [fn 10: 2014-0535951E5]…
DSU plans may also be structured to provide for dividend equivalents in the same manner as described above for RSUs. …
As the stock price approaches the peak of the cycle, DSUs might actually provide an incentive for top executives to leave as it is only on employment termination that the value of the DSUs can be realized.
No withholding on s. 7(1.1) exercise (p.14)
[O]n the exercise of a CCPC option that complies with and is eligible for the deferral under subsection 7(1.1), no obligation to withhold is imposed on the employer. [fn 29: Paragraph 153(1.01)(b). See… 2017-0709811I7 … .]
Retaining s. 110(1)(d) deduction following exercise price reduction (p. 15)
The paragraph 110(1)(d) deduction can also be preserved if, rather than an exchange of options, the existing stock option is amended to reduce the exercise price. The effect of subsections 110(1.7) and (1.8) is to deem an exercise price reduction to have been effected by way of an exchange, thus ensuring that the employee remains eligible to claim the paragraph 110(1)(d) deduction.
Employee savings plan with company match (pp. 19-20)
[S]ome corporations will match the amounts contributed by their employees through payroll deductions….
[W]here the employer matching contributions are used to acquire shares from treasury, deductibility for the corporate employer would likely be denied pursuant to paragraph 7(3)(b). However, where the employee savings plan is structured to provide for shares to be acquired on the market, the employer should generally be entitled to claim a deduction in respect of its cash contributions to the plan.
The employee would be taxed currently on both the employee's payroll deductions as well as the employer matching contributions.
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