Recharge agreement not required for s. 110(1)(e) deduction (p. 10)
- The amount of the s. 110(1)(e) deduction is equal to the benefit deemed to have been received by the employee under s. 7(1).
- Where a foreign parent has issued non-qualified securities to employees of its Canadian subsidiary, the Canadian subsidiary/ employer would be entitled to a deduction under s. 110(1)(e) even in the absence of a recharge of the costs to it.
Avoidance of s. 7(3)(b) through introducing employer discretion (pp. 12, 14)
- Having regard to 2020-0864831I7 and Transalta, where it was determined that s. 7(3)(b) does not deny the deduction to the Canadian employer where it has discretion as to whether a restricted stock unit (RSU) is settled with shares or cash, it may be desirable to introduce such employer discretion into an incentive plan's terms.
- By not committing to issue shares to the employees as part of the plan, s.. 7, and thus, s. 7(3)(b), will not apply.
- However, since there no longer would be protection under s. 7(3)(a) against salary deferral arrangement (SDA) treatment, care should be taken to safeguard against the application of the SDA rules.
S. 7(3)(b) rather than s. 7(1)(b) applicable to cash source-deduction component of net share settlement of RSUs (p. 12)
- S. 7 share-settled restricted stock units (RSUs) may provide for a tax withholding mechanism by way of a "net share settlement," i.e., by reducing the number of shares otherwise issuable to satisfy the applicable source deductions (subject to the employee's prior consent to proceed on that basis so as to avoid disqualification under the s. 7 rules).
- Such reduction in the number of shares issued to the employee would correspond to an employer cash payment to CRA for the source deduction amount.
- It might have been considered that the share value corresponding to the tax withholding amount was to be treated as cash or quasi-cash resulting effectively from the disposition of rights under s. 7(1)(b) (or (b.1)), so that the corporate tax deduction on such portion would not be prohibited by s. 7(3)(b).
- However, in 2020-0840681E5, CRA indicated that this scenario would be governed by s. 7(3)(b) rather than there being a disposition of rights under s. 7(1)(b).
S 7(3)(b) precludes deduction for in-bound recharge (p. 19)
- The payment of recharges (respecting when a subsidiary reimburses its the parent for the cost of stock options or share awards granted by the parent to the subsidiary's employees) is not considered to result in the conferral of a benefit on the parent.
- In the case of a payment related to a share-based compensation plan, it would generally be treated as non-deductible expenses by virtue of s. 7(3)(b) since, with a deduction, the income of the Canadian taxpayer would be lower than it would have been without the benefit conferred on the employee through the sale or issuance of securities.
S. 7(1)(b.1) was response to Mathieu situation (p.16)
- S. 7(1)(b.1) was added in 2010 to address situations like Mathieu, so as to ensure that benefits from the disposition of options to a non-arm's length party are recognized as employment income pursuant to s. 7.
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