Salary Deferral Arrangements

See Also

The Queen v. V&R Enterprises Ltd., 79 DTC 5399, [1979] CTC 465 (FCTD)

In finding (in the context of what now are ss.18(1)(a) and 78(3)) that accrued remuneration was not a "bonus" Grant D.J. stated (p. 5400):

"A bonus is described in the Shorter Oxford English Dictionary as: 'a boon or a gift over and above what is normally due; a premium for services rendered or expected; an extra dividend paid out of surplus profits.'No part of such salary so fixed was in any sense a gift as the services were rendered each year on the understanding that such procedure will be followed."

Words and Phrases
bonus
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing valid year-end accrual of remuneration 90

Administrative Policy

14 May 2019 External T.I. 2017-0737571E5 - SAR plan with dividend equivalents

SDA exception for SAR plans unavailable where dividend equivalents are paid in cash

The share appreciation rights (SAR) plan of an employer corporation provides for dividend equivalents on SAR units that are satisfied by way of cash payments made annually to employee participants. If the current vesting period for a SAR unit granted under the plan is extended from three years to five years, would this engage the salary deferral arrangement (SDA) rules? CRA responded:

[A] unit issued under a SAR plan that entitles the employee to receive only the increase in value of the underlying share from the date the unit is granted to the date it is redeemed will generally not be considered to be an SDA. …This general position also extends to SAR plans that include a dividend equivalent feature … provided that (i) the dividend equivalents are credited in the form of additional units, and (ii) the eventual settlement in respect of the dividend equivalents is on the same basis and timeline as provided for under the plan for the whole unit.

If a SAR plan provides for dividend equivalents to be paid in cash on an accelerated basis (such as annually or after each dividend payment date) without the whole of the corresponding unit being redeemed, the CRA general position will cease to apply with effect from the time that the employee becomes entitled to receive the first such dividend equivalent payment. This is because, in such a case, the units would not be considered to be solely for future services.

CRA went on to indicate that the plan would qualify under the para. (k) exception:

where (i) the units granted constitute a “right to receive a bonus or similar payment” (which we would generally expect to be the case for a SAR plan), and (ii) the dividend equivalent component is redeemed within the same three-year window that applies to the main component of the unit … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(14) dividend equivalent clause is not severable from balance of SAR plan 156

11 January 2019 External T.I. 2018-0740741E5 - Taxation of supplemental retirement plans

additional benefit features of a supplemental pension plan treated as SDAs
Supplemental Plan

In addition to a defined contribution registered pension plan (“RPP”) under which the employer contributes a fixed percentage of each member’s pensionable earnings and also matches employee voluntary contributions, the employer also provides an unfunded and unsecured plan for RPP members whose contributions are capped by the RPP limits. Under each Supplemental Plan, notional contributions (and interest) are allocated to the member’s account based on the same contribution rate as the RPP less the actual employer contributions made to the RPP.

The plan also allows the member to elect to reduce or forego future bonus entitlements and accrued vacation pay entitlements for additional allocations (of equal amounts) to the member’s account. At the earliest of termination of employment, retirement or death, the member is entitled to benefits equal to their account balance as a lump sum, or annual instalments over up to 10 years.

Retirement Allowance Plan

Under the Retirement Allowance Plan, notional contributions are allocated each month to an executive’s account of 7% of the executive’s monthly remuneration, plus a further one-time $125,000 notional contribution at the start of the plan.

The executive, at the earlier of termination of employment or attaining 65, is entitled to the account balance as a lump sum, or in 10 annual instalments – and also (outside of the plan) to an amount equalling 24 months’ base salary plus an amount in lieu of pension and automobile benefits.

SDA rules

Do the SDA rules apply? CRA responded:

Where a [supplemental pension] plan provides benefits that are not reasonable superannuation or pension benefits, we are of the view that one of the main purposes is to postpone tax payable and an SDA will exist.

The CRA generally takes the position that supplementary pension benefits will be considered reasonable if:

  • the terms of the plan are substantially the same as those of the RPP that applies to the same beneficiaries to whom the plan applies; and
  • the benefits that can be paid under the plan are the same as the benefits that would have been paid under the RPP but for the defined benefit or money purchase limit. …

[T]he basic contribution component of the Supplemental Plan appears to be largely consistent with the CRA’s general position outlined above. … However, the bonus contribution and vacation pay contribution components of the Supplemental Plan, as well as the Retirement Allowance Plan, appear to be primarily motivated by tax deferral considerations …[and] would most likely constitute an SDA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(14) - Paragraph 6(14)(a) additional benefit features of supplemental pension plan treated as SDAs separate from qualifying base component of plan 266

2015 Ruling 2014-0546131R3 F - SAR-type Plan

phantom stock plan for a Canadian wholly-owned subsidiary of a non-resident company

Corporation 1, which is wholly-owned by Parentco (a société anonyme, i.e., SA or public limited company), established two phantom stock plans (Plans 1 and 2) for five key employees under which, on the occurrence of a Triggering Event, an employee will receive a cash payment equal to the excess of the Market Value of Shares of Corporation at the date of the Triggering Event over their initial Market Value on grant. Except where the Triggering Event is one which discloses a value (namely, an acquisition of control, amalgamation, business sale or IPO), the Market Value was computed as nine times the average adjusted EBITDA for the previous two fiscal years plus working capital, as adjusted, and minus long-term debt. In addition to the “Material Change” Triggering Events referenced mostly noted above, a Triggering Event references the employee’s death, departure or retirement, and termination of employment for any reason other than termination for a listed delict such as theft.

Ruling respecting the phantom plans not being a salary deferral arrangement (with qualifier that this is a question of fact).

14 March 2017 External T.I. 2016-0627311E5 F - Deduction of contribution to an IPP or RCA

a mooted RCA providing supplementary pension benefits must be similar to the IPP which it supplements

Not knowing of the existence of an IPP respecting the same employee, the RCA actuary did not take into account the amount of contributions (based on the same past and current service years) made by the corporation to the IPP for the employee's benefit in order to establish the RCA contributions. Are the corporation's contribution to the RCA and IPP unreasonable and non-deductible, and would this change if the employee is a shareholder? CRA responded:

In the situation where the contributions to an IPP meet all the conditions for being deductible under paragraph 20(1)(q), the fact that the employer also pays money to a non-registered plan without taking into account the contributions paid by the employer to the IPP for the same employee should not, in and of itself, result in the IPP contributions being unreasonable.

Where a plan provides for benefits that are not reasonable, we are of the view that it is a SDA under subsection 248(1). …

In general, supplementary pension benefits are considered to be reasonable when the terms of the supplemental pension plan are substantially the same as those of the IPP. In addition, benefits that may be paid under the plan must provide the employee with a supplement for the benefits that would be provided under the IPP but for the defined benefit limit. ...

[I]n the situation where a plan was created for the benefit of an employee who is a shareholder or a related party, the CRA would apply the same criteria as those set out above.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(q) non-deductibility if supplementary benefits do not merely proportionately top-up IPP benefits 83

2013 Ruling 2012-0435221R3 - CCPC SAR Plan

SAR Plan for CCPC employees with FMV based on weighted multi-year EBITDA multiples and potential cash-outs before termination

underline;">: Current Plan. Outside board members and officers of a of a Canadian-controlled private corporation (the "Company") hold "SAR Units" which entitle them on cessation of employment otherwise than for cause or on a "Change of Control" (as defined) or termination of the SAR Plan to receive a payment based on the number of their units and the imputed increase in value of each unit from its grant date. The FMV of the Company for purposes of this computation is based on a weighted average of multiples of trailing EBITDA (excluding unusual items) for three trailing periods, plus cash and cumulative corporate distributions, and minus debt. Amounts paid re an employee of a particular subsidiary are charged back to that sub.

Proposed amendments

The Plan will be amended to add new "Threshold Dates" allowing the "Grantees" to redeem a portion of their rights for their cash value when the FMV of the Company reaches certain thresholds (representing specified increases in Company FMV) at specified measurement dates. Furthermore, the calculation of the Company FMV will be modified to include certain extraordinary events in the computation of EBITDA and to make certain adjustments in the event of a business acquisition or divestiture, and the FMV formula will be modified "to ensure that the value of SAR Units is not unduly affected by a year that is exceptionally good or exceptionally bad." These changes will not result in an immediate increase in the value of the existing units. "As a matter of law in the relevant jurisdiction, the proposed amendments…will not result in new agreements coming into existence… ."

Rulings

Provided a Grantee is not entitled to receive the value of rights granted to such Grantee, the amended Plan will not be a salary deferral arrangement. When a Grantee is entitled to receive the value of the rights granted, including on a Threshold Date, it will be a question of fact whether the Plan constitutes an SDA at that time. No disposition of rights resulting from the proposed amendments.

27 June 2012 External T.I. 2012-0440721E5 F - Compte de gestion de santé

conversion of future bonus into PHSP is taxable

2011-0426571C6 indicated that “the allocation of a future bonus to a HCSA [health care spending account] should be taxed as employment income … because the allocation of a bonus to obtain additional flex credits in a HCSA is an allocation of foregone cash remuneration and should be subject to tax. Respecting the application of this position to a particular situation, CRA stated that this position:

applies to situations where a future bonus is converted into a private health services plan of an employee in a benefits plan tailored to the needs of employees. The question of whether that position applies to a particular situation is a question of fact that can only be determined after having examined all the facts and all the documentation relevant to that particular situation.

23 April 2009 External T.I. 2009-0306371E5 - Determination of SERP benefits

employee application of severance to acquire additional service under SERP

Where a specific supplemental employee retirement plan provides benefits that are not the same as those provided under registered pension plans, then the terms of the SERP will be considered to determine if the benefits are reasonable. Where an employee is given the option of using severance amounts to acquire additional pensionable service under a SERP, the plan will not be excluded from the salary deferral arrangement definition (and it would be arguable that the employee had constructively received the retiring allowance at the time the amount was paid into the SERP).

2004 Ruling 2004-005692 -

share sale right to related private company

Ruling that the right of an executive to sell shares of a private company (CCPC) employer acquired by him on exercise of employee stock options to a corporation nominated by the employer corporation would not constitute a salary deferral arrangement.

May 1998 Advanced Life Underwriting Round Table, Q. 2, No. 9807000

The tax referred to in the postponement-of-tax purpose test does not include refundable RCA tax.

In general, a funded and unregistered pension plan will not meet the definitions of a salary deferral arrangement.

17 October 1997 Ruling 97110

It was proposed that an executive participate in a non-funded supplementary retirement arrangement under which, if he retired after 12 years of service, he would receive annual pension benefits equal to 30% of his average annual remuneration during the three-year period preceding his retirement (which benefits would continue for 15 years subsequent to his retirement, and with provision for his spouse receiving 75% of the benefits should he die). With respect to the issue as to whether payments under the arrangement were considered to be something other than a pension due to the short period (12 years) before vesting occurred, the Department was of the view that a pension of 30% after 12 years of service was commensurate with a normal pension of 70% after 35 years.

1997 Ruling 971900

Options received by employees on the merger of two U.S. corporations are amended, following the merger, to provide that they will be paid Dividend Equivalents equal to the amount of any dividends that would have been paid to the holders following the effective date of the merger had the American depositary shares underlying the options been delivered and outstanding on the applicable dividend record date. Any such dividend equivalents would be paid when the options were exercised. "The sole purpose of the Dividend Equivalents is to provide additional incentive for an option holder to remain with the Merged Corporation group of companies. It is expected that the ultimate value of the Dividend Equivalent component of the 1997 Options will be insignificant in comparison to the capital appreciation that may be realized with respect to the shares that may be acquired under the 1997 options."

Ruling that the Dividend Equivalents of the notional interest thereon would not constitute a salary deferral arrangement.

14 September 1994 External T.I. 5-942283 -

The SDA rules could apply to a stock appreciation rights plan if a beneficiary under the arrangement chooses to defer receipt of an amount payable under the plan in a year.

19 April 1991 T.I. (Tax Window, No. 2, p. 20, ¶1207)

A phantom stock plan may be a salary deferral arrangement if its effect is to postpone taxation of an amount, or if there is constructive receipt of an amout without taxation.

22 May 1990 T.I. (October 1990 Access Letter, ¶1491)

Detailed discussion of proposed arrangement respecting leaves of absence for public sector employees.

88 C.R. - Q.26

if on a specified date under a phantom stock plan the employee is only entitled to receive the increase in the value of the underlying phantom share, the plan generally will not be considered a salary deferral arrangement.

88 C.R. - Q.27

where tax deferral has been achieved, this would be a significant factor to be considered in RC's evaluation of the main purpose of the plan.

88 C.R. - Q. 28

plans may have some deferred amounts that are grandfathered while other deferred amounts may not be grandfathered.

86 C.R. - Q.47

six guidelines re what constitutes a SDA.

86 C.R. - Q.48

an arrangement funded solely by employer contributions and that provides for vesting only upon retirement is not a SDA.

ATR-45, February 17, 1992

A share appreciation rights plan involving units whose value was equal to the appreciation in market value of shares of the employer from the date of issue of the units did not constitute a salary deferral arrangement before the time at which the employee had the unfettered right to redeem his units.

Articles

Dov Begun, "Equity Based Compensation and Stock Options", 2017 Annual CTF Conference draft paper

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.

Kevin Bianchini, Reuben Abitbol, "Taxation of Stock Appreciation Rights", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24 No. 8, 2015, p.1655

Description of SARs (p. 1655)

[T]he executive is granted units or stock appreciation rights ("SARs") over a period of time often referred to as the Vesting Period. The amount of SARs granted will depend on whether the company is able to meet pre-determined hurdles. …

Once fully vested, these units or SARs grant the executive a right to receive payment equal to the difference between the share's fair market value and its original price at the plan's inception.

CRA listing of SAR requirements (p. 1656)

In order to constitute a SAR, the following attributes are generally required:

a) Each SAR has a nil value at the date of the grant;2

b) Each SAR provides its holder with the right to receive the appreciation in value of one share in the capital stock of the employer (or related) corporation from the grant date to the date of payment; and

c) Payment is to be made at a fixed future date, i.e., the employee will not have the ability to obtain payment at an earlier date. Without such restrictions, concerns regarding constructive receipt (discussed below) may arise.

Safe harbour until SAR vesting (p. 1656)

[T]he CRA has taken the position that until the employee has a right to exercise and cash in the SARs, the SDA rules would not apply. [f.n…. 9422835 …]

In other words, once the SAR units become fully vested it would have be determined whether the executive is postponing the exercise of the SARs in order to avoid the immediate tax consequences (i.e., the employment income). As stated by the CRA, this is a question of fact… .

Alternative application of constructive receipt (“CR”) at time of vesting (p. 1657)

[I]n the context of the recognition of employment income, the Canadian jurisprudence has yet to develop guidance with respect to the doctrine of CR

…[T]he CRA addressed its position with respect to CR in the context of SDAs in… 1999-0007315… .

…As can be seen…the CRA adopts a very broad approach and leaves open the possibility that even if the SDA main purpose test is met, the rules with respect to the doctrine of CR may still be rendered applicable. Hence, in light of the above-mentioned, it seems likely that the SARs would be taxed at the moment they become fully vested regardless of when exercise occurs.

Jim Kahane, Uros Karadzic, Simon Létourneau-Laroche, "A Fresh Look at Retirement Compensation Arrangement: A Flexible Vehicle for Retirement Planning", Canadian Tax Journal (2013) 61:2, 479 – 502.

"One of the main purposes…is to postpone tax" (p. 483)

One might argue that a retirement arrangement was not established to defer tax where the funding of the retirement benefits was not in lieu of regular compensation or bonus, and therefore such an arrangement would not be an SDA. However, Finance is of the view that tax deferral could be one of the main purposes of a retirement arrangement, and accordingly that arrangement would not be precluded from being an SDA simply because it provided for pension or superannuation benefits. The fact that Finance explicitly excluded RPPs from the SDA definition is a clear demonstration of the department's intention, since taxes on wages that would otherwise have been received are effectively deferred. [fn 16: CRA document no. 2007-0229361C6, June 21, 2007.] Therefore, taxpayers must not rely solely on this purpose test to determine whether a retirement arrangement is an SDA. In determining whether an arrangement is an SDA, the CRA will look carefully at variations in compensation. A sudden decrease in salary or bonus occurring in the same year as a payment to a retirement plan may be relevant in determining whether the plan is a scheme to defer compensation. [fn 17: CRA document no. 2001-0072795, May 8, 2001.]

Excessive benefits standard (p. 483)

If it is determined that a retirement arrangement does provide excessive benefits, it will be considered an SDA even if it otherwise meets the conditions set out in the RCA [retirement compensation arrangement] definition….

Christina Medland, Andrew Stancel, "Tax-effective Risk-adjusted Incentive Arrangements for Public Companies", Taxation of Executive Compensation and Retirement, Vol. 22, No. 9, May 2011: includes overview of cash settled performance share unit plans.

Christina Medland, Jennifer Sandford, "Tax Treatment of Share-Based Compensation", Taxation of Executive Compensation and Retirement, September 2005, p. 583.

Christina H. Medland, "The Potential Effect of the American Jobs Creation Act on Canadian Deferred Compensation Plans", Taxation of Executive Compensation and Retirement, Vol. 16, No. 5, December/January 2005, p. 491.

Simon Thompson, "Canada's Income Tax Rules for Non-Registered Plans: Implications for Foreign Pensions", A Journal of International Taxation, Vol. 15, No. 10, October 2004, p. 34.

Anu Nijhawan, "The Limitations of Deferred Share Unit Plans", Taxation of Executive Compensation, Vol. 16, No. 1, July/August 2004, p. 440.

Christina H. Medland, Ronit Florence, "Pricing of Deferred Share Units - Part 1", Taxation of Executive Compensation and Retirement, Vol. 12, No. 1, July/August 2000, p. 303.

S. Ungurean, "A Deferred Share Unit Plan Receives Revenue Canada Approval", Taxation of Executive Compensation and Retirement, Vol. 9, No. 2, September 1997, p. 19.

V. Bjorndahl, "Share Appreciation Rights (SARs): Possible Risks and Concerns", Taxation of Executive Compensation and Retirement, Vol. 8, No. 8, April 1997, p. 275.

P. Fritze, "Trends in deferred compensation: Limitations and Opportunities", Taxation of Executive Compensation and Retirement, October 1996, p. 195.

Holmes, "Stock-Based Deferred Compensation May be Provided to Employees of Private Corporations", Taxation of Executive Compensation and Retirement, December 1990/January 1991, p. 375.

"Employer's Contribution Towards Stock Plan Allows Tax Deferral for Employee", Taxation of Executive Compensation and Retirement, March 1990, p. 248.

Philp, "Executive and Employee Compensation After Tax Reform", 1988 Conference Report, c. 28.

Gordon, "Deferred Compensation", 1986 Conference Report, c. 34.

Paragraph (k)

Administrative Policy

2015 Ruling 2015-0601441R3 - XXXXXXXXXX Partnership - winding up

no income on RSU/DSU assumption

No employee income was be triggered by the assumption by the proprietor of DSUs and RSUs on a s. 98(5) wind-up.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 98(5) wind-up through s. 85 transfer of partnership interest of one partner to the other and preceded by debt assumptions 272
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) interest deductible following assumption of interest-bearing internal debt on s. 98(5) wind-up 279
Tax Topics - Income Tax Act - Section 34.2 - Subsection 34.2(11) continuation of s. 34.2(11) reserve following partnership wind-up 324
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) continued availability of s. 20(1)(m) reserve following s. 98(5) wind-up 266
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) flow-through of s. 20(1)(n) reserve on s. 98(5) wind-up 262
Tax Topics - Income Tax Act - Section 20 - Subsection 20(24) s. 20(24) election on s. 98(5) wind-up 280
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) s. 18(9) deduction claimable by transferee former partner following s. 98(5) wind-up 216
Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(8) s. 147.2 continuity following s. 98(5) wind-up 336
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(i) no income inclusion on assumption on s. 98(5) wind-up of DSUs and RSUs 329

7 October 2016 APFF Roundtable Q. 4, 2016-0652801C6 F - Salary Deferral Arrangement

no backdating as of the year end

The right to receive an amount under a plan arises on December 31 of Year 1. On March 31 of Year 3, 4 and 5 the individual’s performance for Year 2, 3 and 4 is determined and the amount is revised as of December 31 of Year 2, 3 and 4, respectively. Given that for commercial reasons, the amount which is payable on December 31 of Year 4 is not determined until March 31 of Year 5, being the time when the performance factor for Year 4 is determined, is a payment under this arrangement excluded from the SDA definition? In finding that the para. (k) exception was not available, CRA stated:

[T]he Amount must be paid after the three-year period (ie in Year 5) following Year 1. Note that the English version…is clearer than the French version…[and] states: "to be paid within 3 years following the end of the year."

24 November 2015 CTF Roundtable Q. 2, 2015-0610801C6 - Salary Deferral Arrangements

conversions of RSUs to DSUs no longer permitted except for grandfathered units

CRA has ruled ((e.g. 2005-0144541R3) that units of a 3-year bonus plan that satisfied the conditions of para. (k) in the definition of SDA could be converted, without realizing tax, to units of a DSU plan that satisfied the conditions of Reg. 6801(d). Why has CRA discontinued providing such rulings? CRA responded:

When considering the conditions that must be satisfied under paragraph (k) of the definition of SDA and paragraph 6801(d), a conversion of rights under a 3-year bonus plan to rights under a DSU plan, or vice versa, will not satisfy the conditions under either paragraph (k) or 6801(d). In such circumstances, the conversion of rights under what was a 3-year bonus plan could effectively permit the payment of an amount after the third calendar year, and the conversion of rights under what was a DSU plan could result in the payment of an amount prior to death, retirement or termination of employment. Accordingly…the terms of a plan cannot under any circumstance provide a taxpayer with conversion rights. ...

The CRA will continue to apply the positions in [the] published rulings to any units credited on or before November 24, 2015 (including units with unexercised conversion rights on that date), as well as to additional units credited at any time in respect of those units, for example, dividend equivalents and proportional adjustments due to stock splits or corporate reorganizations.

(See also CRA’s previous oral announcement.)

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 6801 - Paragraph 6801(d) conversions of RSUs to DSUs no longer permitted execept for grandfathered units/no deference to 409A rules 397

20 March 2015 External T.I. 2014-0526941E5 - RSU Plan-Cash Dividend Equivalents

addition to RSU plan of dividend equivalent units to be cashed out not excluded

An employer grants restricted stock units to employees that provide them the right to be issued employer shares. Under a proposed amendment, dividend equivalent rights would be notionally credited in respect of RSUs when dividends were respecting the underlying shares that reflect the value of the RSU, and then would be settled in cash ("cash payment") when shares were issued in respect of the vested RSU. Would this addition cause problems under the salary deferral arrangement rules?

After noting that "generally, an RSU that provides an employee with the right to acquire a share of an employer, subject to certain vesting conditions, would be subject to section 7," and indicating that none of the exclusions in paras. (a) to (l) of the SDA definition would apply, CRA stated:

…[T]he exclusion under paragraph (k) of the SDA definition would not apply as a dividend equivalent payment is not in respect of an employee's right to receive a bonus or a payment similar to a bonus. Nor would the dividend equivalent cash payments fall within the parameters of section 7… . Accordingly, the dividend equivalent cash payments… may be a salary deferral arrangement, where one of the main purposes for the creation of the dividend equivalents is to postpone tax payable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) RSU qualified as s. 7 plan 39

2005 Ruling 2005-0144541R3 - Restricted Share Unit Plan (RSU)

exchange of RSUs for DSUs

The previous RSU plan (based on satisfaction of the 3-year bonus rule in para. (k)) is replaced by a new RSU plan that permits an exchange of RSUs for DSUs (which, prior to this change, were only issued pursuant to the Company's "Executive Stock Option Plan" but which entitled the participant to receive a cash award or, at the Company's option, shares and were intended to qualify under Reg. 6801(d).) Elections to exchange RSUs for DSUs are required to be made in writing no later than two months before the "Vesting Date" of the RSU Award in question (i.e., the date before which termination of employment generally would result in forfeiture of the RSUs). Ruling that:

Provided that, at the time of [such] an exchange…, the RSU award granted under the RSU Plan complies with paragraph (k) of the definition of "salary deferral arrangement"…and the DSU Plan is a plan or arrangement described in paragraph 6801(d) of the Regulations, no amount will be included in the income of an RSU Participant pursuant to subsection 5(1), section 6, paragraph 56(1)(a) or subparagraph 115(1)(a)(i) of the Act solely as a result of the grant of DSUs to the Participant in accordance with 12(i) above where the grant is made pursuant to the Participant's irrevocable election… .

2005 Ruling 2004-0096311R3 - Deferred Share Units - Bonus Plan

discretionary grant of RSUs

The terms of a RSU Plan were modified to ensure that the granting of the units was at the discretion of the CEO in order to ensure that the grant was a bonus and not regular remuneration.

2004 Ruling 2004-010150 -

3 year performance units

Ruling that the plan met the conditions in paragraph (k) where there was an award of deferred units (including performance units) to an employee with the deadline for the payments under the units (including notional reinvested dividends and adjustments based on the relative equity performance of the shares of the public-company employer) was December 30 of the third following year.

2004 Miscellaneous 2004-0088601R3 - RSU plan wherein units can be converted to DSUs

addition of conversion right into DSUs before maturity date

underline;">: RSU Plan. The Company will establish to "Bonus Plans:" an RSU Plan and a PRSU Plan. "Particular Awards" will be granted to RSU Participants as a bonus for services rendered in the year of award. RSUs allocated will be equal to dividing the Particular Award amount by the current share price. Within XX days of the Maturity Date (being generally the 3rd anniversary of the Particular Award) the RSU Participant will be entitled to receive a lump sum cash payment based on the current trading price of shares and the number of RSU Units. On termination of service before the Maturity Date for a Particular Award (other than retirement or death) or engaging in prohibited conduct, RSUs previously allocated will be reduced or forfeited. An RSU Participant who is an active employee and is so invited by the may irrevocably elect to convert RSUs into DSUs, provided that the election is made during a period ending XX days before the Maturity Date.

PRSU Plan

The PRSU Plan is similar except that awards of units are divided in thirds, with the number of units associated with each third adjusted at the 1st, 2nd, and 3rd anniversary of the award based on a "performance factor" (i.e., based on meeting specified targets for the year).

Rulings

. Include that neither Bonus Plan will be a salary deferral arrangement by virtue of Para. (k) of the definition. No amount will be included in a participant's income on the allocation of units under the Bonus Ploans, or on conversion of such units to DSUs (the summary noting that no amount is thereby received). The proposed amendments to the DSU Plan (to accommodate conversions) will not cause it to fall outside Reg.6801(d).

3 December 2003 External T.I. 2003-003511 -

Where the actual receipt of a payment under a particular plan is made at the start of the fourth year (e.g., January 2) after the right to receive the amount (a bonus) arose, the plan will not satisfy the conditions of paragraph (k) of the definition of an SDA. "However, if the plan of arrangement provides that the amount is paid within the three year period but the employer cannot abide [sic] to that requirement, it may be appropriate to conclude that the plan of arrangement ceased to meet the conditions of paragraph (k) of the definition of an SDA at that point in time and any amount payable would have to be included in the employee's income under 6(11) of the Act at that time."

ATR-64 April 20, 1995 (cancelled)

Favourable ruling re an arrangement under which bonuses are paid within the three-year period contemplated in paragraph (k) by having a specified amount (based on the value of a specified number of shares of the employer at the time of the grant of the bonus, plus a notional dividend reinvestment feature) used to purchase shares for the employee through a broker.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) shares purchased through broker 171

Income Tax Technical News, No. 7, 21 February 1996 (cancelled)

Where an employee incentive plan bases a bonus on certain criteria such as appreciation in the employer's stock value, and sales increases, the deferral of the payment of the bonus for an additional three years will not be excepted by paragraph (k) because such bonus relates to services rendered in more than one taxation year.

Articles

Dov Begun, "Equity Based Compensation and Stock Options", 2017 Annual CTF Conference draft paper

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.

Navigation