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."
Administrative Policy
2013 Ruling 2012-0435221R3 - CCPC SAR Plan
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.
23 April 2009 T.I. 2009-030637
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 -
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 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
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
20 March 2015 T.I. 2014-0526941E5 - RSU Plan-Cash Dividend Equivalents
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.
2005 Ruling 2005-0144541R3 -
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 2004-009631 -
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 -
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 Ruling 2004-0088601R3
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 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
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.
Income Tax Technical News, No. 7, 21 February 1996
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.