2014-0535951E5 Election under DSU Plan

Principal Issues: When must an employee make an election to defer salary or wages in the form of DSUs under a 6801(d) or DSU plan?

Position: Prior to the point in time when the employee has the right to receive, or constructively receive, the salary or wages that the employee can defer in the form of DSUs.

Reasons: Definition of "salary deferral arrangement" in subsection 248(1), the paragraph (l) exclusion thereunder, and the provisions of paragraph 6801(d) of the Regulations.

Author: Allen, Gary
Section: 248(1), 6801(d)

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                                                                                                                                               2014-053595
                                                                                                                                               G. Allen

April 10, 2015

Dear XXXXXXXXXX:

Re:  DSU Plans – Elections to Defer Compensation

This letter is in response to your June 16, 2014 email wherein you requested clarification regarding our position concerning elections to defer compensation under a deferred share unit (DSU) plan that satisfies the conditions of paragraph 6801(d) of the Income Tax Regulations (the “Regulations”).

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

A 6801(d) or DSU plan is a prescribed plan for purposes of the exclusion under paragraph (l) of the definition of “salary deferral arrangement” (SDA) in subsection 248(1) of the Act.  In general, a DSU plan permits an employee to defer including in income amounts that are compensation earned in a particular year, until the year when the amounts are actually paid to the employee.  Where a DSU plan fails to satisfy the conditions of paragraph 6801(d) of the Regulations the plan will be an SDA, subject to the main purpose test being satisfied, and taxed accordingly.

Where an employee elects to defer compensation and receive the compensation in the form of DSUs under a DSU plan, the employee’s election must be made prior to the time when the employee has a right to receive, or constructively receive, the compensation.  The Canada Revenue Agency’s views concerning when an amount is considered to be received by a taxpayer were provided in response to Q13 at the 1984 Canadian Tax Foundation Conference and in paragraphs 10 and 11 of IT-502 Employee Benefit Plans and Employee Trusts, available at; http://www.cra-rc.gc.ca/E/pub/tp/it502/README.html.

In general, a DSU plan must require that an employee’s election be made prior to the earlier time when either: (i) the employee has a right to receive the compensation and can legally enforce payment of the compensation, or (ii) the employee has unfettered control over, access to, or use of, the compensation, i.e., the employee has constructive receipt of the compensation.  

We trust that our comments will be of assistance. 

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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