2015-0565181E5 Amendment to DSU plan

Principal Issues: Whether an amendment to a deferred share unit plan giving participants the option to be paid the value of their awards in instalments over a maximum six years after retirement or termination of employment would cause the plan to cease to qualify for the exclusion under ITR 6801(d) from the salary deferral arrangement rules

Position: Yes.

Reasons: ITR 6801(d)(i) requires the plan to provide for payments no earlier than the employee's retirement, termination of employment or death and no later than the end of the first calendar year commencing after that time.

Author: Wurtele, Dave
Section: 6(11), 248(1) "deferred amount" and "salary deferral arrangement", ITR 6801(d)

XXXXXXXXXX
                                                                                                                                               2015-056518
                                                                                                                                               D. Wurtele

April 29, 2015

Dear XXXXXXXXXX

Re: Amendment to deferred share unit plan

This is in reply to your email of January 12, 2015 in which you ask whether an amendment to a deferred share unit (DSU) plan would give rise to adverse income tax consequences. We also acknowledge the additional information provided by telephone.

You indicate that the plan currently qualifies under paragraph 6801(d) of the Income Tax Regulations (the “Regulations”) to be exempted from the salary deferral arrangement (SDA) rules of the Income Tax Act (the “Act”).  In conjunction with the elimination of future awards under the plan, the employer is considering amending the plan to give participants the option to be paid the value of their existing awards in instalments over a maximum six years after retirement or termination of employment.

Our comments

This technical interpretation provides general comments about the provisions of 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.

For a DSU plan to qualify for the SDA exception under paragraph 6801(d) of the Regulations, the plan must provide for payments to be made no earlier than the employee's retirement, termination of employment or death and no later than the end of the first calendar year commencing after that time. If a DSU plan were amended to allow for payments outside of these time parameters, the plan would cease to be excluded from the SDA rules thereby resulting in the value of any outstanding awards being included in the respective employee’s income. The timing of the income inclusion would depend on the facts. 

If it is determined based on the facts that a DSU plan was never intended to provide for payments within the time parameters of paragraph 6801(d) of the Regulations, it is our view that the SDA rules would apply retroactively. For example, we have previously considered a situation where a DSU plan was terminated and all outstanding awards were redeemed in cash. As the early redemption did not involve extraordinary circumstances but fell within full control of the employer and employees, we took the position that the SDA rules applied retroactively with respect to any outstanding awards.

In general terms, where a taxpayer has a right under an SDA at the end of a year to receive an amount after the end of the year, the combined operation of subparagraph 6(1)(a)(v), subsection 6(11) and the definition of "deferred amount" in subsection 248(1) of the Act require the amount to be included in income for that year except to the extent the amount was included in income in a prior year. The effect of these rules is to bring into income the current value of any rights that exist under an SDA at the end of each year that were not previously included in income. If an amount was includable in income in a year that is now statute-barred, the mechanics of subsection 6(11) of the Act result in the amount being brought forward and included in income in the earliest non-statute-barred year. In the situation at hand, this resulted in the full value of the outstanding awards under the DSU plan being brought into the respective employee’s income in the first non-statute barred year.

In response to your second question as to whether payments under a DSU plan can be taxed as capital gains, we can confirm that such amounts are properly taxed as employment income under sections 5 and 6 of the Act.

We trust our comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015