2020-0840681E5 Deduct for income tax withholding on s.7 benefit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does paragraph 7(3)(b) prohibit an employer from claiming a deduction for a portion of its expenses relating to the issuance of shares under a RSU plan that is subject to section 7, where the employer pays an amount to the Receiver General on behalf of an employee in lieu of issuing shares to the employee under the RSU plan?

Position: Yes.

Reasons: The employee is considered to have disposed of a portion of their rights under the RSU plan and is thus deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted to the Receiver General by the employer. Since the benefit arose from the issuance of the shares, paragraph 7(3)(b) operates to preclude a deduction to the employer in respect of the benefit.

Author: Koh, Kah Foo

Section: 7(1); 7(3)(b)

XXXXXXXXXX                                                                                                    2020-084068
                                                                                                                            Kah Foo Koh
September 28, 2020


Re:  Application of Paragraph 7(3)(b)

This is in reply to your letter dated February 14, 2020 in which you requested our views on the deductibility of payments made by an employer to the Receiver General on account of the employer’s income tax withholding obligations arising on the issuance of shares to employees under a restricted share unit plan (the “RSU Plan”).

Specifically, we understand that each employee of a Canadian subsidiary (“EmployerCo”) of a U.S. corporation (“ParentCo”) is expected to be granted a certain number of restricted share units (“RSUs”) under the RSU Plan. The RSUs are subject to section 7. (footnote 1) Each RSU entitles an employee to receive one common share of ParentCo, and one-third of any award of RSUs will vest on each of the first, second, and third anniversary dates of the grant.  The shares of ParentCo are expected to be issued on the same day on which the RSUs vest, and the respective employee will be deemed to have received a taxable benefit pursuant to subsection 7(1) in the year of issuance. EmployerCo will make a cash payment to the Receiver General on behalf of the employee on account of the required income tax withholding. The number of shares issued to the employee under the RSU Plan will be correspondingly reduced.

You provided the following example as an illustration:

-    An employee was granted RSUs on February 1, 2020.
-    On February 1, 2021, 30 units vested, and each share was worth $150 at that time. The employee's taxable benefit under subsection 7(1) was $4,500.
-    The required income tax withholding was $1,800 on the $4,500 benefit.
-    The employee was only issued 18 shares instead of 30 shares, and EmployerCo made a $1,800 payment directly to the Receiver General on behalf of the employee.

You take the view that EmployerCo should be allowed to deduct the $1,800 that it paid to the Receiver General, and that this deduction would not be prohibited by paragraph 7(3)(b).

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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

We disagree with your conclusion about the application of paragraph 7(3)(b).

In general, when a benefit is deemed by subsection 7(1) to have been conferred on an employee by the sale or issuance of shares, paragraph 7(3)(b) prohibits the employer or any other person from claiming a deduction in respect of the benefit in computing their income.

The situation described in your letter fits squarely within the deduction prohibition in paragraph 7(3)(b).

Under the circumstances described in your letter, a portion of the rights of the employee under the RSU Plan is considered to have been disposed of by the employee in exchange for EmployerCo paying the required income tax withholdings arising from the issuance of shares of ParentCo under the RSU Plan. Consequently, the employee is deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted by EmployerCo on behalf of the employee. In reference to your example, the employee was considered to have disposed of 12 RSUs in exchange for $1,800, which is the benefit deemed to have been received by the employee under paragraph 7(1)(b).

Since the benefit as described in your letter arises from the issuance of shares, paragraph 7(3)(b) precludes a deduction by EmployerCo in respect of that benefit.

We trust our comments will be of assistance.

Yours truly,


Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch



Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Unless otherwise stated, all statutory references in this document are to the Income Tax Act.

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, 2020

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 redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, 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, 2020

Monthly Tax Update

For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.

This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.

Packages start at $399/year.

Learn More