2020-0864831I7 Equity award plan and recharge agreement

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: 1. Does the paragraph (k) exception in the SDA definition apply to a hypothetical RSU plan? 2. Will paragraph 7(3)(b) apply to deny a deduction if the USCo parent corporation of the CanCo employer has discretion as to whether an RSU will be settled in the form of one USCo share or an equivalent-value cash payment? 3. Will Part XIII tax apply to reimbursements made under an agreement between CanCo and USCo to make USCo whole for payments of RSUs in cash or USCo shares made to CanCo employees under the Plan?

Position: 1. Likely not. 2. No. 3. No.

Reasons: 1. We generally assume that an award is attributable to past service if employees receive something of value on the grant date. In this case because the grant is made early in the year, the service year likely preceded the grant year. The paragraph (k) exception to the SDA definition would not apply since the settlement date is more than three years after the end of the apparent service year. 2. There is no agreement to sell or issue shares to an employee for purposes of subsection 7(1) since USCo has discretion to settle an RSU in cash. 3. A reimbursement payment would be made pursuant to a legal agreement in return for equivalent consideration paid by USCo to CanCo's employees and would not therefore be a benefit for purposes of subsections 15(1) and 246(1) and Part XIII.

Author: Ferrigan, Helen

Section: 7(3)(b), 248(1) “salary deferral arrangement”, 20(1)(oo), 15(1), 212(2)(a), 214(3)(a), 246(1)

                                                                      November 13, 2020


Len Lubbers                                                  HEADQUARTERS
Director                                                         Income Tax Rulings Directorate
Tax Avoidance Division                                 Helen Ferrigan



Withdrawn request for a technical interpretation
Equity award plan and recharge agreement

We are writing to advise you about a technical interpretation request we recently considered involving a cross-border equity award plan and recharge arrangement. We were asked to confirm that, in the hypothetical scenario outlined below, (i) paragraph 7(3)(b) (footnote 1)  would not apply to prohibit the deduction of certain amounts paid by a Canadian-resident corporation (“CanCo”) in connection with an equity award plan (the “Plan”) and (ii) the amounts would not be subject to Part XIII tax. Although we were prepared to provide both of the requested interpretations for the reasons outlined below, we were unable to confirm that the Plan was not a salary deferral arrangement and the request was ultimately withdrawn. The conclusions we reached in considering the request may nonetheless be of interest to you.

We considered the following hypothetical scenario:

1.    All of the shares of CanCo are owned by a corporation resident in the United States (“USCo”); the common shares of USCo are publicly listed on a designated stock exchange. 

2.    USCo established the Plan and under it may grant restricted share units (“RSUs”) to its own and CanCo’s employees (the “Participants”). All of CanCo’s employees render services to CanCo in Canada.

3.    Under the Plan, settlement of vested RSUs may be made in the form of one common share of USCo (a “Share”) for each RSU payable. USCo may also, at its sole discretion, decide that some or all of the RSUs will be settled in cash rather than Shares. For the RSUs that USCo decides to settle in cash, a Participant will receive a cash payment equal to the number of RSUs times the fair market value of one Share on the date the RSUs become vested.

4.    Awards of RSUs will be made in February of each year. The RSUs will vest on a pro-rata basis over a three-year period and will be payable immediately upon vesting. For example, an RSU award granted in February of Year 1 will have 1/3 of the RSUs vest in February of Year 2, 1/3 in February of Year 3 and 1/3 in February of Year 4.

5.    USCo and CanCo have entered into a written recharge agreement (the “Agreement”) under which CanCo will reimburse USCo for expenses relating to RSUs that are settled by USCo with Participants who are employees of CanCo (the “Reimbursements”).

6.    Because USCo’s accounting practices require it to recognize compensation expenses monthly over the vesting period of the RSUs, the Agreement requires CanCo to begin making Reimbursements for RSUs awarded to CanCo employees prior to the year in which the RSUs are settled. An upward or downward adjustment is made when the RSUs are settled to reflect differences between the amounts previously reimbursed and the amount paid to the employee because of fluctuations in the value of the Shares. CanCo does not claim a deduction for a Reimbursement until the relevant RSUs are settled. Reimbursements include any amounts withheld in respect of employee source deductions.

We were asked to confirm that CanCo would be entitled to deduct the Reimbursements in the year the RSUs are settled with CanCo employees, regardless of whether the RSUs are paid in the form of cash or in the form of Shares or both. In particular, we were asked to confirm that paragraph 7(3)(b) would not apply to deny CanCo a deduction respect of the Reimbursements in computing its income from business.

Secondly, we were also asked to confirm that the Reimbursements would not be subject to tax under Part XIII.

Our comments

Salary deferral arrangement

A “salary deferral arrangement” (“SDA”) is defined in subsection 248(1) as a plan or arrangement under which an individual has a right in a taxation year to receive an amount in a subsequent year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable on salary or wages for services rendered by the individual in the year or a preceding taxation year. Several types of plans are specifically excluded from the SDA definition. One such exception is for three-year-bonus plans, which are described in paragraph (k) of the SDA definition as a plan or arrangement under which a taxpayer has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year to be paid within three years following the end of the year.

The CRA’s long-standing position is that where the amount to be paid to an employee under an RSU plan is based on the full value of the specified shares, the RSUs have generally been granted in respect of the employee’s past services. Unless section 7 or one of the specific exceptions in the SDA definition applies, the RSU plan will generally be considered an SDA.

While the determination of whether a specific plan is an SDA is a question of fact, we became concerned that the hypothetical RSU plan described above would be a SDA.

Under the Plan, the Participants will receive a full Share (or cash equivalent) for each RSU to be settled on each vesting date. As the RSUs will be granted early in Year One and will have a positive value on the grant date (subject only to vesting conditions which do not carry a substantial risk of forfeiture) it is likely that they would be granted partly in respect of past services rendered to CanCo prior to Year One. If the RSUs are settled in Year Four, more than three years after the end of the year in which these services were rendered, the paragraph (k) exception would not apply and the Plan would be an SDA. This position would generally apply unless all the facts and circumstances established that the grant of RSUs was wholly unrelated to the recipient’s past services.

Application of paragraph 7(3)(b)

In general terms, subsection 7(1) applies when a corporation has agreed to sell or issue its shares (or shares of a corporation with which it does not deal at arm’s length) to its employee (or an employee of a corporation with which the corporation does not deal at arm’s length). When such an agreement exists, paragraph 7(3)(b) provides that no corporation is entitled to claim the amount of the benefit that was conferred on the employee in respect of the sale or issue of the shares as a deduction in computing its income.

Based on Transalta Corporation v. R., 2012 TCC 86, the CRA’s position is that a discretionary arrangement that does not give employees the right to require that equity-based compensation be paid in the form of shares rather than cash is not an agreement to sell or issue shares for purposes of section 7.

Under the hypothetical Plan described above, USCo can unilaterally decide to settle RSUs payable to CanCo employees in the form of cash rather than issuing Shares. In such circumstances there would be no agreement to issue shares for purposes of section 7 and paragraph 7(3)(b) would not apply to prohibit CanCo from deducting amounts paid to reimburse USCo under the Agreement.

In general, expenditures are deductible for the purposes of section 9 if they are incurred in accordance with ordinary principles of commercial accounting and business practice, unless the provisions of the Act require a departure from these principles. Although we were prepared to agree that paragraph 7(3)(b) would not apply to the Plan, we note that other rules in the Act might restrict CanCo’s ability to deduct the Reimbursements. If the Plan is an SDA, paragraph 18(1)(o.1) would prohibit CanCo from deducting any of the Reimbursements, except to the limited extent permitted by paragraphs 20(1)(oo) and (pp). If the plan is not an SDA, subsection 78(4) could apply to prohibit the deduction of the Reimbursements prior to the taxation year in which the RSU is settled with a CanCo employee. CanCo’s ability to deduct the Reimbursements would also be subject to the general limitations in sections 18 and 67.

Application of Part XIII tax

Subject to certain inapplicable exclusions, subsection 15(1) requires that the amount or value of any benefit conferred by a corporation on a shareholder be included in the shareholder’s income for the taxation year in which the benefit is conferred. Where such a benefit is conferred on a non-resident shareholder, the amount is subject to Part XIII tax by virtue of paragraphs 212(2)(a) and 214(3)(a).

Subsection 246(1) provides that where at any time a person directly or indirectly confers a benefit on a taxpayer, the amount of the benefit must be included in the taxpayer’s income, if the amount would have been included in the taxpayer’s income if paid directly to the taxpayer and if the taxpayer was resident in Canada. Paragraph 246(1)(b) deems a benefit conferred on a non-resident taxpayer to be a payment made at that time in respect of property, services or otherwise for purposes of Part XIII.

A payment made to reimburse a related party for bona fide expenses incurred pursuant to a legal agreement in return for adequate consideration would not generally be considered a benefit for purposes of subsections 15(1) and 246(1) and, thus by extension, Part XIII tax.

In this case, the Reimbursements would be made pursuant to the Agreement in return for equivalent consideration paid by USCo to CanCo’s employees. CanCo will not confer a benefit on USCo nor suffer any net economic detriment, and the payment will not enrich USCo because of the amounts to be paid to CanCo employees by USCo. We concluded therefore that, notwithstanding the non-application of paragraph 7(3)(b) and the possibility that the Plan is an SDA, Part XIII tax would not generally apply to Reimbursements made under the Agreement.

We trust that the foregoing will be of assistance to you. If you would like to discuss any of these issues further, please contact Dave Wurtele at 613-793-2686 or Helen Ferrigan at Helen.Ferrigan@cra-arc.gc.ca.

Yours truly,



Stéphane Charette
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, statutory references in this document are to the Income Tax Act (the “Act”).

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