Principal Issues: [TaxInterpretations translation] In a particular situation, what are the tax consequences for a Participant to cash out the value of his DSUs upon termination of employment?
Position: It is income from an office or employment.
Reasons: The Act.
March 19, 2009
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QUEBEC Tax Services Office |
HEADQUARTERS 2009-030697 |
Request for Interpretation -Deferred Salary in Share Units (DSUs)
This is in response to your request for assistance addressed to Ms. Lorraine Maisonneuve of the Trust Account Programs Division regarding the tax consequences for an individual resulting from the receipt of a deferred amount in the Particular Situation set out below.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have explained it to us is as follows:
1. Pubco is a public corporation and a taxable Canadian corporation as defined in subsection 89(1).
2. In XXXXXXXXXX, Pubco introduced a deferred salary share unit program (the “Plan") for certain of its senior executives and directors (the “Participants") in respect of the bonus payable to the Participants for the XXXXXXXXXX years and thereafter. All Participants are residents of Canada.
The Plan is a prescribed plan within the meaning of paragraph 6801(d) of the Income Tax Regulations (the "Regulations") under which a Participant may elect to receive a portion of the Participant’s annual bonus in the form of deferred share units ("DSUs") to be credited to a notional account. The number of DSUs credited to a Participant's notional account is based on the fair market value ("FMV") of the common shares in the capital stock of Pubco at the time of the election. The Plan provides that additional DSUs are credited to the notional account of Participants on the payment date of cash dividends paid in the normal course of Pubco's business to the holders of common shares of its capital stock ("Dividend Equivalents"). The Plan is not a salary deferral arrangement, retirement compensation arrangement or employee benefit plan within the meaning of subsection 248(1).
3. The Plan provides that upon termination of a Participant's employment, the Participant is entitled to receive a lump sum cash payment, net of any applicable withholdings, equal to the number of DSUs credited to his or her notional account on such date multiplied by the fair market value (FMV) of a common share of the Corporation on such date (the "Lump Sum Amount"). Finally, the Plan provides that no amount may be paid to a Participant to compensate him or her for any decline in the market price of Pubco's common shares.
4. During a taxation year under audit by your TSO, certain Participants terminated their employment and received from Pubco a cash Lump Sum Amount under the Plan for their DSUs.
Your Question:
You wish to know the tax consequences to a Participant resulting from the cashing in at the end of his employment of the deferred amount in DSUs. You inquired as to whether the fact that the Lump Sum Amount payable by Pubco at that time is based on the FMV of a common share of its capital stock could result in a portion of the Lump Sum Amount cashed in a Participant being considered a capital gain realized (or a capital loss incurred) by the Participant. You have the same type of question with respect to the portion of the Package Amount that relates to the additional DSUs credited as Dividend Equivalents.
Our Comments:
In general, the amount that an individual receives in a year from a prescribed plan within the meaning of paragraph 6801(d) of the Regulations must be included in computing the individual's income for the year as income from a source that is an office or employment.
In the Particular Situation, it is our view that a Lump Sum Amount received by a Participant under the Plan in a particular year is an amount required to be included in computing the Participant's income for the year from an office or employment by virtue of subsection 5(1), paragraph 6(1)(a) or paragraph 6(1)(c), as the case may be. Furthermore, we are of the view that even if the market price of Pubco's common shares has fluctuated (up or down) between the date a Participant elects to receive a portion of the Participant's bonus for a particular year in the form of DSUs and the date the Participant receives the Lump Sum Amount under the Plan, the entire Lump Sum Amount constitutes income to the Participant from a source that is an office or employment. We are also of the view that even if certain DSUs credited to a Participant's notional account have been credited as Dividend Equivalents, the entire Package Amount constitutes income to the Participant from a source that is an office or employment.
Finally, it should be noted that when Pubco pays a Lump Sum Amount under the Plan to a Participant in a year, it must deduct or withhold at source the amount determined in the prescribed manner and remit it to the Receiver General on account of the Participant's Part I tax for the year. In addition, Pubco is required to file T4 information slips for a particular year in respect of the Lump Sum Amounts paid under the Plan in the particular year.
We hope that our comments will be of assistance.
Best regards,
Michel Lambert
Interim Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
c.c. Lorraine Maisonneuve
Manager
Policy and Legislative Research Section
Trust Accounts Programs Division
Taxpayer Services and Debt Management Branch