The share appreciation rights (SAR) plan of an employer corporation provides for dividend equivalents on SAR units that are satisfied by way of cash payments made annually to employee participants. If the current vesting period for a SAR unit granted under the plan is extended from three years to five years, would this engage the salary deferral arrangement (SDA) rules? CRA responded:
[A] unit issued under a SAR plan that entitles the employee to receive only the increase in value of the underlying share from the date the unit is granted to the date it is redeemed will generally not be considered to be an SDA. …This general position also extends to SAR plans that include a dividend equivalent feature … provided that (i) the dividend equivalents are credited in the form of additional units, and (ii) the eventual settlement in respect of the dividend equivalents is on the same basis and timeline as provided for under the plan for the whole unit.
If a SAR plan provides for dividend equivalents to be paid in cash on an accelerated basis (such as annually or after each dividend payment date) without the whole of the corresponding unit being redeemed, the CRA general position will cease to apply with effect from the time that the employee becomes entitled to receive the first such dividend equivalent payment. This is because, in such a case, the units would not be considered to be solely for future services.
CRA went on to indicate that the plan would qualify under the para. (k) exception:
where (i) the units granted constitute a “right to receive a bonus or similar payment” (which we would generally expect to be the case for a SAR plan), and (ii) the dividend equivalent component is redeemed within the same three-year window that applies to the main component of the unit … .