Parentco (apparently, a non-resident public company) funded and administered a performance share plan (“PSP”) for employees of group companies, including Canco. A vested award may be settled in either shares or the cash equivalent, at the discretion of Canco or Parentco. Parentco periodically contributes cash to a custodian Such funds were used to purchase shares on the open market, with the shares used to settle awards under the PSP as well as other equity-based incentive plans.
Before addressing the deductibility of reimbursement payments made by Canco to Parentco pursuant to a recharge agreement for the value of shares distributed to Canco’s employees in satisfaction of vested PSP awards, the Directorate stated that it agreed with the following submission, on the assumption that the arrangement was a trust:
There is an ‘arrangement’ (the PSP); under which contributions (cash) were made by a ‘person’ (Parentco) ‘with whom the employer’ (Canco) did not deal at arm’s length, to another person [the custodian]; and under which arrangement ‘payments’ (the distribution of shares) would be made for the benefit of employees of the ‘employer’ (Canco).