Employees of a Canadian subsidiary participated in a performance share plan (“PSP”) under which the non-resident public parent (Parentco) contributes funds to a non-resident trust, which purchases shares of Parentco on the open market, and distributes shares (within approximately three years) to the group employees as the shares vest in accordance with the performance conditions of the PSP. After finding that the arrangement was an employee benefit plan, Headquarters concluded that payments made by Canco to Parentco under a “recharge” agreement, equal to the fair market value of shares that were distributed to the Canco employees at the time the previously awarded shares had vested, were not deductible under s. 32.1. However, in finding that such payments likely were generally deductible under s. 9, the Directorate stated:
T]he reimbursement payments are in respect of employee compensation for services rendered to Canco as part of its ongoing business activities and are required to be made pursuant to the recharge agreement. …
[A]mounts invoiced by Parentco to a particular entity are based on the employee’s employer as at the grant date. Audit may wish consider whether an adjustment to the amount deductible by Canco is warranted in the event that one or more of Canco’s employees changed employers within the Parentco group during the grant-to-vest period resulting in the PSP awards not being fully attributable to services rendered in connection with Canco’s business.