The Directorate was asked to rule that a received a request to rule that a performance bonus plan would not be a salary deferral arrangement (“SDA”). The Proposed Plan would have granted units whose value at the redemption date would have been essentially based on changes in EmployerCo’s cumulative retained earnings (i.e. retained earnings on redemption date minus retained earnings on grant date) over the period, plus dividends paid over the same period. The Directorate concluded that it could not rule because, under this formula, the units’ value would have increased over the duration of the vesting period even if EmployerCo’s net earnings remained stable over the period (as had been the case in prior years).
Thus, on the first year end in which the units have a positive value, the participants in the Proposed Plan would have, at that time, a right to receive an amount that is, or is on account or in lieu of, salary or wages of the relevant employee for past services.
The Directorate announced:
... ITRD will no longer consider any ruling requests pertaining to whether any given formula-based appreciation plan is a SDA, unless:
i) the plan is of a type described in ATR-45 …; or
ii) the ruling request pertains to whether one of the enumerated exceptions listed in the definition of SDA apply to the plan.
… ITRD is increasingly concerned that the financial metrics that underlie formula-based appreciation plans may be susceptible to manipulation … [which] can be used to obfuscate the fact that a formula-based appreciation plan’s underlying purpose is to defer tax … .
… [S]hare appreciation rights (“SAR”) plans … described in ATR-45 … [have] the following characteristics:
- The unit has no intrinsic value at the date of grant;
- The value of a unit is not guaranteed and may have a negative value after the date of grant; and
- The value of each unit at any particular time is determined by subtracting the FMV of a share of the employer at the date of grant from the FMV of a share of the employer at that particular time.
The CRA's longstanding position remains that a unit issued under a SAR plan with the above characteristics will generally not be considered to be a SDA. This is because we consider such plans to be significantly less susceptible to manipulation … .
… [O]ur decision to no longer consider ruling requests for formula-based appreciation plans does not mean that the CRA now considers all such plans to be SDAs.