In providing general guidance on the allocation of RSU benefits between Canada and a foreign jurisdiction, the Directorate noted that, in dealing with the similar question of allocating cross-border stock options, the OECD Commentary set indicated that generally stock option benefits should not relate to the period of employment after the vesting period and appeared to adopt the rebuttable presumption that an employee stock option benefit pertains to services rendered after the date on which the option was granted, and then stated:
The following methodology generally applies [after 2020] in sourcing RSU Benefits between Canada and foreign jurisdictions (the “Hybrid Methodology”):
i. Separate the “in the money” portion of RSU Benefits at the date of grant (the “ITM Portion”) and the portion of RSU Benefits relating to the increase in fair market value of the underlying shares from date of grant to date of vesting (the “FMV Portion”).
ii. The ITM Portion at the date of grant generally pertains to past services, and is sourced to the jurisdiction in which the employment services were rendered in the year in which the RSUs were granted (if multiple jurisdictions, in proportion to the employment period exercised in each jurisdiction in that year).
iii. The FMV Portion generally pertains to services rendered during the vesting period, and is sourced according to the OECD Guidance (that is, in proportion to the employment period exercised in each jurisdiction from date of grant to date of vesting).
The Directorate further indicated that this methodology applies regardless of where the employee was resident at the time of grant or during the vesting period, whether the RSUs at one time or over a period, whether they are settled in cash or with shares, and whether they are subject to s. 7.
For example, an employee, who was resident and exercised his employment in a foreign country (“FC”) up until December 31, 2021 and thereafter was resident in and exercised his employment in Canada, was granted 300 RSUs (to be settled in employer shares) on December 31, 2020, when his employer’s shares were trading at $10. The RSUs vest 1/3 each on December 31st of 2021, 2022, and 2023.
Focusing, for instance, on December 31, 2023, when he receives 100 shares with an FMV of $34 each, the ITM Portion for those shares, of $1,000, is sourced to FC (where his services were performed before the grant date); and the FMV Portion, of $2,400, is sourced 1/3 to FC and 2/3 to Canada in proportion to the period of employment exercised by him in each jurisdiction during the vesting period.
The individual recognizes an employment benefit of $3,400 in 2023 under s. 7(1)(a) (assume no Treaty). However, he is entitled to claim a foreign tax credit under s. 126(1) for any income tax paid to FC on the portion of the employment benefit that is sourced to FC (i.e., $1,800 = $1,000 + $800).