Under an RSU plan established by the U.S. public-company parent (“USCo”) of CanCo, awards of RSUs are made to participants, including CanCo employees, each February. The RSUs vest on a pro-rata basis over a three-year period and are payable upon vesting in common shares of USCo, except that USCo may, in its discretion, decide that some or all of the RSUs are to be settled in cash rather than Shares.
Under a recharge agreement between USCo and CanCo, CanCo will reimburse USCo for expenses relating to RSUs that are settled by USCo with participants who are employees of CanCo (the “Reimbursements”). Although it is required to make Reimbursement payments in advance, CanCo does not claim a deduction for a Reimbursement until the relevant RSUs are settled.
The Directorate was asked whether s. 7(3)(b) would apply to deny the deduction by CanCo of the Reimbursements. After citing Transalta for the proposition that “a discretionary arrangement that does not give employees the right to require that equity-based compensation be paid in the form of shares rather than cash is not an agreement to sell or issue shares for purposes of section 7,” it stated:
… USCo can unilaterally decide to settle RSUs payable to CanCo employees in the form of cash rather than issuing Shares. In such circumstances there would be no agreement to issue shares for purposes of section 7 and paragraph 7(3)(b) would not apply to prohibit CanCo from deducting amounts paid to reimburse USCo under the Agreement.
However, it went on to indicate that because the Plan was a salary deferral arrangement (it vested too late to satisfy para. (k)), s. 18(1)(o.1) generally prohibited a deduction.