Principal Issues: Whether rights held by an employee under a DSU plan can be transferred to a corporation pursuant to section 85?
Position: No.
Reasons: Income from DSUs is employment income therefore, DSUs do not qualify as “eligible property” for the purpose of subsection 85(1.1).
Moreover, the transfer of DSUs to a person other than the employee during the employee's lifetime would result in the plan not meeting the conditions of paragraph 6801(d) of the Regulations with respect to the employee, such that the plan would be an SDA. This would also result in an immediate income inclusion by virtue of subsection 6(11) and paragraph 6(1)(a) of the Act to the employee for the FMV of his/her units. Subsequent increases of the FMV of the rights would also be subject to tax on a yearly basis as per paragraph 6(1)(a) and subsection 6(11).
Furthermore, such a transfer can indicate that the plan had never met the conditions of paragraph 6801(d) of the Regulations such that the SDA rule would apply retroactively.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 3 NOVEMBER 2023
2023 APFF CONFERENCE
6. Transfer of an interest in a deferred share unit plan to a corporation.
Pursuant to paragraph 6(1)(a) of the Income Tax Act (footnote 1), the value of the benefit deemed to be received by a taxpayer pursuant to subsection 6(11) as part of a salary deferral arrangement ("SDA") must be added to the taxpayer's income. The concept of an SDA is defined in subsection 248(1) and refers, in brief, to a plan or arrangement that entitles a person to receive an amount after the year and that can reasonably be considered to have the purpose of postponing tax payable under the Income Tax Act on an amount owing to the person as salary or wages for services rendered in the year or a preceding taxation year. An SDA specifically excludes certain plans. In particular, paragraph (l) of the definition of SDA in subsection 248(1) excludes prescribed plans. Prescribed plans are listed in section 6801 of the Income Tax Regulations (footnote 2) and include deferred share unit plans described by paragraph 6801(d) I.T.R. ("DSU Plans").
Typically, under a DSU Plan covered by paragraph 6801(d), an employee may receive a portion of the employee’s annual bonus in the form of deferred share units ("DSUs") to be credited to a notional account. The value of those units is linked to the value of the shares of the corporation employing the employee (or a related corporation). For a DSU Plan to meet the conditions set out in paragraph 6801(d), all amounts receivable under the plan must be received after the time of the employee's death, retirement or loss of employment and no later than the end of the calendar year following that date.
Question to the CRA
An employee is considering transferring his rights under a DSU Plan to a taxable Canadian corporation of which he is the sole shareholder ("Holdco"). Can the employee transfer his rights under the DSU Plan to Holdco by way of a rollover under section 85?
CRA Response
n order to transfer property to a corporation under section 85, the property must be eligible property. Only the properties listed in subsection 85(1.1) are eligible properties. These include capital property, resource property, inventory and certain other property specifically mentioned. In this case, to qualify as eligible property, the employee's rights under the DSU Plan would have to qualify as "capital property". Section 54 defines capital property as depreciable property and any property (other than depreciable property) any gain or loss from the disposition of which would be a capital gain or a capital loss of the taxpayer.
In this case, the employee's rights are neither depreciable property nor property the disposition of which would result in a capital gain or loss to the employee. Rather, an employee's rights under a DSU Plan generate income from an office or employment. Since the rights in the DSU Plan are not eligible property within the meaning of subsection 85(1.1), the transfer of those rights to a corporation cannot benefit from the rollover provided for in section 85.
Furthermore, the exception provided for in paragraph 6801(d) I.T.R. applies to a plan or arrangement established between a corporation and its employee (or the employee of a related corporation). Under such a plan, the employee receives or may receive amounts that are reasonably attributable to duties of an office or employment performed by the employee on behalf of the corporation. It is our view that rights under a DSU Plan may not be held by a person other than the employee with whom the agreement has been entered into. A transfer to another person would contravene the preamble to paragraph 6801(d), which requires that the agreement be between the corporation and the employee and that it be that employee who may receive amounts under the arrangement. Furthermore, we are of the view that the transfer of the employee's rights in the DSU Plan could indirectly allow the individual to access the value of the individual's rights before one of the times specifically identified in paragraph 6801(d)(i) I.T.R., which would also contravene the requirements of paragraph 6801(d).
Consequently, the plan or arrangement would no longer benefit from the exception provided for in paragraph (l) of the definition of SDA in subsection 248(1) and would qualify as an SDA in respect of the employee from the date of the transfer. As a result, the FMV of the deferred share units would be included in computing the employee's income in the year of the transfer (to the extent that such value had not already been included), as well as any subsequent appreciation in the value of the units, pursuant to subsection 6(11) and paragraph 6(1)(a).
Generally speaking, when a DSU Plan ceases to meet the conditions of paragraph 6801(d), it is possible, depending on the circumstances, that the arrangement was never a DSU Plan and that the plan qualifies as an SDA as soon as it was entered into. For example, we have in the past been called upon to consider a situation where a DSU Plan was prematurely terminated, with all issued DSUs being redeemed for a cash payment. As the redemption was not the result of exceptional circumstances, but rather was within the control of the employer and its employees, we concluded that the SDA rules applied retroactively to all DSUs granted. By analogy, we are of the view that the presence of a transfer that would be at the discretion of the employee and the employer could demonstrate that the parties never intended to meet the criteria required for the plan to qualify as a DSU plan. In such circumstances, the agreement or arrangement would qualify as an SDA from the time of its creation, resulting in the retroactive application of the SDA rules.
Catherine Ayotte
November 3, 2023
2023-099424
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 R.S.C. 1985, c. 1 (5th Supp.) ("I.T.A.").
2 C.R.C., c. 945 ("I.T.R.").