(a) CRA has ruled ((e.g. 2005-0144541R3) that units of a 3-year bonus plan that satisfied the conditions of para. (k) in the definition of SDA could be converted, without realizing tax, to units of a DSU plan that satisfied the conditions of Reg. 6801(d). Why has CRA discontinued providing such rulings? CRA responded:
When considering the conditions that must be satisfied under paragraph (k) of the definition of SDA and paragraph 6801(d), a conversion of rights under a 3-year bonus plan to rights under a DSU plan, or vice versa, will not satisfy the conditions under either paragraph (k) or 6801(d). In such circumstances, the conversion of rights under what was a 3-year bonus plan could effectively permit the payment of an amount after the third calendar year, and the conversion of rights under what was a DSU plan could result in the payment of an amount prior to death, retirement or termination of employment. Accordingly…the terms of a plan cannot under any circumstance provide a taxpayer with conversion rights.
(b) Can a DSU plan provide for payments to be made in accordance with the permissible distributions events in section 409A of the Code and still comply with the requirements of Reg. 6801(d)? CRA responded:
The timing of payments under section 409A can be earlier than the timing of a factual loss of office or employment required under paragraph 6801(d). … For example, section 409A permits payments to be made as a result of a reduction in service to less than 20% of the previous level, a change in control of the employer or an unforeseeable emergency.
Consequently, it is our view that a DSU plan could not provide for the full range of distribution events permitted by section 409A… and still comply with paragraph 6801(d).
(c) When do these revised positions become effective? CRA stated, respecting “3-year bonus plans and DSU plans that relied on the positions reflected in these published rulings” but for which no ruling was sought, that:
The CRA will continue to apply the positions in [the] published rulings to any units credited on or before November 24, 2015 (including units with unexercised conversion rights on that date), as well as to additional units credited at any time in respect of those units, for example, dividend equivalents and proportional adjustments due to stock splits or corporate reorganizations.
(See also CRA’s previous oral announcement.)