16 January 2007 External T.I. 2006-0178881E5 - DSU Plan Transfer to Stock Option Plan

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can participation under a DSU plan be terminated and effectively converted into participation under an employee stock option plan on a tax-deferred basis?

Position: No

Reasons: The granting of rights under the employee stock option plan in satisfaction of the amount the employee would be entitled to on termination of participation under the DSU plan (the value of DSUs credited to the employee at that time) would cause the DSU plan to fail to comply with subparagraph 6801(d)(i) of the Regulations. As a result, the DSU plan would be a salary deferral arrangement and taxed accordingly.

XXXXXXXXXX 								2006-017888

January 16, 2007

Dear XXXXXXXXXX:

Re: DSU Plan Conversion to Stock Option Plan

This letter is in response to your firm's letter dated November 4, 2005 and further to telephone conversations (XXXXXXXXXX/Allen and XXXXXXXXXX/Allen) concerning the termination of rights under a deferred share unit plan that satisfies the conditions of paragraph 6801(d) of the Income Tax Regulations (the "Regulations") (DSU Plan) and the grant of rights under an employee's stock option plan in accordance with subsections 7(1.1) and 7(1) of the Income Tax Act (the "Act") (ESOP) immediately thereafter. Specifically, you enquire whether participation in a DSU Plan may effectively be converted into participation in an ESOP on a tax-deferred basis.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA). All publications referred to herein can be accessed on the CRA website at the following address:

http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html

Our Comments

Paragraph 6801(d) of the Regulations describes the conditions that must be satisfied in order for a plan or arrangement to be a prescribed plan or arrangement for the purposes of paragraph (l) of the definition of "salary deferral arrangement" in subsection 248(1) of the Act.

In general, subparagraph 6801(d)(i) of the Regulations requires the arrangement to be between a corporation and an employee of the corporation under which the employee may or shall receive an amount that may reasonably be attributable to duties of an office or employment performed by the employee on behalf of the corporation where;

(i) all amounts that may be received under the arrangement shall be received after the time of the employee's death or retirement from, or loss of, the office or employment and no later than the end of the first calendar year commencing thereafter.

Under the arrangement described in your firm's letter, an employee would have the ability to terminate their participation in the DSU Plan and be granted employee stock options under the ESOP, in satisfaction of the employee's right to amounts under the DSU Plan (i.e., the value of DSUs allocated to the employee at the time the employee's participation in the DSU Plan is terminated). In our view, such an arrangement would result in an amount being received prior to the employee's death, retirement or termination of employment. As a result, the plan or arrangement would fail to satisfy the conditions of subparagraph 6801(d)(i) of the Regulations, and therefore the plan or arrangement would be a salary deferral arrangement and taxed accordingly.

We trust our comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch