29 May 1997 External T.I. 9711455 - DEFERRED BONUS SDA

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

At what point does a deferred bonus plan become an SDA to which the paragraph (k) exception might apply.

Position:

At a time in a particular year that 1) an "amount" is determinable, 2) the employee has a "right" and 3) services have been rendered.

Reasons:

Based on the words in the SDA definition.

XXXXXXXXXX 971145

Attention: XXXXXXXXXX

May 29, 1997

Re: Salary Deferral Arrangement ("SDA")

This is in reply to your letter of April 8, 1997, in which you ask for our views concerning the exclusion of a deferred bonus from the definition of an SDA as set out in subsection 248(1) of the Income Tax Act (the "Act").

You describe several situations concerning the timing of an election by the employee to defer receipt of the bonus (e.g., before the bonus becomes payable, before the amount of the bonus is determined, before the services to which the bonus relate are rendered). The following is our general opinion concerning the application of the SDA rules to a deferred bonus.

The subsection 248(1) definition of an SDA refers to an arrangement "under which any person has a right in a taxation year to receive an amount after the year". With respect to a bonus or any other amount an SDA does not arise until the employee has a "right to an amount". Therefore, it is our view that unless the amount of the bonus can be determined, the SDA definition cannot apply. Please note that an amount that can decrease or increase over time as is common, for example, under phantom stock plans will be subject to the SDA provisions. Furthermore, the employee must have a "right", which can be absolute or conditional. Please refer to our previous technical interpretation (E9422835) of September 14, 1994, in which we advise that the exception for a bonus amount from the SDA definition applies only where the plan would otherwise be an SDA and the bonus was payable from the date of the inception of the arrangement.

The definition also requires that the amount "is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year". Thus, it is also our view that the SDA definition will apply to the amount however determined at the point in time at which some services have been rendered in the particular year to which the bonus relates.

Although the foregoing comments are not binding on the Department, we trust they assist.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch