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Tax Alert 2021 No. 13, 26 March 2021
In Internal Interpretation 2019-0832211I7(E) Cross-border Restricted Share Units, the Canada Revenue Agency (CRA) introduces a new methodology for sourcing restricted share unit (RSU) benefits that it refers to as the “Hybrid Methodology.” Under the Hybrid Methodology, the “in the money portion” of the RSU is sourced to employee workdays in the year of grant, and any increase in value of the RSU is sourced to the vesting period. This approach has the potential to complicate the process of sourcing RSU awards.
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An RSU generally represents the right of an employee to acquire a share or equivalent cash value following the satisfaction of vesting conditions.
In situations involving internationally mobile employees, it is necessary to determine the portion of the benefit that is earned for services performed inside and outside Canada. This process is referred to as “sourcing” and is relevant for determining the portion of the benefit that is taxable in Canada (in the case of a non-resident employee) or determining the applicable foreign tax credit.
The determination of the jurisdiction in which the benefit is earned is always a question of fact. That said, the most common approach typically involves sourcing an RSU benefit to Canada based on employee workdays in Canada during the RSU vesting period divided by the total employee workdays over this period, assuming the RSU plan is forward looking and not attributable to past services. This approach is similar to the Organisation for Economic Co-operation and Development (OECD) guidance for stock options that was adopted by the CRA in 2012.
This technical interpretation introduces the “Hybrid Methodology,” a new method for sourcing RSU benefits when employment is exercised within and outside of Canada. The CRA suggests that sourcing under the Hybrid Methodology should comprise the following steps:
The CRA notes the Hybrid Methodology should be applied regardless of whether:
As the CRA notes, the sourcing of benefits is a question of fact and “should be done by examining all of the relevant facts, including the RSU plan documents and the individual award agreements.”
The Hybrid Methodology has the potential to cause some difficulties:
For more information, please contact your EY or EY Law advisor or one of the following professionals:
Danielle Laramée
+1 514 515 4360 | danielle.laramee@ca.ey.com
Laura Assal
+1 416 943 2639 | laura.b.assal@ca.ey.com
Sandra A. Hamilton
+1 416 941 7794 | sandra.a.hamilton@ca.ey.com
Lawrence Levin
+1 416 943 3364 | lawrence.levin@ca.ey.com
Leah Shinh
+1 519 571 3325 | leah.c.shinh@ca.ey.com
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