Deferred Share Unit Plans With Dividend Equivalents

Deferred share unit ("DSU") plans are a form of equity-based compensation for employees, directors, or officers. If structured correctly, DSUs are exempt from the salary deferral arrangement ("SDA") rules in the Income Tax Act (Canada) ("ITA") and are therefore not taxed until they are cashed-out. DSUs are a valuable tool for retaining and rewarding talent but the underlying plan must be carefully drafted to ensure compliance and avoid unwanted tax consequences, especially when including dividend equivalents.

This article will provide an overview of DSUs, and pitfalls to avoid when granting dividend equivalents.

DSUs

To comply with the ITA, and to ensure tax is deferred until the DSUs are cashed out upon the death or retirement of the employee, DSU plans that are not structured to fit into the employee stock option regime must: