Incentivizing Employees: Avoiding A Salary Deferral Arrangement

Incentivizing employees is a critical component of most business strategies. Employers may implement arrangements for deferred cash bonuses, often subject to the satisfaction of certain criteria. From a tax perspective, the efficacy of any such arrangement requires that no tax be payable prior to the time an individual receives a cash payout. To ensure that result, it is critical to avoid the application of the "salary deferral arrangement" (SDA) rules under the Income Tax Act (Canada) (ITA).

A key exception to the SDA rules applies where a right to a cash bonus is granted to an employee for services rendered in a particular year where the cash amount is paid no later than December 31^st of the third calendar year following that service year. Although seemingly straight-forward in its application, recent commentary of the Canada Revenue Agency (CRA) confirms that care needs to be taken in structuring an incentive plan based on this exception. As employers consider