Overview

Deferred Share Units (DSUs) are notional units granted to an employee that mirror the market value of the employer’s common shares and do not represent actual share ownership. While employees do not receive any dividends that are paid to owners of the underlying shares, they are generally granted additional units equivalent to the value of dividends. DSUs are redeemed for the underlying common shares or an equivalent cash benefit.

DSU plans must address the employee’s duties and contain a predetermined formula relating to the number of DSUs that can be awarded. The benefit an employee realizes when redeeming the DSUs is dependent on the share price. The inherent benefit to the employer is that this incentive aligns the goals of the employee with the goals of the company.

Taxation

The general rule is that tax is payable on employment benefits in the year they are received. A benefit of DSUs is that the employee is not taxed until the year that the DSUs are paid out. This tax deferral is dependent on an exception to the Salary Deferral Arrangement (SDA) rules.

The two most utilized exceptions to the SDA rules are the “three-year bonus exemption” and qualifying as a prescribed plan. Restricted Share Units and Performance Share Units are two plans that are designed to avoid the SDA rules by fitting within the “three-year bonus exemption.”

DSUs avoid the SDA rules by qualifying as a prescribed plan. This requires that any benefits be redeemed after the time of the employee’s death, retirement, or termination of employment, and before the end of the following calendar year. The benefit amount must also be dependent on the fair market value (FMV) of the shares. The FMV must be determined at a point in time between one year before end of employment (retirement, death, or termination) and the date the payment is made. This timeline incentivizes employees to maximize company success over a long time horizon. Regardless of whether the DSUs are converted to common shares or an equivalent cash benefit, the award is fully taxable as employment income and subject to payroll withholding tax.

Employee Considerations

The value derived from Deferred Share Units (DSUs) is dependent on share price, which can change significantly over their long time horizon. If the company is successful and the share price appreciates, this award would provide a strong incentive to employees. Conversely, DSUs may not provide an effective incentive to employees if the company experiences a significant decline in their share price.

This article is meant to provide a general overview and is not intended to provide tax or legal advice. You should consult with professionals to ensure that your own unique circumstances have been considered and any action taken is based on the latest information available.

Why do we plan?

Knowing where you are translates into knowing where you're going, and we hope to provide every client with the trust and confidence to navigate through the waters of their financial lives.

Learn More