The August 27 draft legislation contains a number of measures potentially of interest to Benefits Canada readers. Some of the highlights are as follows.
First, the draft contains amendments to the Income Tax Act designed to implement the March 2010 Budget proposals around the taxation of employee stock option benefits. At first blush, the amendments seem consistent with the thrust of the Budget proposals, namely:
• elimination of the previous ability both for an optionholder to surrender his or her options for a cash payment only one-half of which is taxable and for the employer to claim a corporate tax deduction for the entirety of such payment. Henceforth, an optionholder who wishes to claim the half rate of taxation on the stock option benefit will have to file with his or her personal income tax return a copy of the employer’s election to waive its right to claim the corporate tax deduction;
• repeal of the February 2000 budget “stock option deferral” in regard to certain public company options;
• addition of an entire new part of the Income Tax Act, codifying the temporary relief for taxpayers (principally employees of Nortel and other tech wreck victims) who claimed such deferral and were then whipsawed by the subsequent collapse in their employer’s share price;) and
• addition of a clear and express requirement for employers to effect source deductions on stock option benefits, as from January 2011. This change does away with the longstanding prior uncertainty as to whether source deductions were or were not required when employees exercised their stock options.
Second, the draft contains a slightly revised version of the rules implementing the new “employee life and health trust” concept, a preliminary version of which was released earlier in 2010. As the Aug. 27 release contains neither explanatory notes nor a blackline against the original draft, the changes and their significance do not exactly leap off the page. That being said, one key new addition is expanded deductibility for employer contributions to certain specified multi-employer trusts, though not to other, run-of-the mill employee life and health trusts.
Another interesting new element of this latest release is the inclusion of a draft regulation expressly referencing certain payments in regard to the Chrysler Canada and GM Canada employee life and health trusts, established as part of those two companies’ 2009 restructurings. One can easily imagine the relief of the various Chrysler and GM stakeholders and their advisors upon finally seeing this regulation in print.
Third, the draft contains yet another stab at implementing the proposed new rules on “non-resident trusts”, which Finance has been struggling to craft for the past decade in an attempt to prevent Canadian taxpayers from squirreling away excess assets outside the Canadian taxman’s reach. Most of these rules have nothing to do with employee benefits per se. However, because of the broad manner in which previous versions of the proposals have been drafted, the fear has been that the entire worldwide income of a multinational corporation’s offshore employee share ownership trust—in which only a handful of Canadian subsidiary employees participated—could be swept into the Canadian tax net.
This latest draft, though, proposes to define the “resident portion” and “non-resident portion” of such a trust and make the new rules applicable only to the resident portion. While this approach would still create a nexus between such offshore trusts and the Canadian income tax system which many would prefer to sidestep, the implications should be much less draconian. As mentioned above, Finance is accepting comments on this consultation draft until September 27. Thereafter, it can be anticipated that these measures will be put before Parliament for consideration and adoption.