Publications

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Canada has announced its federal budget, which contains potentially important changes to the Canadian federal income tax rules applicable to equity compensation awards.

If enacted, these changes are anticipated to come into effect shortly.

A brief summary of the details of the proposed amendments to the Canadian Income Tax Act follows:

• No deferral of taxable event. With certain limited exceptions, it may no longer be possible to defer the taxation of stock option benefits from the year of exercise to the year of sale of the underlying shares. However, there may be a five-year phase-out of the deferral for outstanding awards.
• Changes to corporate deductions / reduced individual taxation for cash payment. In the case of a cash-settled award, it may no longer be possible for the corporation to claim a deduction for the full amount of the cash payment and for the employee to pay tax on only half the value of such payment. Instead, either the employee will be entitled to the half-rate of tax or the corporation will be eligible for the deduction, but not both.
• Clarification of deduction and tax withholding. The Income Tax Act may be clarified to expressly require deduction at source and remittance of tax on stock option benefits at the time the options are exercised.

Practical Implications

These proposed changes have potential tax consequences for existing holders of stock awards or future stock award recipients in Canada. Accordingly, companies that offer stock awards in Canada should assess the impact of these potential tax changes on Canadian award recipients.

For more information, please contact Dean Fealk or Sang Kim.