Tag Archives: Income Tax Act (ITA)

Proposed Legislative Changes to the Taxation of Employee Stock Options in Canada

In the 2019 Federal Budget, the Canadian government outlined its proposal to introduce a $200,000 annual limit on employee stock option grants for employees of “large, long-established, mature firms”. The government takes the view that the current regime of preferential tax treatment for employee stock options does not help to achieve the policy objective of supporting younger and growing Canadian businesses, but instead, disproportionally benefits executives of large, mature companies who take advantage of the rules as a preferred form of compensation. 

In an effort to provide further clarifications to the proposed new stock options rules, the Department of Finance released a Notice of Ways and Means Motionon June 17, 2019.

Current Regime

Under the current stock option rules, pursuant to subsection 7(1) of the Income Tax Act (Canada) (the “Act”), at the time when employee stock options are exercised by an employee, a taxable benefit is added to the employee’s taxable income to the extent the fair market value (“FMV”) of the underlying shares exceeds the exercise price specified in the option agreement. However, provided that at the time of the grant, the options are not in-the-money (i.e. exercise price is not less than FMV) and, generally, common shares are issued upon the exercise of the options, the employee is entitled to claim a deduction under paragraph 110(1)(d) in the amount of 50% of the taxable benefit determined under subsection 7(1).

New Proposed Amendments

The new draft legislative proposals, if enacted as proposed, would impose a $200,000 annual vesting limit on employee stock option grants (based on the fair market value of the underlying shares at the time the options are granted) that could be entitled to receive the 50% deduction allowed under paragraph 110(1)(d). 

Under the new regime, a vesting year in respect of an option agreement is determined by either: (i) the calendar year in which the employee is first able to exercise his or her option as specified in the option agreement; or (ii) if the option agreement does not specify a vesting time, the first calendar year in which the option can reasonably be expected to be exercised.

The new annual vesting limit would not apply to employee stock options granted by “specified persons” as defined in the Act to mean: (i) Canadian-controlled private corporations (“CCPCs”); and (ii) non-CCPCs that meet certain prescribed conditions (yet to be released).

In addition, the new draft legislative proposals introduce a tax deduction for an employer who enters into an option agreement with its employee to grant non-qualified securities. The amount of deductions the employer is entitled to claim against its taxable income for a taxation year would be equal to the amount of taxable benefit its employees realize under subsection 7(1) in respect of non-qualified securities.

An employer would be entitled to claim such deductions under circumstances where the following conditions are met: (i) at the time of entering into the agreement, the employer notifies the employee in writing that the security is a non-qualified security; (ii) the employer notifies the Minister of National Revenue that the security is a non-qualified security in prescribed form filed with the employer’s income tax return in the year the agreement is entered into; and (iii) the employer is a specified person and the employees would have otherwise been entitled to claim the deduction under paragraph 110(1)(d).

In order to be entitled to claim the tax deduction, it is critical that the employer designates the options that would have otherwise qualified for a deduction under paragraph 110(1)(d) as non-qualified securities by specifying this in the option agreement.

The new draft legislative proposals will apply to employee stock options granted on or after January 1, 2020.

The federal government is currently seeking input on the characteristics of companies that should be considered “start-up, emerging, and scale-up companies” for purposes of the prescribed conditions as well as views on the administrative and compliance implications associated with putting such characteristics into legislation. Submissions of any comments with respect to the prescribed conditions for the consideration by the Department of Finance are due on September 16, 2019.

facebooktwittergoogle_pluslinkedinmail

Tax Court: arrears interest after GAAR assessment accrue from the taxpayer’s balance-due day

old-1645813

Tax Court confirms that arrears interest on taxes resulting from GAAR assessment accrue from the taxpayer’s balance-due day

In Quinco Financial Inc. v. R. (2016 TCC 190), the Minister of National Revenue had assessed Quinco under section 245 (the “GAAR”) of the Income Tax Act (Canada) (“ITA”) to deny certain claimed capital losses.  Arrears interest on the resulting tax due was also assessed, which the Minister computed from Quinco’s “balance-due day”.  The “balance-due day” is the deadline by which a taxpayer is required to pay to the Receiver General certain amounts payable under the ITA for a particular taxation year.  For a corporate taxpayer, it is either two or three months after the end of the particular taxation year, depending on the circumstances.

Quinco took the position that it should not be liable for arrears interest on the assessed tax debt for the period prior to the assessment date.  It proffered numerous arguments to support its position. The most interesting argument was that, although a GAAR assessment requires a determination of the tax consequences reasonably necessary to deny the tax benefit, it does not permit or extend to the recharacterization of the transaction for any other tax purposes; therefore, a taxpayer’s liability for interest does not arise until the date of the reassessment.

Justice Bocock rejected this argument and explained that an assessment under the GAAR,

“whether alone or in conjunction with another technical omission or non-compliant act, is not an assessment divorced from the other provisions of the Act.”

Here, the assessment was raised utilizing the GAAR, but the assessment “insinuated itself into Part I of the Act to reassess the taxpayer otherwise in the normal course.”  Justice Bocock held that subsection 161(1) arrears interest accrues on any tax payable determined under the GAAR from the balance-due day until the GAAR assessment issuance date (and onwards until payment of the tax payable).

 

 

 

 

 

 facebooktwittergoogle_pluslinkedinmail

Tax Residency of Trusts in Canada: Application of the Central Management and Control Test Post-Garron

Canadian and provincial income taxes are assessed on worldwide income on the basis of a taxpayer’s residence. Subsection 104(2) of the Income Tax Act (the “Tax Act”) provides that a trust is deemed to be an “individual” for purposes of the Tax Act. Consequently, trusts that are resident in Canada or deemed to be resident in Canada will be taxed on their worldwide income as opposed to only their Canadian source income. Despite the tax implications accompanying a taxpayer’s residency status, the Tax Act provides little in the way of guidance for determining the residency of a trust. As a result, Canadian courts have been tasked with making this determination.

Central Management and Control

In 2009, Garron Family Trust (Trustee of) v. R.[1] changed the long-standing approach to determining the residency of trusts in Canada.[2] The test set out in Garron provides that the residency of a trust is where the central management and control of the trust actually takes place.[3] The court clarified that the assessment into who has central management and control is a question of fact to be examined on a case by case basis. In concluding that the central management and control of the Summersby and Fundy trusts (the “S&F Trusts”) resided with the beneficiaries, the court considered several factors, including:

  • Whether the evidence or lack of evidence demonstrated an active or passive role taken by the trustee in its management of the trust;
  • The true controlling minds behind investment decisions and management of the S&F Trusts’ assets;
  • The use of a protector mechanism to exert control over the trustee;
  • The beneficiaries’ demonstrated interest in the trustee’s management of the S&F Trusts;
  • The trustee’s expertise in managing trusts; and
  • The trustee’s knowledge of the transactions it had been asked to approve.

Continue Reading »facebooktwittergoogle_pluslinkedinmail

Stock Option Taxation Update

The newly elected federal Liberal government ran on the promise of several personal income tax reforms. The majority of the personal income tax reforms promised by the Liberals focus on addressing income inequality between high-income earners and the middle class – as evidenced by the proposed high-income tax bracket, the reduction in the Tax Free Savings Account contribution limit, the removal of family income splitting, and an over-haul of the current tax treatment of stock-options.

Currently, the rules relating to employee stock option taxation in Canada, generally provide for no tax payable at the time that options are granted and only result in the employee recognizing 50% of the benefit or gain arising from the exercise of the qualifying stock options issued by public companies. This amount is taxed in the year of such exercise. Stock options issued by a Canadian-controlled private company (CCPC), provided certain conditions are met, are eligible for a further benefit in that the tax payable by the employee is deferred until the employee disposes of the shares acquired through the stock option. The result is a “capital-gains” like tax treatment of the increase in the value of the shares. This treatment is implemented by way of a deduction from employment income rather than taxing the stock options as a capital gain.

Continue Reading »

facebooktwittergoogle_pluslinkedinmail

Federal Court of Canada dismisses challenge to CRA’s automated data collection and disclosure regime under FATCA

In a summary judgment released on September 16, 2015, the Federal Court of Canada examined and disposed of the non-constitutional arguments in the Hillis and Deegan case[1] generally finding that the automatic data collection and disclosure of taxpayer information to the United States by Canada pursuant to the Canada-U.S. Intergovernmental Agreement (IGA) is not inconsistent with the Canada – U.S. Tax Treaty (Tax Treaty) and does not otherwise violate the taxpayer confidentiality provisions in section 241 of the Income Tax Act (Canada) (ITA).

The plaintiffs had originally filed a claim seeking a declaration that the relevant provisions under the Canada – U.S. Tax Information Exchange Agreement Implementation Act (IGA Implementation Act) which implements the IGA are ultra vires or inoperative because the impugned provisions are unconstitutional or otherwise unjustifiably infringe Charter rights. An amended statement of claim was subsequently filed adding the non-constitutional arguments. The plaintiffs sought a permanent prohibitive injunction preventing the collection and automatic disclosure of taxpayer information to the United States by the CRA. A special sitting of the Court was scheduled so that the issues could be disposed of before taxpayer information was to be automatically sent pursuant to the IGA.

The Canadian government’s position was that the collection of taxpayer information is authorized by the IGA and that disclosure to the United States is not inconsistent with the Tax Treaty or in violation of section 241 of the ITA.

In its decision, the Federal Court endorsed the general reasoning and the legal arguments submitted by the government.

Continue Reading »facebooktwittergoogle_pluslinkedinmail