Canada: Significant Tax Changes On The Horizon

On November 4, 2015, the leader of the Liberal Party of Canada, Justin Trudeau, was officially sworn in as Canada's 23rd Prime Minister. Mr. Trudeau replaces the Conservative Party's Stephen Harper, who had served as the Prime Minister of Canada since February of 2006.

Over the course of the lengthy campaign that culminated in the election of the new Government, the Liberal Party made a host of campaign promises that could fundamentally alter the Canadian tax system.

While the new Government's campaign pledges have yet to be enacted into law, much speculation has focused on when certain of the proposed tax changes might take effect. If past governmental practice is any indication, the anticipated tax changes may apply from the day that a formal announcement is made by the Minister of Finance, even if the required enabling legislation is not enacted until a later date. Many have also speculated that a Notice of Ways and Means Motion, containing a host of tax-related amendments, could be introduced once Parliament is recalled on December 3, 2015. In short, it is possible that many of the campaign promises made by the new Government may come into force in the very near future.

Business Tax Changes

The Liberal Party proposed a number of business-related tax changes as part of its election platform.

(i) Changes to the Taxation of Employee Stock Options

Of significant concern to many in the business community, the new Government has proposed to limit the deductions that a person may claim in connection with the exercise of employee stock options.

The Income Tax Act currently provides that when an employee is granted certain stock options, the employee is not immediately required to recognize a taxable benefit from employment. However, when the options are subsequently exercised (or, in the case of options relating to shares of certain "Canadian-controlled private corporations" ("CCPCs"), when the shares acquired on the exercise of the options are subsequently sold), a taxable benefit from employment is required to be recognized by the employee. The amount of the taxable benefit is generally equal to the value of the shares acquired on the exercise of the option, less the amount paid to acquire the shares.

As a means of encouraging employees to hold equity interests in their employers, the Income Tax Act currently provides that, under certain circumstances, an employee may claim a deduction equal to 50% of the taxable benefit that arises in connection with the exercise of a qualifying employee stock option (the "Stock Option Deduction").1 (In effect, the Stock Option Deduction results in the taxable benefit being subject to tax at rates comparable to those that would have applied if the benefit was instead treated as a capital gain.)

While the new Government has indicated that it recognizes the importance of maintaining the Stock Option Deduction, it has claimed that the benefit of the Stock Option Deduction has been disproportionately enjoyed by a small number of taxpayers. On that basis, the Government proposed in its election platform that taxpayers only be permitted to claim the Stock Option Deduction in respect of the first $100,000 (US$75,000) of annual gains arising from the exercise of employee stock options. The amount of any such annual gains in excess of $100,000 would be required to be fully recognized as taxable income, without any offsetting deduction.

Planning Considerations

The new Government initially offered few details on how the proposals affecting the Stock Option Deduction will be implemented. However, on November 20, 2015, the new Minister of Finance indicated that it was not the Government's intention to amend the rules governing the taxation of employee stock options on a retroactive basis. According to the Minister, "any decision we take on stock options will affect stock options issued from that date forward" and "any stock options that have been issued prior to that date will be under [the] taxation regime that was in effect prior to that date".

The Minister's comments appear to indicate that employee stock options issued prior to the release of more detailed legislative proposals will be "grandfathered" and will not be subject to the contemplated limitations on the ability to claim the Stock Option Deduction.

Prior to the Minister's announcement, option holders had been left to consider whether it might be prudent to exercise their options before the expected tax changes took effect. The early exercise of options carried certain risks that extended beyond the simple risk of potentially accelerating a taxable benefit unnecessarily if existing options were ultimately "grandfathered" from the proposed tax changes. For instance, where an option holder does not intend (or is not permitted) to immediately sell the shares acquired on the exercise of an option, any subsequent loss on the later sale of the shares cannot be carried back to offset the initial taxable benefit. As a result, the early exercise of a stock option couldcan give rise to immediate taxable income that cannot be reduced in the future by losses arising on the ultimate sale of the shares.

The Minister's recent announcement should provide comfort to most option holders that it is not necessary to exercise existing options early to ensure that the Stock Option Deduction may be fully claimed in respect of such options. Nevertheless, certain option holders may still wish to consider the prudence of exercising options in advance of the impending 4% increase in the highest marginal personal income tax rate (as discussed in more detail below).

The Minister's recent comments appear to suggest that the new Government may take some time to assess how it wishes to adjust the rules governing the taxation of employee stock options. For instance, will limitations on the ability to claim the Stock Option Deduction ultimately apply in respect of all options or will there be an exemption for options in respect of shares of CCPCs or companies that operate in sectors that have traditionally relied heavily on stock option compensation (e.g., technology start-ups)?

The announcement of "grandfathering" relief may also offer special planning opportunities for businesses, albeit for a short period of time. Businesses that have been considering granting stock options to employees may wish to consider expediting such grants to ensure that employees will be able to fully claim the Stock Option Deduction in respect of such new options in the future.

Businesses that grant significant employee stock options may wish to begin considering alternative compensation plans as a means of providing ongoing incentives to those employees that might cease to be able to fully avail themselves of the Stock Option Deduction in the future.

Corporate taxpayers are not entitled to claim a deduction in respect of the value of shares issued on the exercise of stock options when computing their income. If the ability to claim the Stock Option Deduction is limited, businesses may begin to reassess the advantages and disadvantages of granting stock options relative to other forms of employee remuneration. Alternative equity-based compensation programs, which track the equity value of an enterprise, yet entitle the company to claim a deduction in respect of payments made to participating employees, may soon represent a more tax-efficient mode of compensation. Employers with significant stock option programs would be well advised to begin reviewing their stock option plans at the earliest opportunity to mitigate the impact of the impending changes to the Stock Option Deduction.

(ii) Changes to the Employment Insurance ("EI") Program

The Liberal Party also proposed a number of significant changes to the EI system during the election campaign.

First, the Liberals indicated that they would scale back previously proposed reductions to EI premiums. In its 2015 Budget, the former Conservative Government had projected that EI premiums would fall to $1.49 per $100 of remuneration by 2017. The new Government has proposed to limit the reduction in EI premiums to a revised level of $1.65 per $100 of remuneration earned.

Second, the Liberals have proposed to grant employers an exemption from employer-side EI premiums in respect of certain new hires. Specifically, under the proposal, employers that hire a person between the ages of 18 and 24 into a permanent position in 2016, 2017 or 2018 will enjoy a 12 month exemption from having to pay employer-side EI premiums in respect of the employee.

Third, the Liberals have proposed to extend the period during which an individual may obtain EI benefits during a parental/maternity leave from 12 to 18 months (albeit on a reduced basis). (The new Government has acknowledged that the implementation of this latter proposal will require the cooperation of the provinces and amendments to the provincial labour codes.)

Planning Considerations

Employers that intend to hire younger workers into permanent positions may wish to consider delaying the initial retention of such new employees until 2016 in order to take advantage of the promised EI premium holiday. However, employers will need to exercise caution in trying to take advantage of the new incentive. In particular, human rights legislation precludes employers from discriminating between prospective employees on the basis of age. While it may be possible to assess the eligibility of an applicant for the new EI incentive without violating human rights legislation, questions will need to be carefully considered prior to being posed to applicants.

(iii) Other Commercial Tax Changes

The new Government has proposed other tax changes with a view to stimulating economic activity. For one, the new Government proposes to provide a full federal GST rebate in respect of expenditures on new capital investments on affordable rental housing. While further details on the expenditures that will qualify for the rebate have yet to be released, a footnote to the Liberal Party's election platform seems to suggest that the rebate will be modeled on the existing partial rebate under the current law.

The Liberal Party has also proposed to reverse the legislated phase-out of the tax credit offered in respect of the acquisition of shares of "prescribed labour-sponsored venture capital corporations" and immediately reinstate the full 15% federal tax credit. (In 2013, the federal Government proposed to phase-out the tax credit over a four-year period.) It will be interesting to observe whether parallel provincial tax credits, which were previously phased-out, might be re-introduced in light of the new federal proposal.

Personal Tax Changes

A central theme of the Liberal Party's election platform was increasing taxes, and reducing tax benefits, for those individual taxpayers with incomes in excess of $200,000 (US$150,000) per year.

In this regard, the Liberal Party pledged to introduce a new top federal marginal tax rate of 33%, which will apply to personal income that exceeds $200,000 each year. When combined with applicable provincial income tax rates, the combined top marginal tax rate that will apply to taxpayers in many provinces will exceed 50%, with the rate in one province approaching 59%.

The Liberal Party also proposed to repeal the rules in the Income Tax Act that permit certain "income splitting" between spouses. The "family income splitting" provisions, which were first introduced in 2014, effectively permit an individual with a child under the age of 18 to transfer up to $50,000 of his/her income to a lower-earning spouse for federal income tax purposes (for a maximum federal tax savings of $2,000 per year).

Finally, the new Government has proposed to reduce the annual limit on the contributions that individuals may make to a Tax-Free Savings Account from the current limit of $10,000 to $5,500.

Planning Considerations

Taxpayers may wish to consider the prudence of (i) accelerating the receipt of income in 2015, or (ii) delaying the recognition of expenses or deductions to a later taxation year. For instance, taxpayers may wish to consider accelerating the receipt of bonuses or the disposition of property with accrued gains prior to the increase in personal income tax rates. In a similar vein, taxpayers may wish to consider means of maximizing the benefit of the "family income splitting" provisions by managing their income relative to that of their spouse before the provisions are repealed.

Although taxpayers might be eager to take steps to mitigate the impact of the impending personal income tax changes, taxpayers should exercise caution before taking steps to increase their 2015 income. To date, few details have been provided on how, or when, the proposed tax changes will become effective. Particular attention should be paid to all upcoming governmental announcements to determine the effective date of the expected tax changes. Ultimately, each taxpayer will need to carefully weigh the relative risks and advantages that might accrue from accelerating income, particularly in cases where future income or salary levels might be uncertain.

General Tax Policy Statements – Foreshadowing Things to Come?

The new Government's election platform also contained a series of general statements that provide some indication of where future tax changes may emerge.

For instance, the Government has signalled a desire to introduce enhanced tax measures to generate more clean technology investments in Canada. The new Government's stated objective is "to make Canada the world's most competitive tax jurisdiction for investments in the research, development, and manufacturing of clean technology".

The new Government has also repeatedly expressed a desire to review all existing tax expenditures to "target tax loopholes that particularly benefit Canada's top one percent". The Government has suggested that the "core objective" of the review will be to "look for opportunities to reduce tax benefits that unfairly help those with individual incomes in excess of $200,000 per year". The proposed limitations to be imposed on the Stock Option Deduction have been cited as one example of the changes that will be made as part of the tax expenditure review.

The new Government has further suggested that it may introduce more restrictive rules governing the taxation of CCPCs.

The new Government has projected that it will be able to generate $6.5 billion in savings and increased tax revenue over the next four years as a consequence of its review of existing tax expenditures and spending policies. The new Government has also pledged to allocate an additional $80 million over the next four years "to help the Canada Revenue Agency crack down on tax evaders".

Planning Considerations

The new Government's stated focus on tax planning and closely-held business corporations suggests that taxpayers should expect increased audit activity in the coming years. Taxpayers should take steps to ensure that their previous tax plans have been executed and administered in the manner intended, and future tax planning should be undertaken with an eye to the Government's pending legislative proposals.

Footnotes

1  In the Province of Québec, for provincial tax purposes, the available deduction is equal to 25% of the taxable benefit.

2  The revenue projections contained in the Liberal Party's election platform seem to suggest that broad-based "grandfathering" relief was not originally contemplated, although the data presented in this regard is not entirely clear.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michel M. Ranger
Similar Articles
Relevancy Powered by MondaqAI
Roper Greyell LLP – Employment and Labour Lawyers
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Roper Greyell LLP – Employment and Labour Lawyers
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions