In 2004, the U.S. Congress enacted section 409A of the U.S.
Internal Revenue Code to eliminate perceived abuses in the taxation
of non-qualified deferred compensation. Section 409A creates a host
of complex compliance issues for any Canadian company (including
its branches and subsidiaries) that offers bonus- or equity-based
compensation plans and arrangements to employees who are U.S.
citizens or residents. Participating U.S. employees in Canadian
arrangements that fail to comply with these rules by December 31,
2008 face severe U.S. tax consequences, including a harsh 20%
penalty tax and interest charges.
Document Compliance. To comply by the December
31 deadline, affected Canadian companies typically will need to
re-examine a broad range of non-qualified deferred compensation
arrangements, including deferred share unit plans, restricted share
unit plans, performance share unit plans, phantom stock awards,
stock option plans and stock appreciation rights. No assumption can
be made that an arrangement that complied under prior law will
satisfy the new requirements without revision. For example, section
409A requires an affected plan or arrangement to comply with
detailed rules regarding timing of deferral elections, payments and
funding, as well as a general prohibition on the acceleration of
Operational Compliance Program. The very
complexity of these rules has led the U.S. tax authorities to
provide limited relief to taxpayers who correct certain
"unintentional operational violations." However, this
limited relief does not apply to "documentation
failures," and thus all non-qualified deferred compensation
documents must be in compliance by the December deadline. Canadian
companies that fail to bring such documents into compliance by the
deadline or that otherwise fail to exercise commercially reasonable
efforts in complying will not qualify for relief under the
unintentional operational violations program.
To respond to concerns regarding the difficulty of bringing
existing non-qualified deferred compensation arrangements into
compliance, the U.S. Treasury Department has extended the original
effective date (January 1, 2008) of the final regulations under
section 409A by one year. It is unlikely that transitional relief
will be extended beyond the current December 31, 2008 deadline.
Given the harsh U.S. tax consequences to participating U.S.
employees if a deferred compensation arrangement fails to comply
with section 409A, employers should consider reviewing existing
arrangements to ensure compliance by year-end.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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.
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).