Canadian Corporations – US Deferred Compensation Rules - Effect on Cdn Plans
Section 409A of the American Jobs Creation Act has an impact on Canadian companies and the taxation of deferred compensation plans with US participants.
The US Department of Treasury and the Internal Revenue Service recently released draft regulations, providing much needed clarification on how section 409A will apply to such plans. Key changes that you should be aware of are the following:
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The exemption from section 409A for fair market value publicly traded stock options and stock appreciation rights is generally extended to private companies.
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The rule that requires distributions to be made on a specified date is broadened to provide greater flexibility.
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The distribution rules that may impact common Canadian plans (such as the 3-year bonus deferral or restricted share plan, or the deferred stock unit plans) have been clarified.
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There are special rules for severance or retiring allowances.
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The general rule requiring deferral elections to be made prior to the calendar year in which services are rendered has been modified for employers with non-calendar fiscal years who provide compensation that is linked to their fiscal years.
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The definition of "performance based compensation" has been broadened to include equity-based compensation.
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Clarification on identifying "specified employees" (i.e., an employee who earns more than USD $130,000).
Employers generally have until December 31, 2006 to amend their plans to bring them into compliance with section 409A (though certain changes must be made by the end of this year). In the meantime, employers can rely on the draft regulations as good faith compliance with the legislation.
