Employers that weren’t expecting much from this year’s budget will be happy as Finance Minister Jim Flaherty concentrated on cutting costs and tinkering with tax laws.

The most detailed changes occurred in the area of stock-based compensation, with three measures being introduced that will be of interest to certain employers.

The Income Tax Act is to be amended to require employers to immediately withhold and remit any taxes resulting from a stock option being exercised.

“This is intended to prevent the situation where the tax on the award of stock is deferred but the stock drops in value, resulting in the proceeds of disposition being less than the person’s tax liabilities,” explains James Pierlot, a senior consultant with Towers Watson. “They end up owing tax for a benefit they never got.”

Under the current rules an employee who takes a cash award in lieu of stock is permitted to take a stock option deduction for the cash award while the employer may take a deduction for the compensation paid to the employee. The new rules dictate that only the employee may claim the deduction.

Related Stories

The third item is essentially a relief measure for people who acquired shares as part of compensation and deferred tax on them only to owe more in taxes than the proceeds of the sale. These people may now elect to pay an amount of tax equal to the proceeds of disposition.

“There are no measures in the budget which are of great interest to any employer’s HR function or that would have a direct impact on employer sponsored pension plans,” says Pierlot. “Employers who offer stock-based compensation should consult with their advisors and take action if necessary to ensure they will be in compliance with the new rules. Employers may also wish to inform employees who may be liable for deferred tax on securities they’ve acquired through stock options of the new election option that can have an impact on the employee’s tax situation.”

Employers will be happy to know that employment insurance premiums will remain at $1.73 per $100 of insurable earnings until 2011, and the work-sharing program is extended, which will be good news for the approximately 160,000 participating workers.

The Income Tax Act and Employment Insurance Act will be amended to allow notices—such as GST forms and notices of assessment—to be issued electronically. They are currently sent by ordinary mail.

Also included in the budget is a new provision that will help disabled Canadians.

Once a parent or grandparent dies, a tax-free transfer can now be made from the deceased’s RRSP or RRIF into a child’s or grandchild’s registered disability savings plan (RDSP).

The amounts being transferred to the RDSP cannot exceed the available contribution room, for which the lifetime limit is $200,000. This new provision goes into effect on March 4, 2010.

“Certainly, for some people it’s a positive move, and for some people that will have a positive impact. But it won’t help the majority of retirees; it won’t help the majority of Canadians,” says Niels Veldhuis, director of fiscal studies with The Fraser Institute. “Unfortunately, the government didn’t take the measures I would have liked to have seen—which is an increase in the contribution levels allowed under the tax-free savings account and also under the RRSP program. Those things would have helped the majority of Canadians.”

Public pensions
The run-up to the budget saw the country’s federal public sector unions girding for a battle over the defined benefit pension plans held by civil servants, but in the end it was a non-issue.

Salaries and budgets for Members of Parliament and Senators will be frozen for fiscal years 2011-2013, and a review of all government operations will be conducted with the intent of reducing the size of the public service. There is no mention of cuts to public sector pensions—which are excluded from the freeze—but there is mention of a review of compensation levels going forward.

“Employees will continue to see their wages increase as set out in collective agreements, [but] departments will be required to reallocate from the remainder of their operating budgets to fund the increases,” the budget document states.

Also, unlike many government departments, the Canada Pension Plan’s budget will continue to grow at its projected pace.

Long-term issues
The issue of a national securities regulator continues to move at a glacial pace, with the promise of draft securities legislation this spring to be considered by the Supreme Court of Canada. As for large-scale pension reform, the government has pledged to launch public consultations in mid-March as a prelude to the next Ministers meeting in May, where it will be further discussed.

However, since the last Ministers meeting established that there is no pension crisis in Canada, urgency is not expected to be an element.

To comment on this story, contact us.