Global Mobility Tax
On Tuesday, April 16, 2024, Canada’s Finance Minister Chrystia Freeland presented the 2024 Federal Budget in the House of Commons. Many of the proposals focused on new housing and affordability measures, however there are a number of newly announced initiatives that go beyond those areas, and will be paid for partly with new tax increases on the top income earners in Canada, and corporations. This insight focuses on the tax measures that impact companies that have a mobile population.
Capital gains inclusion rate
For capital gains realized on or after June 25, 2024, Budget 2024 proposes to increase the capital gains inclusion rate from 50% (1/2) to:
The inclusion rate for capital gains up to $250,000 realized annually by individuals will continue to be 50%.
The $250,000 threshold for individuals would be fully available for 2024 (i.e. it would not be prorated) and would apply only in respect of net capital gains realized after June 25, 2024.
Impact on employee stock options
Similarly, Budget 2024 proposes to decrease the stock option deduction to 33.3% (1/3) of the taxable benefit to align to the capital gains inclusion rate. Currently, the employee stock option deduction is 50% of the taxable benefit, subject to annual vesting limits of $200,000 in respect of options that can qualify for the stock option deduction.
Claimants of the employee stock option deduction would be entitled to a deduction of 50% of the taxable benefit up to a combined annual limit of $250,000—for both employee stock options and capital gains.
Budget 2024 gives taxpayers with significant unrealized capital gains approximately ten weeks to consider whether to crystallize a portion of their gain while the one-half inclusion rate is still in place.
Employees who cease Canadian residency on or after June 25, 2024 as a result of an international assignment or relocation, and whose deemed dispositions trigger capital gains in excess of $250,000, will see a portion of their gains subject to the two-thirds inclusion rate. Where the employee is under a tax equalization or tax protection policy that covers personal income, the burden of the increased taxation may fall on the employer. Employers with this exposure should consider reviewing their policies to address the potential impact of increased tax costs.
Similarly, holders of employee stock options that have vested and are significantly “in-the-money,” (i.e. has large accrued gains in the underlying shares), should consider whether to exercise their options before June 25, 2024 in order to benefit from the 50% inclusion rate.
There are a number of factors which employers should consider in relation to the limit, including revisiting tax accruals for employees who are a part of tax equalized / protected policies, or proactive communications to employees who are not protected on stock-based compensation, due to the reduced availability of preferential tax treatment.
There are several questions that remain with the legislation. It remains unclear how employers will be required to deal with their withholding obligations on exercised options where an employee’s entitlement to a 50% deduction may be reduced by an employee’s realized gains in the same year. Additionally, it is also unclear how the threshold would be applied to non-residents taxpayers (i.e., would it only consider Canadian source option income for the purposes of the $250,000 limit?)
Non-resident and resident taxpayers, before making any decision to crystallize gains, should be reminded of recent changes to alternative minimum tax (“AMT”) rules effective January 1, 2024, that may apply to “excess” employee stock option exercises and capital gains.
The federal government has stated that amendments to the legislation would be made to reflect the new inclusion rate and additional details would be released in the coming months.
Enhancing the RRSP Home Buyer’s Plan
Budget 2024 proposes to increase the Home Buyer’s Plan withdrawal limit from $35,000 to $60,000. This increase would also apply to withdrawals made for the benefit of a disabled individual. This measure would apply to the 2024 and subsequent calendar years in respect of withdrawals made after April 16, 2024.
While the Budget also extends the repayment period for Canadian residents, there is no change to the requirement that the full outstanding balance of the Home Buyer’s Plan must be repaid within 60 days after ceasing Canadian residency.
Assignees who cease residency shortly after having made a Home Buyer’s Plan withdrawal will be required to repay the entire balance within 60 days or have the balance included in taxable income, and will not be able to spread it out over the five-year deferral period and the 15-year repayment period. Employers should be prepared for employees to request relief or financial assistance especially given that the maximum withdrawal will be increased to $60,000.
Withholding waivers for non-resident service providers (Regulation 105)
Budget 2024 proposes to provide the CRA with the legislative authority to waive the corporate withholding requirement of 15%, over a specified period, for payments that a Canadian payer issues to a non-resident service provider, if either of the following conditions are met:
This proposal would allow the CRA to waive the withholding requirement on multiple transactions with a single waiver, subject to any conditions and information requirements necessary to reduce compliance risks.
Non-resident service providers who have engaged in contracts with Canadian companies would generally have to navigate a lengthy waiver process to request relief of Canadian withholding if they are otherwise exempt from Canadian taxation.
This proposal runs parallel, to an extent, to the Non-Resident Employer Certification (“NREC”) introduced in 2016, which has eased the administrative burden surrounding the Canadian payroll withholding and reporting requirements for treaty-exempt employees who had business travel into Canada (“Regulation 102”).
While the Budget does not specify the maximum period of time that can be covered by a single waiver (the Regulation 102 certification can be applied for up to two calendar years at a time), this proposal should similarly ease the administration and cash flow with respect to Regulation 105 compliance. The scope of the relief may be limited if the level of Canadian activity creates a taxable presence in Canada.
It is important to note while there is an easing of Regulation 105 compliance, there is no change to the current Regulation 102 compliance regime in Canada. Every employer who pays a salary to a resident or a non-resident employee, who renders services in Canada, is required to report and remit Canadian tax withholding on Day 1, Dollar 1 (unless a waiver is obtained).
A summary of the Federal Budget measures is provided below and may include some changes which interest you. Budget 2024 proposes to:
On April 18, Québec announced it would be harmonizing certain elements of the federal budget, including the change to the treatment of capital gains. Further, at the time of publication of this Alert (April 22, 2024), Québec has not provided guidance about the harmonization and implementation of changes to the stock option deduction rules, and has indicated that further guidance will be issued at a later date.
For more information on the Canadian federal budget, please see this link.
If you would like to understand the proposed changes or model the impact for select employees or executives, please reach out to your Vialto Partners point of contact or alternatively one of the Canada team members listed below:
Dan Trinh, Vancouver
Partner
Theo Ciju, Toronto
Director
Alex Legg, Calgary
Director
Gary Li, Toronto
Senior Manager
Further information on Vialto Partners can be found on our website: www.vialtopartners.com
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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
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Further information on Vialto Partners can be found here: www.vialtopartners.com
Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
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