CANADA - new Canada-United States treaty protocol that impact employees participating in global equity and retirement plans - Deloitte

Hello,


Please find attached the recent Global Rewards Update for Canada:


This update summarizes the various effective dates of the provisions
under the new Canada-United States treaty protocol that impact
employees participating in global equity and retirement plans.



Deloitte's Global Rewards Updates are intended to inform you of changes
to local laws surrounding the treatment of rewards over the past few
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Kate Forsyth            213-593-4279            kforsyth@deloitte.com<mailto:kforsyth@deloitte.com&gt;

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Thank you and best regards.


Marlene Zobayan

West Region Global Rewards Practice Leader

Global Rewards Update
CANADA
FEBRUARY 2009
 
 
ENTRY INTO FORCE OF CANADA-UNITED
STATES FIFTH PROTOCOL
For assistance in this matter or any other
issue related to the operation of your global
rewards plans, please contact your local
Deloitte global rewards consulting services
advisor or email us at: 
globalequity@deloitte.com and a global
rewards consultant will contact you.
 
As discussed in a previous Update, on September 21,
2007, Canada and the United States signed a new
Protocol to the Canada-United States Income Tax
Convention (1980) (the “Treaty”.  Various provisions
of the Protocol, including Annex B of the Diplomatic
Notes exchanged with the Protocol (“Annex B” were
scheduled to become effective on different dates,
depending on the date the Protocol came into force. 
The Protocol has now come into force on December
15, 2008.  This update outlines the different effective
dates of provisions in the Protocol that impact
executives participating in global equity plans.
 
STOCK OPTION SOURCING
As discussed in the previous Update, section 6 of
Annex B allows taxpayers to source stock option
income on the basis of the taxpayer’s principal place
of employment between the date of grant and date of
exercise or disposition of the option.  This provision is
now effective for stock option benefits that are
included into income in taxation years that begin on
or after January 1, 2009, (that is, starting from the
2009 taxation year).
 
ARTICLE XV (2) (b) INCOME FROM EMPLOYMENT
The Protocol introduced three major changes to the
ability of nonresidents of a country to be exempt from
taxation, by virtue of Article XV (2) (b), in that
country for employment services rendered in that
country:  
 
1. The “183 day” calendar year test is
replaced by a “183 day” rolling period
test, such that the treaty exemption in
Article XV(2)(b) is not available if the
taxpayer is present in the country of the
employee’s non-residence for periods
exceeding 183 days in any 12 month
period commencing or ending in the fiscal
year concerned;
 
2. Such exemption is also not available if the
remuneration is paid by, or on behalf of, a
person who is a resident of the country of
the employee’s non-residence; and 
 
3. Third, the exemption requires that the
remuneration is not borne by a
“permanent establishment” in the country
of the employee’s non-residence, thus
removing the requirement that such
permanent establishment be that of the
“employer”.  
 
This provision is now effective for employment
income that is included into income in taxation
years that begin on or after January 1, 2009, (that
is, starting from the 2009 taxation year).
 
For example, if a Canadian employee spends less
than 183 days in the U.S. in each of 2008 and
2009, but spends more than 183 days in the U.S.
in a 12 month period beginning in 2008 and ending
in 2009, he is precluded from claiming the
exemption in XV (2) (b) for 2009, but not
necessarily precluded from claiming such
exemption in 2008.
 
  PERMANENT ESTABLISHMENT FOR EMPLOYER
TRIGGERED BY ACTIVITIES OF EMPLOYEES
The Protocol adds two scenarios, in new paragraph 9
of Article V, whereby the activities of an employee in
the foreign country can trigger a permanent
establishment in that country for the employee’s
employer:  
 
1. Where services are performed by an
employee in the foreign country for periods of
183 days or more in any 12 month period,
and more than 50% of the gross active
business revenues of the enterprise consist of
income derived from such services; and 
 
2. Where services are provided (by one or more
employees) in the foreign country for 183
days or more in any 12 month period with
respect to the same or connected project for
customers who are either residents of the
foreign country, or who maintain a
permanent establishment in the foreign
country and the services are provided in
respect of that permanent establishment.
 
This provision is now effective as of January 1, 2010,
and shall not include any days of presence, services
rendered, or gross active revenues that occur or arise
prior to January 1, 2010.
 
EXEMPTION FOR PENSION CONTRIBUTIONS
The Protocol provides an employee with a deduction
for employee contributions to, and an exemption for
employer contributions to, a qualifying retirement
plan (such as a registered pension plan and group
registered retirement savings in plan in Canada, and a
401(a), 401(k), and simple 408(k) or (p) retirement
plan in the U.S.).  
 
Under new paragraphs 8 to 17 of Article XVIII, the
deduction/exemption is available under the following
three scenarios: 
 
1. Continued participation in a home plan for
employees on a short term (less than 5 year)
assignment in host country (treaty provides
for host country deduction/exemption);
 
2. Participation in host country plan by
employees who continue to reside in home
country (treaty provides for home country
deduction/exemption); and
 
3. U.S. citizens residing in Canada who
participate in Canadian plan (treaty provides
for US deduction/exemption).
This provision is now effective for employment
income that is included into income in taxation
years that begin on or after January 1, 2009, (that
is, starting from the 2009 taxation year).
 
OTHER PROVISIONS
 
The Protocol provides for a host of other
provisions.  Some of the provisions that are
effective as of January 1, 2009 are summarized
below: 
 
• Allowing for a treaty exemption for capital
gains, where the gains were taxed in that
country on exit (i.e. pursuant to a
departure tax).
 
• Reducing the risk of double taxation for
Canadian residents who die holding stock
options in a U.S. corporation.
 
ACTION
Employer should:
 
• Review current internal process for
Canada-United States cross border
stock option transactions, and advise
the employees about the new treaty
sourcing requirement.
 
• Encourage the employees to
participate in the qualifying
retirement plan, in order to claim the
contributions and exemptions.
 
• If applicable, communicate the other
treaty benefits to the employees.

 



 
 


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