Canadian salary deferral arrangement legislation.

May 4, 2009

On May 4, 2009, Tax Executives Institute submitted the following recommendations to the Canadian Department of Finance, recommending changes to the Salary Deferral Arrangement legislation in order to afford greater flexibility in the design of long-term incentive compensation packages. TEI's comments were prepared under the aegis of its Canadian Income Tax Committee, whose chair is Rod C. Bergen of The Jim Pattison Group. Contributing substantially to the development of TEI's comments were Marvin E. Lamb and Stephen Galka of Imperial Oil Limited. Jeffery P. Rasmussen, TEI Tax Counsel, serves as legal staff liaison to the committee.

The Salary Deferral Arrangement (SDA) legislation was enacted more than 20 years ago in order to prevent abuses of the employee benefit plan (EBP) rules by non-taxable employers. While the purpose of the SDA rules is targeted, in application the rules have been applied broadly and impede the development of effective, modern long-term incentive compensation (LTIC) packages that taxable Canadian corporations must offer to attract and retain talented employees. On behalf of Tax Executives Institute, I write to propose changes to the SDA rules that will narrow their scope without undermining their efficacy in preventing excessive accumulations of retirement income by employees of nontaxable employers.

Background

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 7,000 professionals manage the tax affairs of 3,200 of the leading companies in Canada, the United States, Asia, and Europe and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions.

Our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit.

Evolution of Compensation Practices Enhances Long-Term Employee Retention

Corporate compensation programs have changed substantially since the SDA rules were adopted in 1986. Then, most compensation programs consisted of a salary, an incentive-based cash bonus, and, as a long-term incentive, ordinary stock options. Over time, employers have complemented these programs by instituting innovative LTIC programs to attract and retain talented employees on a long-term basis.

The longer the rewards under an LTIC program are deferred, the greater the incentive for employees to remain with the employer and the better the employer can align shareholder and employee interests. Moreover, because of (1) concerns in the capital markets about the leveraging and dilutive effects of employee stock options on existing shareholders and (2) recent changes in the accounting for stock options, employers have reduced the use of ordinary stock option grants in favor of LTIC programs, especially those utilizing full-value equity instruments. (1) Thus, LTIC programs are increasingly based on restricted stock, restricted stock options, restricted stock units, phantom stock, and tandem programs with multiple incentives. To be effective as an incentive for long-term performance, these plans must be structured for periods longer than three years but...