From an employment perspective, the 2019 Budget focuses on ensuring greater fairness and preparing Canadians for a changing economy. We will outline the three principal tax changes announced in the 2019 Budget of interest for employees, independent contractors, employers and owner-managers.
Canada Training Benefit
To ensure that Canadians can learn and upgrade their skills at all stages in their working life, the 2019 Budget introduces a refundable tax credit available to help cover the cost of up to one-half of eligible tuition and fees associated with training (generally the same tuition and fees under the same rules for the tuition tax credit). Eligible individuals will accumulate $250 each year in a notional account, to a lifetime maximum of $5,000. The following conditions must be met to accumulate the yearly $250:
- a Canadian resident individual (aged between 25 and 64 years at the end of the year) must file a tax return,
- the individual must have working-type earnings which generally include an individual’s employment income and business income) in excess of $10,000; and
- the individual must have net income that does not exceed the top of the third tax bracket ($147,667 for 2019).
The accumulation will expire at age 65 and the refundable Canada training credit will reduce the amount that will qualify as an eligible expense for the tuition tax credit. The annual accumulation will start with the 2019 taxation year and the first credit will be able to be claimed for the 2020 taxation year.
The Minister also announced that the federal government intends to introduce, in conjunction with the Provinces and territories, leave provisions so that employees would get four weeks for training every four years. This training support benefit would be operated through Employment Insurance.
Employee stock options
The 2019 Budget proposes to limit the preferential tax treatment of employee stock options granted to employees of “large, long-established, mature firms,” while the rules will remain unchanged for “startups and rapidly growing Canadian business.” Under the existing rules, employees who are issued stock options are half taxed on qualifying stock option benefits because they benefit from a deduction of 50% of the benefit realized on the disposition of the options. The proposals in the 2019 Budget would impose a $200,000 annual cap on employee stock option grants “large, long-established, mature firms” (based on the fair market value of the underlying shares on the date of grant). For example, if an employee is granted stock options for shares with a fair market value of $1 million, only the first $200,000 would be half taxed, while the remained would be fully taxed. The Budget does not contain draft legislation for this proposal and it indicates that further details on the measure will be provided in the summer of 2019. The government announced that “any changes will apply on a go-forward basis only and would not apply to stock options granted prior to the announcement of the legislative proposals to implement any new regime.”
Pensionable service under an individual pension plan
Individual pension plans (“IPPs”) are mechanisms to provide lifetime retirement benefits to owner-managers in respect of their employment. IPPs are defined benefit registered pension plans that have fewer than four members and at least one of the members (e.g. controlling shareholder) is related to an employer that participates in the plan.
To prevent planning undertaken to circumvent the prescribed transfer limits related to IPPs, the 2019 Budget proposes to prohibit IPPs from providing retirement benefits in respect of past years of employment that were pensionable service under a defined benefit plan of an employer other than the IPP’s participating employer (or its predecessor employer). Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to benefits provided in respect of prohibited service will be considered to be a non-qualifying transfer that is required to be included in the income of the member for income tax purposes. This measure applies to pensionable service credited under an IPP on or after 19 March 2019.
About the Author: Alexandra Neacsu Monkhouse is an employment lawyer and partner at Monkhouse Law dealing with the intersection of taxation and employment law.
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