Canadian companies may want to review their executive remuneration strategies.
Specifically, new changes to the limitation on corporate tax deductions for employee remuneration may mean that public companies should revisit their executive compensation plans and make any necessary adjustments to their overall remuneration approach.
The United States passed tax legislation on December 22, 2017, which includes significant changes to corporate and personal tax rules. Among other changes, the new U.S. tax rules decrease the corporate income tax rate to 21% (from 35%), effective January 1, 2018, repeal the corporate alternative minimum tax (AMT) for tax years beginning after 2017 and deem certain corporate foreign earnings as repatriated for U.S. income tax purposes.
For details of other U.S. tax changes, see TaxNewsFlash-Canada 2017-65, "Canadian Multinationals - Prepare for U.S. Tax Changes", TaxNewsFlash-Canada 2017-67, "Real Estate Businesses - Important U.S. Tax Changes", TaxNewsFlash-Canada 2017-63, "Highlights of New U.S. Personal Tax Changes" and TaxNewsFlash-Canada 2017-66, "U.S. Shareholders -Take Action by December 31."
Restricted tax deduction for excessive remuneration
The new U.S. tax reform has widened the existing $1 million annual deduction limitation on certain compensation paid to certain employees of public corporations. As a result, corporations should determine whether they are affected by the expanded limitation and consider reviewing their remuneration arrangements to implement adjustments such as increasing base salary and lowering certain equity-based bonuses.
The new rules expand certain definitions so that the deductibility limitation will apply in additional situations. Specifically, all compensation, including options or equity awards that were tied to specific performance criteria, is now counted toward the $1 million deduction limit. Further, the United States has widened the definition of a "covered employee" under the limitation so that it includes a company's Chief Financial Officer (CFO), as well as any former covered employee (even where they have retired or died). Previously the limitation only affected Chief Executive Officers (CEO) and their three highest paid officers, but not the CFO. In addition, companies with mandatory Securities and Exchange Commission (SEC) filings will now be subject to the limitation, including certain foreign companies with U.S. American depositary receipt listings.
For more information, contact your KPMG adviser.
Information is current to July 24, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500