Important Consultation Periods End Soon: Changes to ESOP & Annuities

Beth Graddon & Evelyn Jacks

Don’t miss the opportunity to both plan with your high net worth clients, and weigh in with Finance Canada on two important tax changes proposed in the 2019 Federal Budget. The proposals impact employee stock options and annuities. To provide your views diarize the following deadlines and ensure you act soon: September 16 in the case of Employee Stock Option Plans and October 7 for the new annuity options.

ESOP changes. The federal government is moving ahead with plans to impose a $200,000 limit on employee stock options taxed at a preferential rate beginning next year, and as part of this, they’ve launched a consultation that ends on September 16, 2019.

As we reported earlier this summer, the government proposed this change as they believe the preferential tax treatment of employee stock options is not meeting its intended goal, which is to encourage and support start-up and emerging Canadian businesses in creating more jobs. Instead, government noted it feels the existing provision has largely benefited a relatively small number of high-income Canadians.

Knowledge Bureau Report contacted Kristin Ramlal, PFP, CIM, FCSI who will cover this topic in more depth at the Distinguished Advisor Conference taking place in Puerto Vallarta, November 10-13 this year, for her comments on the provision from the point of view of the role of financial advisors in anticipation of these changes. Here’s what she told us:

“Financial Advisors should consider taking this time to evaluate the potential impact that these changes may have on their clients with publicly traded stock options and implement the financial and investment planning strategies necessary, prior to Jan 1, 2020.

Employees of publicly traded companies with stock options will need to understand the existing and proposed tax implications associated with funding their current and future cash flow needs, through exercising their options.

Furthermore, stock option holders close to retirement, or planning an upcoming departure from their current employer, may need to take into consideration the potential impact of early expiry of their options (often 90 days post departure) issued after Jan 1, 2020, which could impact the taxation of future cash flows as a result of executing options in the money.

A multi-advisory team of experts; such as, retirement income planner, HR consultant, IIROC licensed investment specialist, personal tax specialists and, if required, cross border specialists, may be at the table with you to consider alternatives and to weigh in on the tax, investment and retirement income planning strategies.”

Perspectives like this matter as we move into the fall and a relatively short planning window before the proposed changes are slated to take effect.

Your opinion matters, and you can provide Financial Canada with feedback on this proposed $200,000 annual limit. Plus, they’re asking for your insight on how non-CCPCs that will not be subjected to this limit should be defined. So far, the government has only clarified that it’s a category that will include “start-ups, emerging, or scale-up companies” but they have not yet broken down the definition further than that. Comments can be sent to:

Annuities. Another important consultation opportunity that comes to an end on October 7, 2019. You can weigh in on the government’s proposal, outlined below, that will permit additional, new types of annuities under Registered Plans.

  • Advanced life deferred annuities will be permitted under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit-sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP); and
  • Variable payment life annuities will be permitted under a PRPP and defined contribution RPP.

These measures enable taxpayers to move some of their retirement savings out of their registered accounts and into an annuity deferred until age 85.

Additionally, as part of this proposal, the government is requesting further feedback on other proposed tax system changes, including:

  • Improving the consistency of the tax treatment of owners of multi-unit residential properties with that of owners of single-unit residential properties
  • Modifying the Income Tax Act to remove the time limitation on the period that a Registered Disability Savings Plan may remain open after a beneficiary becomes ineligible for the Disability Tax Credit
  • Bringing the specified multi-employer plan rules into line with the tax rules that apply to other defined benefit registered pension plans
  • Prohibiting an Individual Pension Plan from providing retirement benefits in respect of past years of pensionable service under a defined benefit plan of an employer other than the Individual Pension Plan's participating employer (or its predecessor employer)
  • Improving the "allocation to redeemers" methodology used to allocate capital gains to redeeming unitholders of mutual funds
  • Improving the rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains
  • Making the "requirement-for-information" process more efficient by allowing requirements for information to be sent to banks and credit unions electronically

Comments can be sent to:

Additional educational resources: These changes, once implemented, will impact retirement income planning and the financial strategies that a multi-advisory team of experts uses. Become a Real Wealth Manager , and help clients implement a plan that adapts to newly emerging challenges and changes to create a secure retirement.