When paying compensation to directors for their services, companies have payment options that can provide tax benefits or in some cases, unwanted tax consequences. It is important to understand these options and their tax implications to avoid any surprises down the road. Osler's Dov Begun and Colena Der, both partners in Osler's Tax Group, shared their insights on the tax rules in their Canadian Taxation of Directors' Compensation webinar for the Institute of Corporate Directors.
Director compensation is treated as employment income and taxed only when it is received. The exception is compensation that is considered to be a salary deferral arrangement where an individual has the right in a taxation year to receive an amount after a taxation year and the main purpose for the creation or existence of the right is to postpone tax payable. In this case, the compensation may be taxed upfront even when it is not received until some later time.
With a deferred share unit plan, payment is made after retirement, death or termination of employment. The payment must be made before the end of the following calendar year in which any of the triggering events occurred. The amount of the payment must be determined on the basis of the fair market value of the shares of the employer corporation within one year of the occurrence of a triggering event. There can be no guaranteed minimum payment or downside protection.
Canadian corporations paying fees to non-Canadian resident directors must withhold income tax on fees paid in consideration for services rendered in Canada. Fees related to the attendance at a meeting from outside of Canada via teleconference or video conference are generally considered nontaxable in Canada. Where the director performs some services in Canada and some outside of Canada, compensation must be allocated for reporting and withholding purposes.
View Canadian Taxation of Directors' Compensation webinar
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.