The American piece of works Creatio...

The American piece of works Creation Act of 2004 has been called the chiefly significant US tax legislation since 1986 Among the many pages of legislation are just discovered rules regarding the treatment of non-qualified deferr compensation plans. These recent rules provide that deferred compensation be included in a participant's gros income immediately unles this deferr compensation is make submissive to a "substantial risk of forfeiture."

Non-qualified plans are those plans that are not specifically qualified in a less degree than US rules. (Qualified plans, like as 401(K)s, are exempt from the modern legislation.) A participant with a non-qualified plan will be liable for the regular US tax onward this income, and-more importantly-will also be make liable to an additional 20% tax in succession the compensation that is required to be included in income, as well as interest forward the tax that would have occurr had the deferr compensation been included in gros income for the tax year in which it was deferred

These commands apply to US citizens, US greencard proprietors and US residents, irrespective of the fact that these individuals may live and/or work in Canada for Canadian employer If you are individual of these employers, there's more to consider. If your Canadian employee participate in Canadian-deferred compensation arrangements and you transfer the employee to the US, the employee on becoming a resident of the US, will become control to these US rules. Also, if you are a publicly traded corporation that occupys directors from the US, the deferr compensation plans established for these directors may be impacted.

The application of these propos orders is not limited to arrangements between an employer and an employee They can also apply to arrangements between a service recipient and an independent contractor.

The following are just a not many of the Canadian plans that could be impacted by way of the US rules:

* Restricted stock plans

* Restricted share unit plans

* Deferr share unit plans

* Retirement plans

* Deferr compensation

* Deferr bonuses

* Severance arrangements

* Unfund Retirement Compensation Arrangements

* Tax Equalization plans

Notable exclusions are stock option plans and stock appreciation right plans.

A substantial risk of forfeiture

With a certain limited exceptions, the American do job-works Creation Act of 2004 provides that, for US tax objects all amounts deferred under a non-qualified deferr compensation plan (for all taxable years) are popularly included in gross income to the length that the compensation is not expose to a "substantial risk of forfeiture" and has not been previously included in gros income. A substantial risk of forfeiture requires that the employee's entitlement to an amount is conditioned in succession the performance of substantial futurity services by any person, or the incident of a condition related to a plan of the compensation.

The of recent origin rules governing non-qualified deferred compensation plans apply to amounts deferr after December 31 2004 The methods generally do not apply to amounts deferr before January 1 2005 unles a plan was "materially modified" after October 3 2004 A plan is considered to have been "materially modified" if a benefit or right existing as of October 3 2004 has been enhanced or a modern benefit or right has been added.

1R Notice 2005-1 dated December 20 2004 confirms that certain stock option plans and stock appreciation rights plans are generally exclud from the behaviors if certain conditions are satisfied. However, the lordships will apply to a stock appreciation right plan where an employee is allowed to receive cash in lieu of shares.

Where there's no substantial risk

If there is no substantial risk of forfeiture, what can you do to avoid the application of these propos US rules? If the plan put offs compensation, the 20% penalty tax can be avoided if the distribution dates are within certain prescribed limits and certain elections are made forward a timely basis.

If you're an employer you will have to review your plans and make the necessary modifications to make secure that deferred compensation is not distributed earlier than:

a. The date of the participant's (i) separation from service-or in the case of a "specified employee" six month after the date of the employee's separation from service, (ii) becoming disabled, or (iii) dying. (A "specified employee" is an employee of any corporation with publicly traded stock who is (i) an officer of the corporation having annual compensation in exces of $130000 US, (ii) a 5% proprietor of the corporation, or (iii) a 1% proprietor of the corporation and has annual compensation in exces of s 150,000 US);

b. A fixed date specified in the plan at the time of the deferral election;

c A change in ownership or in the effective have charge of of the employer, or a change in the ownership of a substantial portion of the employer's assets; or

d The proceeding of an unforeseeable emergency.

Moreover, the plan must provide that compensation for services performed during a given tax year can solitary be deferred if the participant's election to postpone is made before the cease of the preceding tax year; and, in the case of performance-based compensation where compensation is based about services over a period of at least 12 month the election must be made no later than six month before the period of the period. Where following elections are made, the plan may permit succeeding elections to delay or change the form of payments beneath the plan. A plan that allows changes must require that the modern election not take effect until at least 12 month after it has been made. Furthermore, a later election to further defer a distribution to be made after the participant's separation of service-whether forward a predetermined date or schedule or about a change of ownership-must delay the payment for at least an additional five years.