Salary Deferral Arrangements

Introduction - Salary Deferral Arrangements

Employers have come up with many different ways of compensating their employees to better achieve a tax effective method of compensating employees and ensuring their loyalty. Typical objectives include tax efficiency, rewarding employee performance, improving retention of employees, and compensating employees based on the employer's financial or share value performance. One major legal constraint on the design of employment compensation arrangement is that if any arrangement meets the Income Tax Act's definition of a salary deferral arrangement then it can unexpectedly change the timing of when the employee includes the compensation in their taxable income and the employer's payroll compliance obligations.