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ARTICLE · 15 MARCH 2005

New U.S. Internal Revenue Code Provision Affects Canadian Incentive Plans

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The <I>American Jobs Creation Act of 2004</I> made changes to the U.S. Internal Revenue Code to curb perceived abuses, like those occurring in high-profile cases such as Enron.

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Article by Christina H. Medland and Bari Zahn

The American Jobs Creation Act of 2004 made changes to the U.S. Internal Revenue Code to curb perceived abuses, like those occurring in high-profile cases such as Enron. New section 409A of the Code imposes limits on "nonqualified deferred compensation", a term that includes many common Canadian share-based forms of incentive compensation. Section 409A will apply to U.S. taxpayers (including U.S. citizens) who participate in Canadian compensation plans.

Many forms of share-based incentive compensation adopted by Canadian companies may constitute nonqualified deferred compensation that may not meet the requirements of section 409A. If this is so, U.S. taxpayers who receive awards under these Canadian plans may lose the benefit of income tax deferral and be subject to additional tax and interest. Canadian compensation arrangements that may constitute nonqualified deferred compensation include deferred share units, restricted and

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