The Department of Finance released draft legislative proposals in July and August of 2010 to implement a variety of tax measures, including those first outlined in its 2010 Budget along with several previously announced tax initiatives, for public consultation.

The proposals outline significant changes to the tax rules applicable to employee stock options that will:

• alter the deductions available when stock option rights are paid out in cash instead of exercised for shares;
• alter the treatment of underwater options in certain circumstances; and
• eliminate the taxable benefit deferral on the exercise of options to acquire public company shares after March 4, 2010.

The proposals also introduce new rules for employee life and health trusts and contain the long-awaited non-resident trust exemption for registered pension plans. The proposals contain a number of less significant but important amendments relating to the operation of registered plans (RRSPs, RRIFs, DPSPs and RPPs).

The proposals also include a change that would broaden the income tax deduction for legal fees paid by employees in connection with disability insurance claims.

More information about the federal government’s 2010 Budget initiatives is available in our March 8, 2010 FTR Now, 2010 Federal Budget: Highlights For HR Professionals.