Chapter Objectives

1
Chapter Objectives

• Be able to
• Explain what factors to consider when evaluating
  different compensation packages.
• Identify and explain the different types of
  indirect compensation available and their tax
  implications.
• Identify and explain the different types of
  deferred compensation available and their tax
  implications.

2
Basic Objectives and General TaxPrinciples of
Employee Compensation

• The fundamental objective of a compensation
  program is to provide maximum satisfaction to
  employees at the least possible cost.
• An employer can offer non-taxable and
  tax-deferred compensation items to create
  increased after-tax value. Also, the cost savings
  can be retained by the employer, shifted to an
  employee, or shared between them.
• In order to make the fullest use of the available
  tax preferences, the employees tax position must
  be taken into account. It is also important to
  recognize that different forms of compensation
  will have different values to different
  employees.

3
Indirect Employee Compensation

• Although indirect compensation is fully
  deductible to an employer, it can vary from
  taxable to tax-free for employees.
• Some examples of taxable benefits are personal
  use of employers auto, incentive awards (such as
  holiday trips), low-interest loans, premiums
  under provincial hospitalization plans, and
  tuition fees. Even though these benefits are
  fully taxed, cost savings can result if the
  employee needs the particular benefit and the
  employer may be able to acquire the benefit at a
  cost lower than that available to an employee.
• Some examples of non-taxable benefits are
  premiums under private group sickness plans,
  reimbursement of moving expenses, and discount on
  merchandise. Not only are these benefits
  tax-free, the employer may be able to acquire the
  benefit at a cost lower than that available to an
  employee.

4
Deferred Employee Compensation

• Given the highly progressive tax rates imposed on
  individuals, deferred compensation may be quite
  beneficial.
• The two main advantages of deferred compensation
  are the compensation payments may be delayed
  until a time when there are lower tax rates, such
  as retirement and the investment returns may
  accrue on an pre-tax basis, rather than an
  after-tax basis.
• The three categories of deferred plans are
  registered plans, non-registered plans, and
  stock-based plans.

5
Registered and Non-registered Plans

• The two registered deferred compensation plans
  are registered pension plans (RPPs) and deferred
  profit sharing plans (DPSPs).
• A limited amount of contributions are deductible
  by an employer and these contributions are not
  taxable to the employee until withdrawn from the
  registered plan. Furthermore, investment returns
  on the accumulated contributions are not taxed to
  the employee until withdrawn from the registered
  plan.
• Non-registered plans include employee profit
  sharing plans, employee trusts, salary deferral
  arrangements,and retirement compensation
  arrangements. There is no tax relief granted for
  the amounts deferred and, thus, they are rarely
  used.

6
Stock-based Plans

• Stock-based plans are designed to provide
  employees with long-term incentives and rewards
  by giving them an opportunity to purchase shares
  which will grow in value as corporate profits
  increase. The four types of plans are stock
  option plans stock purchase plans stock bonus
  plans and phantom stock plans.
• Stock option plans provide the employee with the
  right to purchase shares from the corporate
  treasury at a specified price for a specified
  period of time. The benefit is computed as the
  difference between the shares value and the
  option price. The timing of the benefit will vary
  depending on whether the option price was lower
  than the shares value at the time of granting
  the option. Capital gains will be computed if,
  and when, the shares are sold for a profit.

7
Stock-based Plans (continued)

• In a stock purchase plan, funds are loaned to
  employees to purchase stock from the corporate
  treasury. There is no discount provided and,
  thus, no benefit to calculate. Capital gains will
  be computed if, and when, the shares are sold for
  a profit.
• In a stock bonus plan, bonuses are paid in shares
  rather than cash. The amount of a bonus is
  included in income regardless of whether it is
  paid in cash or shares. Capital gains will be
  computed if, and when, the shares are sold for a
  profit.
• In a phantom stock plan, points are granted to
  employees during a vesting period. At the end of
  the vesting period, the points are exchanged for
  a cash bonus. Stock is not issued in this type of
  plan.