On September 1, 2010 the Department of Finance issued draft legislation to implement certain proposals announced in the March 4, 2010 budget. Specifically, new subsection 153(1.01) will consider stock option benefits, and benefits relating to units of a mutual fund trust issued to employees, to be remuneration and subject to the same withholding and remittance rules as salary or remuneration. The 50% deduction available to employees under paragraph 110(1)(d) of the Act, where the exercise price is at least equal to the FMV of the share at the time of granting the option, will reduce the stock option benefit on which the withholding tax will apply. However, stock option benefits relating to shares of a Canadian controlled private corporation will not be subject to these new rules.
The withholding requirements under new subsection 153(1.01) will apply for stock options exercised after 2010.
New subsection 153(1.01) will also not apply to stock option benefits arising from options which existed before 4:00 pm EST on March 4, 2010 and which included at that time a written condition prohibiting the employee from selling shares acquired under the agreement for a period of time after exercise. There is no mention as to the length of this time period.
The legislative proposals offer no guidance on how employers are to satisfy the withholding tax obligation. While existing legislation under subsection 153(1.1) gives the Minister of National Revenue discretion to reduce required withholding amounts that would cause undue hardship, new legislation has been introduced specifically stating that relief will not be granted with regards to stock options solely because it is received as a non-cash benefit.
We will continue to do research to determine if the Department of Finance will provide guidance to employers on how to fund the withholding tax obligation.
Prior to the introduction of the draft legislation there was an element of uncertainty as to whether the existing rules required withholdings on stock option benefits. The uncertainty was irrelevant as Canada Revenue Agency ("CRA") had an administrative policy to not require withholdings on these benefits.
Certain steps can be taken to mitigate the impact of these rules and in many cases the stock option agreements will need to be reworded to permit a sale of a portion of the shares or alter the number of shares awarded.
Please call a Collins Barrow Professional to learn how we can assist you.
Enzo Testa, CA, is a Tax Partner and Sandra Napoletano, CA, is a Tax Manager in the Toronto office of Collins Barrow.
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