Principal Issues: Whether the Minister is entitled to waive the withholding requirement in respect of a stock option benefit (non cash remuneration) where it is the only remuneration paid to an employee for the taxation year?
Position: No.
Reasons: New subsection 153(1.31) provides that the Minister does not have the discretion to waive a withholding requirement in respect of a stock option benefit solely because it is received as non-cash remuneration.
XXXXXXXXXX
2011-039949 I. Landry, M.Fisc.
May 6, 2011
Dear XXXXXXXXXX,
Subject: Withholding tax on exercise of stock options
This is in response to your email of March 15, 2011 in which you asked us to comment on the application of subsections 153(1.01), 153(1.1) and 153(1.31) and paragraph 153(1)(a) of the Income Tax Act (the "Act") in a particular situation (the Particular Situation).
You described a situation in which an employee proposes to acquire shares of the capital stock of the individual’s employer in 2011 under an employee stock option plan (the "Plan"). You indicated to us that the employee will be deemed to have received a benefit because of the individuals’ employment under paragraph 7(1)(a) and that this taxable benefit will be the only earnings earned by that individual from that employer for the 2011 year. Finally, you stated that even if the employer in the Particular Situation was required to withhold and remit the amount of source deductions calculated in the prescribed manner (the "Deductions"), it would be impossible in practice for it to do so since no remuneration or other monetary benefits will be paid in 2011 to this employee. In the event that we conclude that the employer has an obligation to withhold and remit the Deductions, you are asking us to provide you with guidance on how to proceed.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your letter only briefly describes a particular hypothetical situation, our comments below may not be fully applicable in a particular situation.
Paragraph 153(1)(a) provides inter alia that every person paying at any time in a taxation year salary, wages or other remuneration shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee’s tax for the year. Under new subsection 153(1.01), an amount that is deemed to have been received by a taxpayer as a benefit under or because of any of paragraphs 7(1)(a) to (d.1) is remuneration paid as a bonus for the purposes of paragraph 153(1)(a), except the portion, if any, of the amount that is deductible by the taxpayer under paragraph 110(1)(d) in computing the taxpayer’s taxable income for a taxation year. However, subsection 153(1.01) does not apply in respect of benefits arising from rights granted before 2011 under an agreement to sell or issue securities that was entered into in writing before 4:00 pm, Eastern Standard Time, on March 4, 2010, which at that time contained a written condition according to which the taxpayer could dispose of the securities acquired by virtue of the agreement only after the expiry of a certain period.
Furthermore, subsection 153(1.1) provides that where the Minister is satisfied that the deducting or withholding of the amount otherwise required to be deducted or withheld under subsection 153(1) from a payment would cause undue hardship, the Minister may determine a lesser amount and that amount shall be deemed to be the amount determined under that subsection as the amount to be deducted or withheld from that payment. However, new subsection 153(1.31) provides that an amount deemed to have been received as a benefit under or because of any of paragraphs 7(1)(a) to (d.1) shall not be considered a basis on which the Minister may determine a lesser amount under subsection (1.1) solely because it is received as a non-cash benefit.
In the Particular Situation, we are of the view that the person who issued shares in 2011 (or later) of the person’s capital stock to one of that person’s employees (or former employees) under a Plan would have an obligation under paragraph 153(1)(a) to withhold and remit the amount of the Deductions in respect of the benefit deemed to be received by the employee because of paragraph 7(1)(a). If the employee was entitled to the deduction under paragraph 110(1)(d) in computing the employee’s taxable income for the year, the amount of the Deductions would, however, be reduced because of paragraph 153(1.01)(a).
In addition, following the adoption of new subsection 153(1.31), we are of the view that an employer can no longer relieve itself of its obligation to withhold and remit the amount of Deductions in a situation such as the Particular Situation simply because the amount deemed to be paid as a benefit under paragraph 7(1)(a) would be non-pecuniary, it was the only remuneration paid to that employee in a particular taxation year or the remuneration paid or other pecuniary benefits paid in the particular taxation year were insufficient to cover the amount of the Deductions.
Finally, although we are aware that in the Particular Situation the employer will have to find a solution to ensure compliance with its obligation to withhold and remit the deductions, we are not able within the context of this request for an opinion to comment or provide potential solutions. However, we would be willing to consider any particular situation as part of a request for advance rulings.
Best regards
Guy Goulet CA, M. Fisc.
for the Director
Ontario Corporate Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch