10 February 1993 Income Tax Severed Letter 923447 - Stock Option Withholding Information Return

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

                                           J. Gagné
XXXXXXXXXX                                 (613) 954-1295
                                           HAK-4903-20-0
                                           HAK-4920-1
                                           RE: 5229
Attn: XXXXXXXXXX

February 10, 1993

Dear XXXXXXXXXX

This is in response to your letter of November 20, 1992, forwarded to us by Rulings Directorate, which concerns deductions at source for stock option benefits.

We have reviewed the technical issues raised in your letter in which you reach the conclusion that because a stock option benefit conferred by an employer is not, technically, an amount paid by the employer, no withholding at source is required under subsection 153(1) of the Income Tax Act (the Act) and no information return is required to be filed under section 200 of the Income Tax Regulations. Unfortunately, we are unable to concur with your interpretation and would like to bring the following clarifications.

1) LEGISLATION:

1.1 Salary and wages, as defined in subsection 248(1) "means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part 1".

1.2 Subdivision a of Division B of Part 1, entitled "Income or loss from an office or employment" contains two main headings with respect to the computation of income "Basic Rules" and Inclusions". Under the Basic Rules, subsection 5(1) of the Act provides for the inclusion in a taxpayer's income for a taxation year, the "salary , wages and other remuneration, ... received by him in the year". Under the Inclusions, sections 6 and 7 of the Act provide for, among others, the inclusion in a taxpayer's income of those items that require valuation such as non-cash taxable benefits and stock option benefits. Stock option benefits would, therefore, constitute "income ... from an office or employment" that would be "salary, wages and other remuneration" for purposes of subdivision a of Division B of Part 1 of the Act.

1.3 Since subsection 153(1) is in Part 1 of the Act, and paragraph 153(1)(a) provides for the withholding at source by every person paying "salary or wages or other remuneration", it follows that the amount of the required withholding is computed with reference to the aggregate of the amounts included in a taxpayers's income under sections 5, 6 and 7 of the Act.

1.4 In view of the above comments, it follows that information returns with respect to stock option benefits would be required to be filed pursuant to subsection 200(1) of the Regulations.

2) POLICY:

2.1 Since some of the remuneration in sections 6 and 7 of the Act is non-cash remuneration, withholdings may only be effected through deductions at source from amounts actually paid to a taxpayer. However, the Department recognizes that requiring additional withholding from cash payments, such as normal salary, can create hardship to the employee. This type of hardship will be created when either the benefit is very large in proportion to the individual's normal salary or if the option is exercised later in the year. In order to obviate such hardship, the Departments's position is to encourage employers to make withholdings from employees' cash remuneration to the extent possible without imposing actual hardship upon the individual. The determination of hardship in these circumstances may be made at the discretion of the employer, acting in good faith.

2.1 In a situation when the non-cash benefit is the only form of income received from that employer, withholding becomes impractical and the employer will not be required to withhold tax on the amount of such benefits.

Concerning the 3 scenarios you submitted, the withholding requirements should be determined as follows:

a) Determine the stock option benefit. b) Where circumstances warrant, the stock option benefit subject to the withholding requirements may be reduced by the deduction permitted by par. 110(1)(d) of the Act. c) Divide the amount obtained in b) by the number of pay periods remaining in the current year. d) Determine the gross remuneration for the period by adding the amount obtained in c) to the gross cash earnings for the period. e) Determine the maximum withholding for the individual without imposing undue hardship.

Situation 1:

We agree with your conclusion, however the calculation should have been made as explained above.

Situation 2:

Withholding should be calculated as explained above. In that case, the stock option benefit should be prorated over the number of pay periods remaining for the year and added to the gross salary for each period. Withholding would be on the same basis as described in (e) above.

Situation 3:

As stated in paragraph 13 of Interpretation Bulletin IT-113 R3 (copy enclosed), when a corporation is a Canadian-controlled private corporation at the time of its agreement to sell or issue shares, subsection 7(1.1) of the Act will apply even though the corporation subsequently lists its shares on the Canadian stock exchange prior to the issuance of the shares pursuant to the agreement. Therefore, the comment explained in situation 2 applies.

We trust the foregoing will be satisfactory.
                                    Original signed by
                                    E. Hammond

                                    Paul Rémillard
                                    Chief,
                                    District Office and
                                    Taxation Centre
                                    Support Section
                                    Source Deductions
                                          Division

c.c. B.W. Dath, Director, Rulings Directorate