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 or where the remuneration paid is not sufficient to remit the required withholding?
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 a non-cash remuneration.
June 15, 2011
XXXXXXXXXX Headquarters Income Tax Rulings Directorate Isabelle Landry, M.Fisc. 450-623-0193
2011-040550
Withholding tax on the exercise of stock options
This is in response to your email of April 29, 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") where there is a taxable benefit under paragraph 7(1)(a).
Specifically, you asked us if an employer is required to withhold and remit the amount of source deductions calculated in the prescribed manner (the "Deductions") where an employee is deemed to have received a benefit because of the employee’s employment by virtue of paragraph 7(1)(a) for a taxation year after 2011 and that taxable benefit is the only remuneration paid to that employee for a particular pay period in the taxation year.
You also asked us if our position is the same where the remuneration or other financial benefits paid during the particular pay period is insufficient to cover the amount of the Deductions.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
Subsection 153(1)(a) provides, in particular, 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 after 2010 as a benefit under or because of any of paragraphs 7(1)(a) to (d.1) represents 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 particular taxation year. However, subsection 153 (1.01) does not apply with respect to benefits arising from rights granted before 2011 to a taxpayer under an agreement to sell or issue securities that was entered into in writing before 4:00 p.m. Eastern Standard Time, March 4, 2010 and that included, at that time, a written condition prohibiting the taxpayer from disposing of the securities acquired under the agreement for a period of time after exercise.
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.
We are therefore of the view that a person issuing in 2011 (or subsequently) shares of its capital stock to one of its employees (or former employees) under a stock option plan for employees would be required by virtue of 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 pursuant to paragraph 7(1)(a). If the employee were 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 pursuant to paragraph 153(1.01)(a).
In addition, following the enactment 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, where there is a taxable benefit under paragraph 7(1)(a), by reason only of the amount deemed to be paid as a benefit under paragraph 7(1)(a) being a non-cash benefit that was the only remuneration paid to that employed person during a particular pay period or where the remuneration or other monetary benefits paid in a particular pay period would be insufficient to cover the amount of the Deductions.
Finally, although we are aware that in those situations the employer will have to find a solution to ensure compliance with its obligation to withhold and remit the Deductions, we are not able to comment or provide any potential solutions.
We hope that our comments are of assistance.
Best regards,Guy Goulet CA, M. Fisc.
Manager
Ontario Corporate Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch