24 July 1990 External T.I. 900310 F - Value of Stock Option Benefit Subject to Witholding at Source

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

July 24, 1990

Dear Sirs:

Re:  Subsections 153(2) and 156(1) of the Income Tax Act (the "Act")

This is in response to your enquiry March 29, 1990 wherein you have asked whether an employee would be required to remit by instalments in the following situation:

1.     The employee of a corporation has been granted a stock option as envisaged in subsection 7(1) of the Act.

2.     The value of the shares subject to the option is considerably in excess of the exercise price.

3.     In 1989, the employee exercised a portion of his option thereby realizing an employment benefit equal to the amount by which the fair market value of the shares at the time of acquisition exceeded the price by him.

4.     The employment benefit is in excess of 25% of the employee's net income (or taxable income as your correspondence states).

5.     It is anticipated that the employee will exercise a portion of his option in 1990 and again the employment benefit will be in excess of 25% of the employee's net    (or taxable) income.

6.     The employer has withheld tax from the employee's salary for both 1989 and 1990.

We agree with the opinion expressed by the Calgary District office in their letter dated March 29, 1984 (a copy of which you submitted) that the value of a stock option benefit is considered to be income from an office or employment and therefore properly subject to withholding at source by the employer although the requirement to withhold may be waived in circumstances where the withholding would cause undue hardship.  We would add, however, the comments of Mr. H.G. Ladd, Assistant Deputy Minister, Western Region, at the 1983 Canadian Tax Foundation Annual Conference:  "In those circumstances where an employee is aware that he will exercise an option within the taxation year, an estimate of the value of the benefit should be made and that value averaged over the year for uniformity of withholding".

As withholding is required under paragraph 153(1)(a) of the Act, subsection 153(2) is applicable.  The requirement to remit by instalment under subsection 156(1) of the Act is not invoked in any instance where subsection 153(2) of the Act applies.

We trust that the above comments are of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch