13 October 1998 Internal T.I. 9821967 - STOCK OPTION, WITHHOLDING TAXES

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.

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.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

How is a stock option benefit computed and is the benefit subject to withholding taxes?

Position: Computed under 7(1)(a) and withholdings a Source Deductions question.

Reasons:

Computation of benefit under 7(1)(a) is clear. Whether the benefits are subject to withholding is questionable and has been addressed by the Source Deductions Division.

								October 13, 1998

	TORONTO WEST TAX SERVICES OFFICE		HEADQUARTERS
J. Jackson						M.P. Sarazin
	Director						952-9853

	Attn:  Joanne Stamopoulos
								982196

Stock Option Benefit - XXXXXXXXXX

This is in reply to your round trip memorandum dated August 21, 1998, wherein you requested our comments regarding the taxation of stock option benefits under section 7 of the Income Tax Act (the "Act") received by employees of XXXXXXXXXX (the "Company").

The Company was a wholly owned Canadian subsidiary of a U.S. public company, XXXXXXXXXX. The shares of XXXXXXXXXX traded on the XXXXXXXXXX Stock Exchange. On XXXXXXXXXX, a U.S. corporation, XXXXXXXXXX, acquired all of the shares of XXXXXXXXXX. As a result of the takeover of XXXXXXXXXX, options to acquire shares of XXXXXXXXXX became immediately exercisable. Consequently, the employees of the Company exercised their stock options and paragraph 7(1)(a) applied in respect of the benefits realized as a result of the exercising of such options.

Question #1

What is the benefit received by each of the employees of the Company and how is the benefit computed for purposes of the Act?

Comments

The Departments general views regarding stock options are found in Interpretation Bulletin IT-113R4. We note that the computation of the amount of benefit is described in paragraph 1 wherein it states:

"An employee who exercises a stock option and acquires shares is generally required to include in employment income, in the taxation year in which the shares are acquired, a benefit equal to:

• the fair market value of the shares at the time the shares are acquired by the employee

Minus:

• any amount paid or payable by the employee to the corporation for the shares, and
• any amount paid by the employee to acquire the right to acquire the shares."

Therefore, the employees of the Company would compute their benefit by taking the fair market value of the shares of XXXXXXXXXX, converted into Canadian dollars on the acquisition date, acquired in the year under the stock options as a result of the takeover less the aggregate of amounts paid or payable for such shares, converted to Canadian dollars on the acquisition date, and the amount paid to acquire the rights to acquire the shares under the stock option, converted to Canadian dollars on the date that such rights were acquired.

Whether an employee is entitled to a deduction under paragraph 110(1)(d) of the Act is a question of fact. In this regard, we would refer you to paragraph 18 of IT-113R4. The employees will only be entitled to a deduction under paragraph 110(1)(d) of the Act when all of the conditions described in paragraph 18 of IT-113R4 are satisfied.

Question #2

Does the Company have to deduct withholding taxes in respect of the stock option benefits included in the income of the employees?

Comments

Under the provisions of subsection 153(1) of the Act, an employer is required to withhold taxes in respect of "salary wages or other remuneration" earned by its employees. It follows that the amount of the required withholding is computed with reference to the aggregate of the amounts included in a taxpayer's income under sections 5, 6 and 7 of the Act. In this regard, we suggest that you discuss the matter with your Source Deductions Division. They may be able to tell you if there is an administrative position excluding non-cash employment benefits from the subsection 153(1) withholding requirements.

We trust that the above comments will be helpful.

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch