Administering stock options can be challenging for payroll, particularly where the persons concerned are no longer employees and there are no other earnings from which to make source deductions.

These challenges increased after the related income tax source deduction requirements changed in Now that a couple of years have passed, it would be interesting to discover how compliant employers are with the new rules.

For example, the taxable benefit consequences of surrendering options back to an employer, for a cash payment, are the same as if such options had actually been converted into shares. The main challenge in administering stock options is the gap — which may be measured in years — between the events that must be managed:.

Simply creating a plan under which employees may either be granted options or acquire shares is not something that triggers a taxable benefit. Similarly, granting actual options for the future purchase of shares does not itself trigger a taxable benefit. Instead, the general rule is that a taxable benefit occurs when employees either acquire shares or dispose of stock options. When the employer is a Canadian-Controlled Private Corporation a CCPC , this rule changes for issued shares — a taxable benefit is only recognized when employees sell or otherwise dispose of shares.

The potential gap between the time options are granted and the time share are acquired or disposed of, if the employer was a CCPC, means that persons might no longer be employees.

The taxation of stock options | The tax planning guide

How does this affect the required source deductions and reporting? For income tax purposes, the source deduction rules changed in the federal budget.

As of that budget, stock option taxable benefits are deemed to be cash payments to employees. In other words, even if no other earnings or cash are involved, employers must remit income tax source deductions calculated on employee stock option benefits.

Presumably employers who honour this obligation are not just out of pocket and have the right to recover any such remittance from the former employees concerned.

Taxation of Stock Options for Employees in Canada

However, there are exceptions to this remittance requirement. First, this requirement does not apply when the employers is a CCPC, where shares are only taxed in the year of disposal or sale.

Second, employers are not required to treat stock option benefits as a cash payment:. For the last two bullets, employers are only required to remit on the net income tax owing after applying the available deduction amounts. For CPP purposes, the gross taxable benefit amount is a pensionable earning.

This status does not change, if at the time the taxable benefit is recognized, the person is no longer in an employment relationship to the employer concerned. None of the deductions above that reduce taxable income are taken into account for CPP purposes.

For EI purposes, since they are non-cash, stock option benefits are not insurable earnings and no ROE reporting is required. Prior to the budget change, the CRA accepted that employers were not required to withhold and remit when the only employment income were taxable benefits.

Stock option taxable benefits are T4 reportable, even for benefits that are income taxable in years where otherwise there is no employment relationship. This means the gross amount of any stock option benefits must always be reported in T4 Boxes 14 and 26, even for former employees.

If no CPP source deductions are taken, and no corresponding employer contributions are reported on the T4 Summary, presumably a PIER report would show both sides of these CPP contributions as owing.

He can be reached at armcewen shaw. This article was first posted to Canadian HR Reporter and Canadian Payroll Reporter on May 14, You are commenting using your WordPress. You are commenting using your Twitter account. You are commenting using your Facebook account. Notify me of new comments via email. Notify me of new posts via email.

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Home About Resources Overtime Webinars and Seminars Custom Training Testimonials Stay Informed! The main challenge in administering stock options is the gap — which may be measured in years — between the events that must be managed: Granting employees options to acquire a specific number of shares at a particular price; Such options being exercised or shares being directly acquired; and Employees disposing of their options or stock to either the employer or a 3 rd party.

Second, employers are not required to treat stock option benefits as a cash payment: Facebook Google LinkedIn Email Print. Gallery This entry was posted in Source Deductions and Reporting and tagged Canadian-Controlled Private Corporation , CCPC , CPP pensionable earnings , EI insurable earnings , phantom stock options , security option benefits , stock optipon benefits , T4 reporting. Leave a Reply Cancel reply Enter your comment here Fill in your details below or click an icon to log in: Email required Address never made public.

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