If you receive employee stock options (ESOP) or restricted stock units (RSU) at work or participate in the Employee Stock Purchase Plan (ESPP) offered by your employer, you should be aware of new CRA rules on withholding taxes. In the past, employers typically did not withhold taxes at the time an employee received or exercised their stock option benefits. Instead, stock option benefits were included in the T4 slips and employees paid any taxes owing at the time they filed their taxes.
In Budget 2010, the Federal Government provided relief for Canadians who elected to defer taxes on their stock options only to find that they owed taxes on phantom profits. At the same time, the Government also repealed the rule that allowed stock option benefits to be deferred to the year of the sale. A little noticed provision in the budget (see Page 356 of the budget document) also required employers to withhold taxes on stock option benefits:
Budget 2010 proposes to repeal the tax deferral election and to clarify existing withholding requirements to ensure that an amount in respect of tax on the value of the employment benefit associated with the issuance of a security is required to be remitted to the government by the employer. This amount will be added to the employer’s remittances of tax withheld at source in respect of all employee salary and benefits, including other in-kind benefits, for the period that includes the date on which the security was issued or sold. These measures will prevent situations in which an employee is unable to meet his or her tax obligation as a result of a decrease in the value of these securities.
The Government provided some time for businesses to adjust their payroll systems to handle withholding taxes on employee stock benefits. My understanding is that starting this year, employers will withhold taxes on stock option benefits. Here’s an example of how it would work. Let’s say you are in the top 46% tax bracket. If you exercise and sell options on 100 shares of your employer, you will be subject to a withholding tax on the value of 23 of those options (assuming 50% of the stock option benefit is taxable).
