Stock Benefit Withholding Requirements
Question
What is the CRA’s view with respect to an employer’s obligations to withhold from the cash proceeds when an employee exercises a stock option and sells the underlying shares on the same day?
Response
Legislatively, withholding of Canada Pension Plan (CPP) contributions and income tax is required on the full taxable benefit arising out of the exercise of a security option agreement. An employer is not required to withhold on a stock option benefit only when the employee is eligible and elects to defer including the benefit in income under subsection 7(8) of the Act.
In situations where the employer is aware that the employee wishes to exercise a security option and dispose of the security on the same day, the employer should withhold the full amount of CPP and income tax on the benefit. Where the employer is not aware of the employee’s intention to sell the security on the same day, the employer can spread the withholding over several pay periods if the amount to be withheld is larger than the employee’s remuneration for the pay period.
When calculating the amount subject to deductions, the CRA will allow the employer to reduce the amount of the benefit by the deductions available under paragraph 110(1)(d), (d.1) or (d.01) of the Act, whichever applies.