WITHHOLDING REQUIREMENTS ON STOCK OPTION BENEFITS ARE CHANGING
The 2010 federal budget clarified employer withholding requirements on employee stock option benefits to ensure tax is withheld and remitted to the government on these benefits, eliminating the ability to reduce withholdings by claiming undue hardship. Based on this clarification, employers will be required to withhold tax on stock option benefits net of the 50% stock option deduction (if applicable). The intent behind this change is to ensure an employee can meet their tax obligations up front, in the event that the value of their securities declines after the options are exercised to purchase the shares. The government is therefore shifting the tax collection risk to the employee and/or employer.
These withholding requirements will apply to stock option benefits on securities acquired by employees after 2010, to give employers time to adjust compensation arrangements and update their payroll systems for this change. Note that the change will not apply in respect of options granted before 2011 under a written agreement entered into before 4pm EST on March 4, 2010 if, at that time, a condition existed in the agreement restricting the employee from disposing of the optioned securities for a period of time after exercise.
Given that stock option benefits are a non-cash employment benefit, employers will need to consider alternatives to ensure employees have sufficient “cash” income or proceeds from which the required tax liability on the stock option benefit can be withheld. Consideration should be given to how stock option agreements are written to ensure the employer is able to meet their withholding obligations. Agreements may require a condition for immediate disposition of a portion of the securities to ensure sufficient proceeds are available for the tax withholding. As well, adjustments may need to be made before the end of 2010 for current agreements not meeting the exception noted above.
Contact your BDO advisor to discuss the implications of this change on administrative processes related to your employee stock option plans.
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