The following question was asked of the CRA by the Tax Executive Institute in connection with its December 5, 2017 liaison meeting with CRA representatives. If the CRA is ultimately unwilling to provide the administrative concession described in the question below, would the Department of Finance be willing to consider a legislative amendment to the same effect?
“An employer is generally required to withhold and remit tax on stock option benefits realized by an employee to the same extent as if the amount of the benefit had been paid to the employee as a cash bonus. However, an employer’s withholding and remittance obligations do not generally extend to any portion of the benefit that is deductible by the employee under paragraph 110(1)(d) or under subsection 110(2.1). Subsection 153(1.01) expressly permits these two tax withholding exemptions.
With respect to the tax withholding exemption under subsection 110(2.1), upon the exercise of employee stock options, if the employee directs an employer approved broker or dealer to immediately sell the shares and donate all or part of the proceeds to a qualifying charity, subsection 110(2.1) may entitle the employee to claim a tax deduction under paragraph 110(1)(d.01) proportionate to the amount of the donated proceeds. Unlike the case where shares are donated, subsection 153(1.01) specifically provides that the amount determined under paragraph 110(2.1)(b) to be deductible under paragraph 110(1)(d.01) will reduce the amount of the stock option benefit subject to withholding. In other words, the employer would not be required to withhold and remit tax on the portion of the cash proceeds donated to charity.
Under paragraph 110(1)(d.01), if an employee donates shares acquired in the exercise of employee stock options during the year, the shares are acquired and within 30 days of exercising the option, the employee is generally entitled to an additional tax deduction in an amount equal to one‐half of the stock option benefit realized. Unlike the case where share sale proceeds are donated by an employer‐appointed broker, subsection 153(1.01) does not explicitly provide for an employer withholding tax exemption in cases where after exercising options to acquire shares, the employee donates the acquired shares to a charity; technically speaking, withholding tax in respect of the stock option benefit realized on the exercise must still be collected and remitted.
In cases where an employer facilitates the donation of an employee’s shares acquired upon the exercise of employee stock options by transferring such shares to a charity selected by the employee, would the CRA be open to providing an administrative concession whereby the employer could reduce the stock option benefit subject to withholding by an additional 50‐percent deduction available under paragraph 110(1)(d.01)?
DEPARTMENT OF FINANCE RESPONSE
The Department of Finance would be prepared to consider circumstances where the listed exemptions from employer withholdings offered in subsection 153(1.01) would be extended to include circumstances where shares issued under the exercise of employee stock options are donated (in kind) to a qualified donee.
Before considering a legislative amendment the Department would need to consider what circumstances would need to be present before the exemption would be offered, such as, but not limited to, whether:
1) the employer should have an obligation to facilitate the donation;
2) any restrictions should be placed on the naming of the donee; and
3) there should be arm’s length restrictions between the donor and the donee.”
Such a legislative amendment would be useful to potential donors of stock options and thus to charities…but don’t hold your breath.
 The CRA said it had no legal power to change the legislative rules.
By: Arthur Drache