SARs Double Deduction Eliminated
The Budget proposes to eliminate the ability of both the employer and the employee to claim a deduction under the ITA upon exercising cash-settled SARs granted in tandem with stock options. Pursuant to the Budget, only the employer can claim the deduction for the cash disbursement, unless the employer makes an election in a prescribed form to waive it. The employee would be eligible to claim the stock option deduction if: the employer makes an election in a prescribed form not to take its deduction; the employer provides a copy of the election to the employee; and, the employee files the election in the year the employee claims the stock option deduction. These measures would apply to dispositions of stock options after 4:00 p.m. Eastern Standard Time on March 4, 2010.
Income Deferral Eliminated
Pursuant to the federal budget in 2000, an employee of a public company could elect to defer the income inclusion of the in-the-money amount, from the year of exercise, to the year the shares were sold, to a maximum of $100,000. The Budget proposes to eliminate this deferral for stock options exercised after 4:00 p.m. Eastern Standard Time on March 4, 2010. The Budget does not affect the deferral of the stock option benefit for employees of Canadian controlled private companies (CCPCs).5
Special Relief for Historical Tax Deferrals
The financial market meltdown over the last couple of years significantly depressed the prices of the common share of many companies. This negatively impacted many stock option holders who exercised their stock options before the meltdown and elected to defer their tax liability to the date of disposition of the shares. Some of those who have had to sell their shares while prices are depressed have incurred tax liabilities greater than their proceeds on selling the shares. The Budget proposes special tax relief in these situations. Essentially, the special tax relief would limit the tax liability to the proceeds of the sale (two-thirds of the proceeds for residents of Quebec), taking into account the tax benefit of the capital loss, provided the shares are sold before 2015.
Withholding Obligation Clarified
The Budget proposes to clarify an employer’s obligation to remit taxes on the exercise of stock options, even when stock options are exercised and the shares acquired are held, rather than sold. The Budget clarifies that taxes must be remitted in respect of the inthe- money amount as if the benefit had been paid to the employee as a cash bonus. If the stock option deduction is available to the employee, the deduction can be taken into consideration in determining the amount of taxes to be remitted on the exercise of the stock option. The remittance requirement applies to benefits arising on the issuance of securities after 2010. There is a limited exception to the employer’s remittance obligation for stock options granted before 2011 if there was a preexisting agreement in writing entered into before 4:00 p.m. Eastern Standard Time on March 4, 2010, which restricted the employee from disposing of the shares for a period of time after the acquisition.