Stock options are not really as complicated as one may think. In many cases, the challenge associated with the reporting of these benefits comes down to how the information is communicated to the payroll department.
The questions below were submitted to the Canadian Payroll Association’s (CPA) Payroll InfoLine service by payroll professionals across Canada and discuss the following topics: how to deal with a variety of stock-based remuneration plans, interest free loans to employees, company vehicle benefits, and reporting an employee’s bonus on the ROE while she is on maternity leave.
Question: We have several stock-based remuneration plans in our organization including, restricted stock units, stock option plans and share purchase plans. How and when are these taxable benefits reported? We find the whole process extremely confusing and would like to obtain as much clarification as possible.
Answer: Stock options are not really as complicated as one may think. In many cases, the challenge associated with the reporting of these benefits comes down to how the information is communicated to the payroll department.
In many instances, the terminology used to describe the type of security option benefit an employee receives does not match the definitions used by the Canada Revenue Agency (CRA) and Revenue Quebec (RQ).
This can be often be due to the fact that security benefits consist of public securities that originate from outside of Canada and the treatment of security options can vary significantly from one country to the next. When the information is transmitted to the Canadian payroll department by the head office located outside Canada, they may use terminology and refer to the tax reporting treatment applicable in that country; which may be quite different.
To simplify matters, the Canadian payroll department needs to be aware of the various treatment and reporting requirements required for security options in Canada.
The key factor to note in Canada is that the security options become taxable when the employee acquires the shares whether the employee sells the shares or not.
Security options can be broken down into three types of plans:
Stock option: This plan allows employees to purchase shares of their employer’s company or of a non-arm’s length company at a predetermined price.
These amounts are reported in Box 14 and Code 38 of the T4 and Boxes A and L of the RL-1. The benefits are subject to C/QPP and income tax. This is the only type of stock option plan where a 50% deduction is reported in Code 39 of the T4 and a 25% deduction is reported in Code L-6 of the RL-1.
Employee stock purchase plan (ESPP): This plan allows employees to acquire shares at a discounted price, (i.e., for an amount that is less than the value of the stock at the time of the acquisition of the shares). Many ESPPs provide for a delay in the acquisition of the shares as follows: an employee contributes a certain amount over a period of time and at pre-specified periods, the employee can purchase shares at a discount using the accumulated contributions. The benefit is equal to the value of the shares, minus the amount paid.
These amounts are reported in Box 14 and Code 38 of the T4 and Boxes A and L of the RL-1 and are subject to C/QPP and income tax.
Stock bonus: Under this plan, an employer agrees to give the shares to an employee free of charge. In effect, the employer agrees to sell or issue shares to the employee for no cost. Restricted stock units normally fall into this category.
These amounts are reported in Box 14 and Code 38 of the T4 and Boxes of the RL-1 and are subject to C/QPP and income tax.
Capital gains deduction only applicable to Stock Option Plans
The 50% deduction is not reported in Code 39 of the T4 nor is the 25% deduction reported on the RL-1 in Code L-6 for ESPP’s or stock bonus plans, as the benefit is not based on an agreement between the employer and the employee allowing the employee to purchase shares at a fixed per share price, in the same way as with stock option plans.
Treatment is different for various circumstances, such as donating security options to charity and Canadian Controlled Private Securities. These topics will be addressed in a webinar entitled, “Taking Stock of your Options”, to be presented later in the year. Further details will be provided in due course on the CPA website at payroll.ca.
Question: An employee in New Brunswick was provided an interest free loan two years ago. This individual has recently resigned and there is still a balance outstanding on the loan of $8,500 that he is refusing to pay. How do we handle this?
Answer: Where a loan to an employee is partially or fully forgiven, the amount forgiven is income in the hands of the employee. Report the value of the amount forgiven on a T4 slip in the year it is forgiven in Box 14 and Code 40. A forgiven loan is considered a cash taxable benefit and will be subject to CPP, EI and income tax. Additional information can be found in Interpretation Bulletin IT-421.
Question: We have a company vehicle purchased in 2011. Since then, the value of the vehicle has depreciated. For reporting of automobile benefits, should I use the original purchase value of the vehicle or use current market value?
Answer: For the purpose of reporting the automobile benefits, you should use the original purchase value of the vehicle.
The cost of the automobile you own for determining the standby charge is the total of the following two amounts:
- the cost of the automobile when you bought it, including options, accessories, and the GST/HST and PST, but not including any reduction for a trade in; and
- the cost of additions (including the GST/HST and PST) you made to the automobile after you bought it (that you add to the capital cost of the automobile to calculate the deduction for depreciation).
Question: We are paying a bonus to an employee who is on maternity leave and she is concerned that it will affect her EI benefits. When do we report this bonus on the Record of Employment (ROE) and how will it impact the employee on leave?
Answer: All payments made after the ROE has been issued must be reported on an amended ROE. The amount of the bonus and a description of the payment are reported in Block 17C. You may describe the bonus as discretionary or a bonus on performance earned prior to the leave. You should provide the period of time the bonus was actually earned to avoid a call from Service Canada for more information. The employee will have to declare this bonus to Service Canada.
Service Canada will then recalculate the benefit and determine if the bonus will affect the claim. The benefits should not affect the EI benefits if it was a bonus earned prior to the period of the maternity leave.
By Janet Spence, CPM, Manager, Compliance Services and Programs
Republished with permission from the Canadian Payroll Association (CPA)
The Canadian Payroll Association’s mission is Payroll Leadership through Advocacy and Education.
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