Global Tax Adviser
February 2010

WHT Applies to Non-Cash Remuneration Paid to Non-Resident Employees

Leanne Gehlen
International Executive Services, Vancouver

The CRA stated in a recent technical interpretation that tax must be withheld on non-cash remuneration paid to non-residents out of an employee benefit plan trust, regardless of whether any cash remuneration is paid to the employee. This comment was made at the 2009 Canadian Life and Health Insurance Association (CLHIA) Round Table.

The CRA was asked what the employer's withholding tax obligations are when shares are distributed out of an employee benefit plan trust in satisfaction of an employee's benefits or, in the exercise of a stock option under a “cashless exercise” program, where shares to be acquired under the option are first sold short and the proceeds are then distributed to the employees.

Employee benefit plan trust
The CRA noted that when payments are made out of or under an employee benefit plan, tax is withheld on the earlier of the date the payment is made or the date on which the recipient receives an unrestricted right to the payment. A trustee of such a trust is required to withhold tax on the fair market value (FMV) of the shares at the time they are issued to, or constructively received by, the employee and report the benefit on a T4. If the employee is not paid any cash remuneration, the CRA will administratively waive the withholding on the benefit.

The CRA added that this administrative position applies only to Canadian residents, and that withholding must be made for non-residents regardless of whether any cash remuneration is paid to the employee.

Employee stock option – Cashless exercise
The CRA also commented on situations in which an employee may elect (or may be required) to use a broker to sell the security short in the exercise of his or her option. In these cases, the broker must remit all or a portion of the net cash proceeds to the employer to pay for the shares being exercised. The balance is then paid to the employee. This is often referred to as a same-day sale or cashless exercise.

The CRA noted that, where the employer is aware of the same-day sale or cashless exercise, the employer is required to withhold tax and CPP contributions on the benefit. There is no administrative position available to reduce this obligation, except that the employer may reduce the amount of the benefit on which to withhold tax if the employee is entitled to the 50 percent stock option deduction.

The CRA also stated that the benefit in a same-day sale or cashless exercise is based on the FMV of the security at the time the treasury share is transferred to the employee or the employer's broker.

For more information, contact your KPMG Tax adviser.

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