24 February 2000 Internal T.I. 1999-0009047 - Stock option benefit for non-residents

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Where stock options are exercised in 1997 by a non-resident, are the stock option benefits for 1997 attributable to the year the person was granted such stock options.

Position: yes

Reasons: Stock option benefits for 1997 are attributable to the taxpayer's employment with Canco in 1993, the year in which Stock Agreement was entered into, and the amount of such benefit that should be included in the taxpayer's taxable income for 1997 is calculated as follows. Total stock option benefit calculated for 1997 under section 7 of the Act in respect of stock options exercised under the Stock Agreement multiplied by the fraction where the numerator equals the total number of days the taxpayer was in Canada performing duties for Canco in 1993 and the denominator equals the total number of days the taxpayer was performing duties for Canco in 1993.

		February 24, 2000

	International Tax Services Office	International Section
	2204 Walkley Road	G. Middleton
	Ottawa ON  K1A 1A8	957-2122

	Attention:	Charles Guertin
		Client Services
		1999-000904

XXXXXXXXXX

This is in reply to your e-mail and further to our various telephone conversations requesting our comments on the taxpayer's refund request for 1997. As we discussed, there are insufficient facts to determine the taxpayer's income tax liability for 1997 but we would like to offer the following comments.

Our comments are based on the information provided by the taxpayer's representative and included with the taxpayer's 1997 income tax return which is enclosed. Based on this information, we have assumed that the taxpayer ceased to be a resident of Canada in 1995 and was a non-resident of Canada from the date of departure in 1995 until he moved back to reside in Canada in 1997.

(However, it should be noted that you may wish to request additional information to substantiate the information provided by the taxpayer's representative in order to determine with certainty the taxpayer's residence status, employment activities, presence, etc. for the relevant years.)

1. With respect to paragraph 2(b) of Article XV of the Canada-U.S. Income Tax Convention (the "U.S. Convention"), it will be necessary to know the number of days the taxpayer was actually present in Canada for the calendar year 1997. The number of days the taxpayer is present in Canada for the purposes of paragraph 2(b) includes all the days present in Canada whether or not the taxpayer was a resident of Canada at the time and whether or not the taxpayer was performing employment services at that time. In addition to knowing the number of days the taxpayer is present in Canada in the calendar year 1997, it is also necessary to know:

• the actual day on which the taxpayer became a resident of Canada in 1997;
• the taxpayer's employer(s): and, for each employer, the total remuneration earned for his services; the total number of days each year employed by each employer; the number of days of employment services rendered in Canada and the number of days of employment services rendered outside Canada;
• the number of days performing services performed in Canada for a Canadian resident employer; or, if he performed services for a U.S. resident employer, whether that employer has a permanent establishment in Canada.

It should be noted that any part of a day in Canada is considered to be a day in Canada.

2. The information supplied by the taxpayer's representative (although unsubstantiated) indicates that the taxpayer exercised stock options in 1997 at a time when the taxpayer was a non-resident person. The stock options are in respect of agreements dated XXXXXXXXXX (Stock Agreements 1 and 2, respectively) between the taxpayer and a Canadian resident company ("Canco"). Our views with respect to calculating the taxpayer's stock option benefits that are subject to tax in 1997 are set out below.

• The stock option benefits relating to Stock Agreement 1 are considered to be attributable to the taxpayer's employment with Canco in 1993, the year in which Stock Agreement 1 was entered into, and the amount of such benefit that should be included in the taxpayer's taxable income for 1997 is calculated as follows.

Total stock option benefit calculated for 1997 in respect of stock options exercised under Stock Agreement 1 multiplied by the fraction where the numerator equals the total number of days the taxpayer was in Canada performing duties for Canco in 1993 and the denominator equals the total number of days the taxpayer was performing duties for Canco in 1993. Presumably, the taxpayer was present in Canada for more than 183 days in 1993. Based on the information supplied by the taxpayer's representative, the entire stock option benefit under Stock Option Agreement 1 should be subject to tax in Canada in 1997.

• The amount of the stock option benefit for 1997 relating to Agreement 2 would be determined in a similar manner (i.e. the benefit is considered to be attributable to the taxpayer's employment with Canco in 1994, the year in which Stock Agreement 2 was entered into). However, based on the information supplied by the taxpayer's representative (although unsubstantiated), the entire stock option benefit under Stock Agreement 2 would be exempt from tax in Canada in 1997 if the taxpayer is in fact a non-resident person at the time that he exercised the stock options granted under Stock Agreement 2 pursuant to paragraph 2(b) of Article XV of the U.S. Convention. The reason for this is that the taxpayer presumably was not present in Canada for more than 183 days in 1994 as indicated by the information supplied by the taxpayer's representative. (It is also noted that stock option benefits do not constitute remuneration that is "borne by" for the purposes of paragraph 2(b) of Article XV of the U.S. Convention.)

3. The calculation of the taxpayer's 1997 income tax liability is quite complex as it has to be calculated in accordance with various provisions in the Act (e.g. sections 2, 3, 5, 7, 114, 115, 126, subparagraph 110 (1)(f)(i), etc.) and pursuant to provisions in the U.S. Convention (e.g. Articles XV, XXIV, etc.). If you should require any assistance in this matter, we suggest you contact René Fleming of the International Tax Directorate and he can be contacted at 952-8741.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (819)994-2898. The severed copy will be sent to you for delivery to the client.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. René Fleming
International Tax Directorate
5th Floor, 344 Slater Street
Ottawa ON K1A 0L5