21 February 2000 External T.I. 1999-0009425 - stock option exercised by non-resident

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: Stock option exercised by non-resident.

Position: Benefit is attributable to employment in year option granted.

Reasons: Law. Numerous previous files.

XXXXXXXXXX 1999-000942
J. Stalker
Attention: XXXXXXXXXX

February 21, 2000

Dear Sirs:

Re: Stock options received by non-resident

This is in reply to your letter of January 19, 1999 in respect of stock options received by a resident of the U.K.

First, you ask whether stock option benefits would be considered to be included in the phrase "salary, wages and other similar remuneration" for the purposes of Article 15 of the Canada - U.K. Income Tax Convention (the "Convention"). The term "salary or wages" is defined in subsection 248(1) of the Income Tax Act (the "Act") as follows (emphasis added):

"salary or wages", except in sections 5 and 63 and the definition "death benefit" in this subsection, means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer's business but does not include superannuation or pension benefits or retiring allowances.

Since the benefit under section 7 of the Act falls within subdivision a of Division B of Part I of the Act, stock option benefits fall within the term salary and wages. Since the Convention does not define the term "salaries, wages and other similar remuneration", paragraph 2 of Article 3 of the Convention provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning it has under the Act. Accordingly, stock option benefits under section 7 fall within the "Dependent Personal Services" Article of the Convention.

In addition, you have presented the following hypothetical situation. USco, a corporation resident in the United States, has two wholly owned subsidiaries, Canco which is resident in Canada and UKco which is resident in the United Kingdom. On June 1, 1993 Employee X was granted a stock option by USco while working for Canco. This stock option was contingent upon the employee putting in two years of service for the parent company or either of its wholly owned subsidiaries and so could not be exercised before June 2, 1995. On March 1, 1995 the employee ceased to be a Canadian resident and became a U.K. resident and started to work for UKco. The stock option was exercised on June 2, 1995 while the employee was working for UKco.

It appears that your query involves a factual situation involving completed transactions. Issues involving completed transactions should be addressed by the appropriate Taxation Services Office of the Canada Customs and Revenue Agency. However, we can offer the following comments which we hope will be of assistance to you.

Where an individual exercises a stock option after he or she has ceased to be resident in Canada, the individual will be required to include the benefit in income to the extent it is attributable to services rendered in Canada pursuant to subsections 2(3) and 115(1)(a)(i) of the Act, subject to the provisions of any tax convention or agreement.

In your example, the entire amount of the stock option benefit will be included in Mr. X's income in 1995 under subparagraph 115(1)(a)(i) of the Act since the entire stock option benefit is considered to be attributable to Mr. S's duties of employment performed in Canada for Canco in the year the stock option was granted. Stock option vesting rights do not have any impact on this tax treatment. In addition, Canada retains the right to tax this amount under the Convention. Although benefits derived from the exercise of a stock option are taxed in the year the option is exercised, the "calendar year concerned " for the purpose of paragraph 2 of Article 15 of the Convention refers to the year in which the employment was exercised. Mr. X does not meet the requirements in paragraph 2 for the years in Canada in which the employment was exercised for which the stock option was granted, and accordingly, Mr. X will continue to be taxable in Canada on the benefit derived from the stock option as provided in paragraph 1 of Article 15.

We trust our comments are helpful.

Yours truly,

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