6 July 2000 External T.I. 2000-0018745 - Stock Options, Chile Convention

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 a former Canadian resident exercises a Canadian stock options relating to Canadian employment while he or she resides in Chile, will the stock option benefit be taxed in Canada?

Position: Yes.

Reasons: The amount would be taxed in Canada under paragraph 2 of Article 15 of the Canada-Chile Income Tax Convention.

XXXXXXXXXX 2000-001874
M. P. Sarazin
July 6, 2000

Dear Sir:

Re: Canada-Chile Income Tax Convention

This is in response to your letter dated April 5, 2000, wherein you requested clarification regarding the application of section 7 of the Income Tax Act (the "Act") and Article 15 of the Canada-Chile Income Tax Convention (the "Convention").

You are of the view that the Convention applies to the year that the stock option is exercised by an individual and not the year that the benefit was earned by the individual. Consequently, where the individual is a resident of Chile when he or she exercises a stock option that was granted for his or her Canadian employment services, the Convention would apply to have the full benefit taxed only in Chile.

Comments

Confirmation of the tax consequences associated with completed transactions are provided by the relevant tax services office (for non-residents this is the International Tax Services Office). Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, please refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of information circulars and interpretation bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.

Pursuant to subsections 7(1) and (4) of the Income Tax Act (the "Act") where an individual exercises his stock option after he or she has ceased to be an employee, the individual will be taxable in Canada on any employee stock option benefits arising from that employment as though he or she were still an employee. In accordance with subsection 2(3) and subparagraph 115(1)(a)(i) of the Act, where a non-resident exercises such an option any benefits which arise will be taxable in Canada, subject to the provisions of any tax convention or agreement.

Paragraph 1 of Article 15 of the Convention provides that salary, wages and other remuneration derived by a resident of Chile in respect of employment shall be taxable only in Chile unless the employment is exercised in Canada. If the employment is so exercised in Canada, such remuneration as is derived from the Canadian employment may be taxed in Canada. Since the Convention does not define the term salary and wages, 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. Subsection 248(1) of the Act defines salary and wages to mean "...the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I..." and therefore the term would include any benefits provided in section 7 of the Act.

Accordingly, since the stock option benefits arose in respect to the individual's employment in Canada, paragraph 1 of the Convention would not deny Canada the right to tax the income arising on the exercise of the option but it also does not prevent Chile from also taxing such income.

Paragraph 2 of Article 15 provides that remuneration derived by a resident of Chile in respect of an employment exercised in a calendar year in Canada will be exempt from tax in Canada if the resident of Chile is present in Canada for a period or periods not exceeding in the aggregate 183 days in that year, the remuneration is not paid by a person resident in Canada and the remuneration is not borne by a permanent establishment or a fixed base that that the employer has in Canada. We are not able to comment on the residency of a payor or whether the person who will bear the cost of the remuneration is resident in Canada since these are questions of fact. However, in our view, the calendar year concerned referred to in paragraph 2(a) of Article 15 of the Convention is the year in which the employment was exercised and not to the year in which the stock option was exercised. Accordingly, where the stock option relates to a year in which the taxpayer was present in Canada for a period or periods exceeding in the aggregate 183 days, the Convention does not grant any relief and such a taxpayer will continue to be taxable in Canada on the benefit derived from the stock option.

Where both countries tax the income arising on the exercising of the option, a foreign tax credit, if available, would be provided by the state of residence (Chile) where the stock option benefit received by a resident of Chile is taxed in Canada.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate