21 May 2002 External T.I. 2002-0136495 - FOREIGN STOCK OPTIONS CDN 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 CCRA.

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

Principal Issues:

1. Does a Canadian resident have to include stock option benefits realized on the exercising of his or her options in his or her income where the options were granted while they were non-residents?

2. Where the Canadian resident paid taxes in a previous year to the country where he or she resided at the time the stock options were granted, will there be a foreign tax credit allowed in respect of those previous taxes?

Position:

1. Yes.

2. No.

Reasons:

1. A resident has to include all of his or her income in accordance with the provisions of the Act. Paragraph 7(1)(a) would apply.

2. A taxpayer can only claim a foreign tax credit for the income taxes paid to another government in respect of the income in that same year. There is no provision that would allow the taxpayer to claim a foreign tax credit in the current year for foreign taxes paid in a previous year.

XXXXXXXXXX 2002-013649
M. P. Sarazin, CA
May 21, 2002

Dear XXXXXXXXXX:

Re: Stock Option Benefits

This is in reply to your letter of April 22, 2002, requesting our views regarding several questions that you have asked in respect of the taxation of stock option benefits provided by a foreign company to its employees.

Comments

In your letter you have outlined an actual fact situation related to completed transactions. As noted in Information Circular 70-6R4, this directorate can only provide advance income tax rulings in respect of specific proposed transactions. We must advise you that the review of completed transactions falls within the responsibility of tax services offices which, in the case of non-residents, is the International Tax Services Office. Information Circulars and Interpretation Bulletins are available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html. Consequently, we can only provide you with the following general comments.

The Canada Customs and Revenue Agency's general views regarding the taxation of stock options are found in Interpretation Bulletin IT-113R4 entitled "Benefits to Employees - Stock Options". This Interpretation Bulletin should answer most of your questions relating to the application of the stock option provisions of the Income Tax Act (the "Act"). However, the Interpretation Bulletin has not been updated to reflect the recent amendments to the Act regarding the election to defer the recognition of benefits where certain conditions are satisfied.

Question 1

Are the shares of the particular corporation prescribed shares within the meaning assigned by subsection 6204(1) of the Income Tax Regulations (the "Regulations")?

General Response

The determination of whether specific shares are prescribed shares within the meaning assigned by subsection 6204(1) of the Regulations is a question of fact. Generally, ordinary common shares without any restrictions attached to the shares will qualify as prescribed shares.

Question 2

Where an employee received stock options while residing in another country that taxes stock option benefits in the year of grant, will the employee that moves to Canada in a subsequent year and exercises his or her stock option while a resident of Canada have to include the benefit in his or her income and will the employee get any credit for the income taxes paid to a foreign government in a previous taxation year?

General Response

A resident of Canada is taxed on his or her world income. Paragraph 7(1)(a) of the Act would apply to include the full amount of any stock option benefit realized by the resident of Canada. We note that there is no provision in the Act to permit a deduction for the amount of any benefit that may have accrued while the employee was a non-resident. The determination of whether an Income Tax Convention between Canada and another country would reduce the amount that would have to be included in the Canadian resident's income is a question of fact. We would have to have all of the relevant facts before we could make such a determination.

The Canada Customs and Revenue Agency's general views in respect of foreign tax credits are found in Interpretation Bulletin IT-270R2 entitled "Foreign tax credit". In paragraph 13 of IT-270R2, we state that the foreign tax has to be paid for the particular year in question before it will be eligible for inclusion in the computation of the foreign tax credit. Consequently, amounts paid to a foreign country in respect of income taxes recognized in that foreign country for a previous year will not be eligible for the foreign tax credit in Canada for a subsequent year.

Question 3

Does the employer have to withhold income taxes for stock option benefits provided to its employees?

General Response

Your question regarding the determination of whether a stock option benefit is subject to withholding taxes should be addressed to the Trust Accounts Division of the Canada Customs and Revenue Agency. When you have all of the facts, you may forward your query to Mr. Marc Normand, Manager, Policy and Technical Services Section, Trust Accounts Division. Mr. Normand can be reached at (613) 954-1307.

Question 4

Are stock option benefits recognized for purposes of the Canada Pension Plan and Employment Insurance premiums?

General Response

Under the heading "stock options" in section 2.23, the Employers Guide - Taxable Benefits (T4130) states that the taxable stock option benefit is subject to CPP (but not EI) withholdings.

We trust that the above comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate