12 June 2003 Internal T.I. 2003-0021807 - Cross-Border Stock Options

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: The taxpayer paid tax on an employee stock option to Treatyland in the year the options were granted. The taxpayer also paid tax to Canada in the year the options were exercised. Is he entitled to claim a foreign tax credit in Canada for the taxes paid to Treatyland?

Position: No, although the taxpayer is welcome to apply to Competent Authority to see if any relief is available.

Reasons: Paragraph 126(1)(a) allows a credit for non-business-income tax paid "for the year". We have interpreted that phrase to mean the year the tax is exigible in the foreign country.

June 12, 2003

	ASSESSMENT & COLLECTIONS BRANCH	HEADQUARTERS
	Individual Returns & Payment Processing Directorate	Income Tax Rulings
	Legislation Section	  Directorate
S. E. Thomson
	Attn:  Sheila Barnard	(613) 957-2122

2003-002180

Netherlands Stock Option

We are writing in response to your email dated April 25, 2003 in which you ask for our comments on the taxation of a stock option benefit realized by a resident of Canada. You have also faxed to us some documents provided by the taxpayer.

The facts as we understand them are as follows. If any of these facts are not correct, our comments may not be appropriate.

1. In XXXXXXXXXX (the taxpayer) was employed by XXXXXXXXXX in the Netherlands, and was resident in the Netherlands for purposes of the Canada-Netherlands Income Tax Convention (the "Convention"). We assume that the option was entirely related to employment exercised in the Netherlands.

2. In XXXXXXXXXX, the taxpayer was granted options to purchase XXXXXXXXXX shares in XXXXXXXXXX or XXXXXXXXXX by virtue of his employment with XXXXXXXXXX. We assume that XXXXXXXXXX did not deal at arm's length with XXXXXXXXXX at the time of the grant, and that the options were not granted to him in his capacity as a member of the board of directors. The exercise price was XXXXXXXXXX.

3. The taxpayer paid tax in XXXXXXXXXX in respect of the XXXXXXXXXX grant on a benefit of XXXXXXXXXX% of the exercise price of the shares, XXXXXXXXXX. The tax rate was 60%, therefore, the taxpayer paid tax in XXXXXXXXXX to the Netherlands government in the amount of XXXXXXXXXX.

4. In XXXXXXXXXX, the taxpayer became resident in Canada for purposes of the Convention.

5. On XXXXXXXXXX, the taxpayer exercised his option and acquired XXXXXXXXXX shares of XXXXXXXXXX at an exercise price of XXXXXXXXXX. The market value of the shares at the time of exercise was XXXXXXXXXX, therefore, the taxpayer realized a benefit of XXXXXXXXXX on the exercise. At an exchange rate of 1.3868, this relates to Cdn $XXXXXXXXXX.

6. In the Netherlands, the difference between the exercise price and the market value at the time of exercise is considered to be a capital gain. We assume the Netherlands did not tax any portion of this gain in XXXXXXXXXX.

7. The taxpayer has reported the benefit as a capital gain on his XXXXXXXXXX Canadian return, and has claimed on the XXXXXXXXXX return a foreign tax credit for the XXXXXXXXXX paid in XXXXXXXXXX.

You would like to know if the taxpayer is eligible to claim the foreign tax credit on the capital gain.

OUR COMMENTS

In Canada, the difference between the value of the shares at the time they are acquired, and the exercise price is taxed as an employment benefit by virtue of paragraph 7(1)(a) of the Income Tax Act (the "Act"), and not as a capital gain. The employee stock options owned by the taxpayer in XXXXXXXXXX when he became a resident of Canada were not subject to a disposition and reacquisition at the time of immigration, pursuant to paragraph (c) of the definition of "excluded right or interest" in subsection 128.1(10) of the Act. Therefore, assuming the shares were sold for the same price at which they were acquired, XXXXXXXXXX the taxpayer does not have a capital gain in Canada. The employment benefit is taxable in Canada even though the option was granted in the Netherlands (see Craig S. Tedmon, Jr. V. MNR 91 DTC 962). Depending on the nature of the shares, the taxpayer may also be eligible for the deduction under paragraph 110(1)(d) of the Act.

As a result, the employment benefit gives rise to tax in both the Netherlands and in Canada, with no relief provided under Article 15 or Article 22 of the Convention. Article 15 (Dependent Personal Services) of the Convention provides that the benefit may be taxed in the State of residence (Canada), and may also be taxed in the State of source (the Netherlands) since the employment was exercised there, and none of the exceptions in paragraph 2 apply. Paragraph 5 of Article 22 (Elimination of Double Taxation) states that relief of double taxation under the Convention is subject to the law of Canada. Paragraph 126(1)(a) of the Act provides that the taxpayer may deduct such part of any non-business-income tax paid by the taxpayer "for the year" to the government of a country other than Canada. The year in question is the XXXXXXXXXX taxation year, the year in which the employment benefit arose in Canada. The tax paid to the Netherlands was in respect of the XXXXXXXXXX taxation year, not in respect of the XXXXXXXXXX taxation year (see paragraph 13 of IT-270R2 Foreign Tax Credit and our document E9516185). Therefore, the taxpayer cannot offset Canadian tax paid in XXXXXXXXXX with the tax paid to the Netherlands in XXXXXXXXXX.

However, the taxpayer is welcome to contact the Competent Authority of Canada to see if there is any relief available under Article 25 (Mutual Agreement Procedure) of the Convention. For information on contacting the Competent Authority of Canada, see IC 71-17R4 Requests for Competent Authority Consideration Under Mutual Agreement Procedures in Income Tax Conventions.

We trust that our comments have been helpful.

Olli Laurikainen, C.A., Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate