6 February 2004 Internal T.I. 2003-0037271I7 - 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.

Principal Issues: Whether stock option benefit is attributable to services rendered in Canada?

Position: Yes

Reasons: Since there is no compelling evidence to suggest some other period, we will apply our default position that stock option benefits relate to services rendered in the year of grant. However, the taxpayer may apply to U.S. Competent Authority to see if there is relief available.

			February 6, 2004

	TORONTO NORTH TSO	HEADQUARTERS
	Large File Case Section 	Income Tax Rulings
			  Directorate
	Attn:  Su-en Chee	S.E. Thomson
(613) 957-2122

			2003-003727

Re: XXXXXXXXXX - Exercise of Stock Options - Your file W/S 452-2-1

We are writing in response to your memo to us of September 3, 2003 in which you ask for our comments on the above file. The facts you have given to us are as follows:

The taxpayer, XXXXXXXXXX, worked in Canada for his Canadian employer XXXXXXXXXX until XXXXXXXXXX, when he was given a XXXXXXXXXX assignment in the U.S. to work for the parent company, XXXXXXXXXX He was considered to be a non-resident of Canada as of XXXXXXXXXX by our International Tax Services Office. On XXXXXXXXXX became a permanent employee of XXXXXXXXXX US.

In each of the years XXXXXXXXXX was awarded stock options under the parent company's stock option plan. XXXXXXXXXX exercised the majority of his stock options in XXXXXXXXXX and XXXXXXXXXX. The exercise price of the options was equal to the fair market value of the common stock on the date of grant.

You have given us copies of XXXXXXXXXX US's stock option plans. The stated objectives of the plans are as follows:

? To provide an incentive for key employees of the Corporation or its Affiliates to remain in the service of the Corporation or its Affiliates;

? To extend to them a proprietary interest in the Corporation so that they will apply their best efforts for the benefit of the Corporation;

? To aid the Corporation in attracting able persons to enter the service of the Corporation and its Affiliates.

In granting the stock option rights, the Stock Option Committee shall take into consideration contributions the employee has made or may make to the success of the Corporation or its Affiliates.

XXXXXXXXXX percent of the option rights vest with the grantees on each of the XXXXXXXXXX anniversary of the grant date. The option agreements cease to be exercisable should the employment with XXXXXXXXXX US or its subsidiaries terminate, other than for normal retirement, death or disability.

XXXXXXXXXX Canada reimburses XXXXXXXXXX US for the stock option benefit enjoyed by its employees.

Mr. XXXXXXXXXX realized stock option benefits of CDN$XXXXXXXXXX in XXXXXXXXXX, and CDN$XXXXXXXXXX in XXXXXXXXXX. He reported a benefit of CDN$XXXXXXXXXX on his XXXXXXXXXX Canadian income tax return, and CDN$XXXXXXXXXX on his XXXXXXXXXX Canadian income tax return. These amounts are based on the total number of days employed in Canada between the grant date and the exercise date of the options.

YOUR VIEWS

In your view, the full amount of the option benefits arising in XXXXXXXXXX and XXXXXXXXXX is attributable to XXXXXXXXXX employment in Canada. XXXXXXXXXX was employed in Canada when his options were granted. If his service to XXXXXXXXXX Canada immediately prior to the awarding of the options had not been satisfactory, he would not have been awarded any of the options. The fact that stock options were awarded to XXXXXXXXXX every year when he was an employee of XXXXXXXXXX Canada, and that when he exercised these stock options in the U.S., the cost of the benefits is charged back to XXXXXXXXXX Canada tend to support the position that the options were granted in respect of past service.

OUR COMMENTS

Pursuant to sections 2(3), 7(1), 7(4) and subparagraph 115(1)(a)(i) of the Income Tax Act, a non-resident taxpayer who was granted stock options while he was resident in Canada or was employed in Canada will be taxable in Canada on the benefit realized when the options are exercised. Pursuant to Article XV of the Canada-U.S. Income Tax Convention (the "Convention"), Canada may tax the benefit to the extent that the employment that gave rise to the benefit was exercised in Canada.

We agree with your view that the options are attributable to XXXXXXXXXX employment in Canada. Our default view on determining to which services a stock option benefit relates is that the benefit is attributable to services rendered in the year of grant, unless there is compelling evidence to suggest that some other period is more appropriate.

The information above suggests that the options could relate to a future period, since one of the objectives of the plans is to provide an incentive to key employees to remain in and apply their best effort for the benefit of the company. Or, the options may relate to service in the immediately prior year, since the Committee may take into consideration the employee's past contributions, and options were granted each year. Furthermore, the benefit may relate to service over the vesting period, since XXXXXXXXXX had to remain employed for XXXXXXXXXX years before he could exercise a particular option. Since it is not completely clear to which, if any, of these service periods XXXXXXXXXX options relate, our default position applies to allocate the benefit to the services rendered in the year of grant. If XXXXXXXXXX Canada paid XXXXXXXXXX US an amount in respect of XXXXXXXXXX stock option benefit, we would consider this to lend support to our view that the benefit relates to services rendered in Canada.

We base our views on our interpretation of comments made by the courts in Vincent N. Hurd v The Queen 79 DTC 5369 (FCTD) and 81 DTC 5140 (FCA), where options were granted to a taxpayer while he lived and worked in Canada, and were exercised by him when he lived and worked in the U.S. The taxpayer had attempted to apportion the benefit over the period from grant date to exercise date, based on employment days in each country (similar to XXXXXXXXXX). The court found that the benefit related to duties performed in Canada, and there was no basis for apportionment.

We understand that the method XXXXXXXXXX has used to apportion the benefit is a method used in the U.S. for tax purposes. While this method may be convenient, we feel that this allocation method may not necessarily represent the period of service to which the benefit relates in any particular case.

However, we realize that applying both the U.S. method and the Canadian method of allocating the benefit can result in double taxation, since both countries are asserting their right to tax the stock option benefit in accordance with Article XV of the Convention. That is, both countries consider themselves to be the country of source on some portion of the benefit. In light of this, you may wish to suggest to XXXXXXXXXX that he apply to the Competent Authority of the U.S. to see if there may be any relief available.

We trust that our comments have been helpful.

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