7 June 2007 External T.I. 2006-0217731E5 - Tax Treatment of Employee 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: 1) When to report a stock option benefit? 2) Who is responsible for withholding and reporting the benefit when it is conferred on the employees of a Canadian subsidiary by a US parent?

Position: 1) When to report a stock option benefit is a question of fact. 2) If the US parent has agreed to sell or issue shares to the employees, they will report the benefit and be responsible for withholding.

Reasons: 1) Subsection 7(1) is clear. 2) Subsection 153(1) is clear.

								2006-021773
XXXXXXXXXX 							Bruce Hartt
(613) 946-3558
June 7, 2007

Dear XXXXXXXXXX:

Re: Request for technical interpretation - Restricted Stock Units

We are writing in response to your letter dated December 7, 2006. In your letter, you requested our comments on when to report a stock option benefit and who is responsible for withholding and reporting the benefit when it is conferred on the employees of a Canadian subsidiary by a US parent.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

As is noted in paragraph 1 of Interpretation Bulletin IT-113R4 - Benefits to Employees - Stock options, subsection 7(1) of the Income Tax Act (the "Act") will apply when a particular corporation has agreed to sell or issue shares of that corporation or shares of another non-arm's length corporation to an employee of either the particular corporation or of any corporation with which it does not deal at arm's length. Section 7 of the Act will not apply if the benefit conferred by the stock option agreement is not received by reason of the employee's employment.

It should be noted that section 7 of the Act is applicable where a non-resident corporation has agreed to sell or issue shares to individuals employed in Canada by a corporation with which the non-resident corporation does not deal at arm's length.

Pursuant to paragraphs 6(1)(a) and 7(1)(a) of the Act, an employee who exercises an option and acquires shares is generally required to include in employment income a benefit in the taxation year in which the shares are acquired. It will always be a question of fact when shares are acquired. Shares are considered to be acquired when legal ownership of the shares has been transferred and the vendor has entitlement to receive payment. In general, this would occur where the shares have been transferred to the employee and paid for.

Pursuant to paragraph 153(1)(a) of the Act, every person paying salary, wages or other remuneration in a year, other than amounts described in subsection 212(5.1) of the Act, must deduct and withhold tax in accordance with the rules prescribed by the Income Tax Regulations (the "Regulations"). Pursuant to subsection 200(1) of the Regulations, the payer must report the payment on an information return (in this case the T4 Information Slip) in prescribed form.

Based on the information provided, in our view, the US parent, as the corporation that has agreed to sell or issue shares to the employees, will be considered to be the "payer" of the stock option benefit for purposes of subsection 153(1) of the Act and would be responsible for reporting the value of the benefit and the withholdings. However, if the US parent receives reimbursement, in whole or in part, either directly or indirectly, in respect of the benefit from the Canadian subsidiary, the Canadian subsidiary would be responsible for reporting the value of the benefit and the withholdings.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch