7 May 2009 External T.I. 2008-0276181E5 - Stock Option Benefits

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) Whether stock option benefit of a non-resident individual employed in Canada (as a director of a company) is subject to Canadian tax; 2) Whether employer withholding is required

Position: 1) Stock option benefit is taxable in Canada; 2) Employer is required to withhold at the same rates as those applicable to Canadian resident individuals

Reasons: 1) Stock option benefit is taxable under section 115; 2) Withholding is required under section 153

2008-027618
XXXXXXXXXX Gwen Mah
613-957-2113
May 7, 2009

Dear XXXXXXXXXX :

Re: Employee Stock Option Benefits

We are writing in response to your request of February 13, 2008 seeking our views on the application of the Income Tax Act (the "Act") to an individual who is a resident of the United States and who performs services in Canada as a director of a Canadian public corporation. More specifically, you have asked us if the individual is subject to income tax in Canada in respect of any employee stock option benefits relating to the exercise of an option granted to the individual by the corporation and if so, is the employer required to withhold and remit an amount under the Act based on the amount of the stock option benefit. You also asked us for our views on whether the individual's compensation is pensionable under the Canada Pension Plan (the "CPP") and to advise you of the withholding requirements in respect of CPP. Our response on matters concerning the application of the CPP will be provided under separate cover.

Background

You describe a situation where a public corporation resident in Canada (the Corporation) employs an individual (the individual) who is a resident of the United States, as a director of the Corporation. Under the terms of the agreement between the individual and the Corporation, the individual is expected to attend (in person) quarterly meetings in Canada (each quarterly meeting lasts approximately 5 days). The individual will receive, in respect of his employment as a director, compensation in the form of retainer fees (fees) and stock options. The individual will provide his services to the Corporation and not to any other person and none of his services will be performed outside of Canada. The fees paid to the individual will exceed $10,000 (Cdn) annually.

Our Comments

Please note that it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications, referred to below, can be accessed on the CRA website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments, which we trust will be of some assistance.

Stock Option Benefit

Where an option to acquire shares of a public corporation is issued to a non-resident individual as consideration for employment services that are performed in Canada, the benefit received by the individual from the exercise of the option will, by virtue of section 7 and subparagraph 115(1)(a)(i) of the Act, be included in the individual's taxable income earned in Canada in the year in which the shares are acquired. The amount of the benefit is equal to the fair market value of the shares at the time they are acquired less the total of the amount paid by the individual to acquire the options and the amount paid to acquire the shares. Where the individual's services are exclusively performed in Canada, the entire benefit will be sourced to Canada based on the allocation method set out in Annex B to the 5th Protocol to the Canada - United States Income Tax Convention (the Convention).

Stock Option Deduction

In computing the non-resident individual's taxable income earned in Canada on the exercise of a stock option, the individual may be entitled to a deduction of 50% of the amount of the benefit under paragraph 110(1)(d) of the Act. Paragraph 115(1)(d) of the Act permits a deduction under paragraph 110(1)(d) to the extent that it relates to the stock option benefit included in the individual's taxable income earned in Canada for the year. To qualify for the deduction under paragraph 110(1)(d) of the Act:

a) the individual must be dealing at arm's length with the Corporation at the time immediately after the option agreement is made;
b) the amount payable by the individual to acquire the shares is not less than the amount by which the fair market value of the shares at the time the option agreement was made exceeds the amount paid by the individual to acquire the options; and
c) the shares to be issued under the option agreement are prescribed shares, as described in section 6204 of the Income Tax Regulations, at the time of their issue.

For more information about the taxation of stock option benefits, please refer to Interpretation Bulletin 113R4 "Benefits to Employees - Stock Options", Information Circular 75-6R2 "Required Withholdings from Amounts Paid to Non-Resident Providing Services in Canada" and T4130 "Employer's Guide - Taxable Benefits and Allowances".

Withholding Obligation

Remuneration paid to a non-resident individual in respect of employment services provided in Canada is generally subject to the same withholding, remitting, and reporting obligations as those for Canadian resident employees. The amount of the required withholding is based on graduated rates calculated on the combined amount of the fees and the benefit, pursuant to paragraph 153(1)(a) of the Act and section 102 of the Income Tax Regulations. For withholding purposes, a payment equal to the amount of the benefit is considered to be made by the employer at the time a stock option is exercised and a share is issued.

Where the individual qualifies for the deduction under paragraph 110(1)(d), as described above, that deduction may be taken into account when determining the amount of the benefit that is subject to withholding.

A waiver for an exemption from withholding may be granted where a U.S. resident individual is not subject to tax in Canada pursuant to paragraph 2 of Article XV (Income from Employment) of the Convention. For 2009 and subsequent taxation years, where the remuneration (including the benefit) exceeds C$10,000 and is paid by a resident of Canada, the individual would be subject to tax in Canada and would therefore not qualify for a waiver.

In the above circumstances, an employer is required to make an information return in prescribed form (T4 slips and summary).

We trust the above is helpful. Please contact Gwen Mah at 613-957-2113 if you have any questions or comments.

Yours truly,

Daryl Boychuk
Manager, International Tax Section I
International and Trusts Division
Income Tax Rulings Directorate,
Legislative Policy and Regulatory Affairs Branch