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: Will the rights to shares granted by the employer company be subject to the deemed disposition rules in paragraph 128.1(4)(b) of the Act when the employee emigrates from Canada?
Position: No.
Reasons: The rights are exempted from the deemed disposition rule by subparagraph 128.1(4)(b)(iii) of the Act since they fall into the definition of "excluded right or interest" in subsection 128.1(10) pursuant to paragraph (c) thereof.
XXXXXXXXXX
2013-048796
Henry Leung
(613) 957-2129
February 26, 2014
Dear XXXXXXXXXX :
Re: Definition of "Excluded Right or Interest"
This is in response to your e-mail dated May 6, 2013 where you described the following hypothetical situation. We apologize for the delay in responding to your query.
- Canco is a corporation resident in Canada. Canco is not a Canadian-controlled private corporation ("CCPC");
- An individual employed by Canco is a senior employee who is paid a regular salary, as well as being entitled to receive "free shares", as determined by management of Canco. These shares are unissued shares of Canco;
- Canco grants the right to receive the shares to the individual, and each year, the individual is notified of the quantity of shares that the rights granted entitle him to, the vesting period, as well as the date on which the rights "fully vest". The ownership of the shares is transferred to the individual for no consideration. The vesting period is approximately 4 to 6 years after the date the individual was granted the rights under the agreement;
- The individual has no right to receive the shares granted before the vesting date stipulated in the agreement. If the employee leaves the employment of Canco before the vesting date, the individual will lose the rights to the shares;
- The individual plans to depart from Canada to assume employment at a work location outside Canada, but will remain an employee of Canco. The departure date will precede the end of the vesting period in respect of a portion of the rights; and
- The employee will be subject to the rules of paragraph 2(3)(a) and subparagraph 115(1)(a)(i) of the Income Tax Act ("Act") with respect to the employment benefit when the shares vest and the individual has full ownership of the shares, if such occurs after the individual ceases to reside in Canada.
You ask whether there is a deemed disposition of the rights to the shares when the individual emigrates from Canada pursuant to paragraph 128.1(4)(b) of the Act or whether such rights would be exempt from the deemed disposition rules.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Generally, where an individual ceases to be resident in Canada, paragraph 128.1(4)(b) of the Act provides:
The taxpayer is deemed to have disposed, at the time (in this paragraph and paragraph (d) referred to as the "time of disposition") that is immediately before the time that is immediately before the particular time, of each property owned by the taxpayer other than, if the taxpayer is an individual,
- (i)
(ii)
(iii) an excluded right or interest of the taxpayer,
(iv)
(v)
for proceeds equal to its fair market value at the time of disposition, which proceeds are deemed to have become receivable and to have been received by the taxpayer at the time of disposition;
Paragraph 128.1(4)(c) then deems the individual to reacquire each of the property deemed disposed of in paragraph (b) at a cost equal to the proceeds of disposition of the property.
In this case, the question that arises is whether the right to the free shares that are offered to the individual by Canco will qualify as an "excluded right or interest", as provided for in subparagraph 128.1(4)(b)(iii) of the Act so that the right to the free shares will be exempt from the deemed disposition rules described above.
Subsection 128.1(10) of the Act defines "excluded right or interest":
"excluded right or interest" of a taxpayer who is an individual means
- (a)
(b) ...
(c) A right of the individual under an agreement referred to in subsection 7(1);
(d)
The pre-amble of subsection 7(1) of the Act includes the following phrase:
where a particular qualifying person has agreed to sell or issue securities of the particular qualifying person
to an employee of the particular qualifying person,
Therefore it is our view that an "agreement referred to in subsection 7(1)" includes any arrangement under which a corporation agrees to issue its shares to one of its employees. This view is supported by paragraph 6 of Interpretation Bulletin (IT) -113R4 "Benefits to Employees Stock Options":
6. An agreement to sell or issue shares of the capital stock of an employer corporation
, as contemplated in subsection 7(1), is referred to in this bulletin as a "stock option agreement." The word "issue" means to deliver unissued shares of a corporation, including to deliver unissued shares for no monetary consideration. Therefore, section 7 applies when an employer corporation agrees to sell or issue, to an employee of the corporation or of a corporation with which it does not deal at arm's length, its own shares,
at less than fair market value or for no monetary consideration.
In this scenario, although there is a vesting period between the time when the right to receive a number of shares are first granted to the individual, and the time when the rights vest and the shares are issued to the employee, it is the "right" to such shares which is of relevance to the definition of "excluded right or interest" in subsection 128.1(10) of the Act. Since the individual has the right to eventually (at vesting time) be issued the shares granted under the agreement, the definition of "excluded right or interest" is met in paragraph (c) of subsection 128.1(10) of the Act, and there would be no deemed disposition of such a right on emigration by virtue of subparagraph 128.1(4)(b)(iii).
Although it is beyond the scope of this interpretation, paragraph 1 of Article 15 of the OECD Model Convention states that salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. Where it is exercised in the other Contracting State, such remuneration may be taxed in that other State. A stock option benefit derived from an option should be associated with the period of employment that is required to obtain the right to exercise that option. Since the vesting period (or a portion of it) and the exercise date of the option may occur after the individual has emigrated from Canada, it is important to note that there may be a need to determine which country has primary taxing rights as the country of source to the employee stock option benefit. CRA has taken the position that for stock options exercised after 2012, the principles set out in paragraphs 12 to 12.15 to the Commentary on Article 15 of the OECD Model Convention will be applied to allocate a stock option benefit for purposes of the Act, unless an income tax treaty specifically applies to produce a different outcome. Although each scenario depends on its facts and circumstances, generally the OECD commentary suggests that a stock option benefit is apportioned to each source country based on the number of days during the vesting period where employment is exercised in that country over the total number of working days in the vesting period that is related to that particular stock option.
We trust these comments to be of assistance.
Yours truly,
Olli Laurikainen, CPA, CA
For Director
International Division
Income Tax Rulings Directorate
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