10 December 1987 Income Tax Severed Letter 5-4039 - [871210]

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.

K.B. Harding (613) 957-2129

December 10, 1987

Dear. Sirs:

This is in reply to your letter of October 8, 1987 concerning the interpretation of paragraph (2)(b) of Article XV of the Canada-U.S. Income Tax Convention (Convention) in the following hypothetical situation.

A Canadian public corporation has operating subsidiaries in the United States which are private companies. The Canadian company has a stock option plan for its employees and for the employees of its U.S. subsidiaries.

The stock options are issued to an employee who is resident in the United States and employed by one of its U.S. subsidiaries. While employed in the United States the U.S. resident employee also performs duties in Canada on a periodic basis but will not be present in Canada for periods exceeding 183 days in any taxation year.

You requested our opinion as to whether an employee described above would be taxable in Canada in respect of the benefit derived under the stock option plan.

Our general position is that where a non-resident receives an option to acquire shares of the Canadian public corporation while employed with the U.S. subsidiary and resident of the U.S., the income that flows from the exercise of the option by the employee, while he is a non-resident, is not taxable in Canada to the extent that such income cannot be regarded as relating to the non-resident taxpayer's duties of employment in Canada.

It is our view that where the non-resident exercises his employment in Canada a relative portion of his employment income is received in respect of such employment and paragraph 2 of Article XV of the Convention will determine whether a portion of that income will be taxable in Canada, Accordingly, when the non-resident employee exercises his option a portion,of the benefit will be received in respect of his employment in Canada and the same paragraph of Article XV of the Convention will also apply to such income.

When interpreting paragraph 2(b) of Article XV it is our view that the phrase "an employer" refers to the employer of the non-resident employee. It is always a question of fact whether an employer/employee relationship exists in any given situation. If a person comes to Canada and exercises his duties for a Canadian company and the costs, whether directly or indirectly, are borne by the company, the presumption is that the person is taxed in Canada unless the facts dictate the contrary. Quite often a person is paid by a U.S. company but when he is performing his duties in Canada he is under the direction of the Canadian operation. In such a situation, he is considered an employee of that Canadian company. In conclusion, it is not necessarily the person who pays the salary that determines whether the non-resident has a Canadian employer but the conditions under which that person is operating in Canada.

We trust these comments are suitable for your purposes.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch