14 December 1992 Ruling 9122811 F - Stock Option Exercised by a Non-resident (4735-1)

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.

December 14, 1992

Where non-residents are in receipt of benefits under sections 6 and 7 of the Income Tax Act (the "Act"), will such benefits fall within the "Dependent Personal Services" article of Canada's tax treaties?

The Law

Section 6, paragraph 7(1)(b), subparagraph 115(1)(a)(i), subsection 248(1) and the Dependent Personal Services of Canada's Tax Treaties

Problem

In the John Hale case (90 DTC 6181), the Trial Division of the Federal Court concluded that a benefit received by virtue of employment as stated in paragraph 7(1)(b) of the Act was not "remuneration" and would therefore not fall within Article 15 of the Canada U.K. Income Tax Convention (the "Convention"). While the taxpayer's appeal was heard in the Federal Court of Appeal (92 DTC 6473) the judgement did not deal with whether a stock option benefit was remuneration.

Discussion

The decision in Hale is not consistent with what we understand to be the intended scope of the Dependent Personnel Services Article of Canada's Tax Conventions. Each of Canada's tax conventions or agreements provide in the article on "General Definitions" that any term not defined in a tax convention or agreement shall, unless the context otherwise requires, have the meaning which it has under the law of the State concerning the taxes to which the convention or agreement applies. The law in this situation refers to the definition of such terms for purposes of the Act.

The term "salary and wages" as defined in subsection 248(1) of the Act reads as follows.

"salary or wages" except in sections 5 and 63 and the definition "death benefit" in this subsection , means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer's business but does not include superannuation or pension benefits or retiring allowances" (underlining for emphasis)

Since the benefits under sections 6 and 7 of the Act fall within subdivision a of Division B of Part I of the Act, such benefits would fall within the term salary and wages for purposes of Canada's tax conventions or agreements. Since the "Dependent Personal Services" article of all of Canada's tax conventions or agreements refers to "salary, wages and other remuneration", it is not necessary to determine whether or not benefits under sections 6 and 7 fall within the term "remuneration" since they would be included in the "Dependent Personal Services" article by virtue of the term "salary and wages". In summary, it is the Department's position that benefits under sections 6 and 7 of the Act fall within the "Dependent Personal Services" article of Canada's tax conventions or agreements.

Decision

Where an individual exercises his stock option or receives other benefits after he has ceased to be resident in Canada, he will be required to include such benefits in income pursuant to subsection 2(3) and subparagraph 115(1)(a)(i) of the Act and as salary and wages for purposes of the Dependent Personal Services article in Canada's tax treaties. It will be necessary to review the appropriate tax convention or agreement to determine whether or not a specific taxpayer will be granted any relief under the Dependent Personal Services article.