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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
December 2, 1993
Cheryl Charette, Chief Rulings Directorate
Assessing and Enquires Program K.B. Harding
Employee Stock Option Exercised while a non-resident
This is in response to a letter, dated October 13, 1993 which was received from XXXXXXXXXX and was attached to a Fax Sheet dated November 16, 1993 addressed to ITO. A copy of the Fax Sheet and letter is attached so that you may respond directly to the taxpayer since he is questioning the assessing practices of Revenue Canada. We have outlined our position on the hypothetical situation set out below. It should be noted that the XXXXXXXXXX requested an early response on the matter from the Department.
The hypothetical situation presented was one where an individual terminated his Canadian residence in 1992 on becoming a resident of the United States. Prior to his becoming a resident of the United States, he was employed for several years by a wholly-owned Canadian subsidiary corporation (CANCO) of a U.S. public company (USCO). During the period the individual was employed in Canada by CANCO, he was granted options to purchase from USCO shares of its capital stock. In 1993, the year in which he exercised his option to purchase the shares of USCO, he was a resident of the United States throughout that year. At the time he exercised his option, the fair market value of the shares exceeded the amount he was required to pay for them under the option agreement. Canco was charged an amount in respect of the benefit which the non-resident realizes from exercising the stock option and USCO does not have a permanent establishment or fixed base in Canada.
Where USCO charges CANCO an amount in respect of the stock option benefit, CANCO would not be permitted to deduct any amount in computing its income by virtue of paragraph 7(3)(b) of the Act. Therefore, whether or not USCO charges CANCO in respect of the stock option benefit, such benefit would not be borne by CANCO for purposes of the Convention. It should be noted that whether or not CANCO is charged any amount in respect of the benefit, the benefit would be considered to be sourced in the country where the individual performed the services to which the options relate.
In the particular case, where the individual exercises his stock option after he has ceased to be an employee, he will be taxable in Canada as though he were still an employee of CANCO on any employee stock option benefits which arise in connection with that employment pursuant to subsections 7(1) and (4) of the Income Tax Act (the "Act"). Accordingly, the individual is required to include in his income for the year for Canadian tax purposes any benefits that arise from the exercise of such options in accordance with subsection 2(3) and subparagraph 115(1)(a)(i) of the Act but may obtain relief from Canadian taxation under the provisions of any tax convention or agreement.
Paragraph 1 of Article XV of the Canada-U.S. Income Tax Convention (the "Convention") provides that salary, wages and other similar remuneration derived by a resident of the United States in respect of employment shall be taxable only in the United States unless the employment is exercised in Canada. If the employment is so exercised in Canada such remuneration as is derived from Canada may be taxed in Canada.
Since the Convention does not define the term salary and wages, paragraph 2 of Article III of the Convention provides that any term not defined in the Convention shall, unless the context otherwise requires have the meaning it has under the Act. Subsection 248(1) of the Act defines salary and wages to mean "...the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I..." and therefore the term would include any benefits provided in section 7 of the Act.
Accordingly, since the stock option benefits arose, in the hypothetical situation set out above, in respect to the individual's employment in Canada, paragraph 1 of Article XXV of the Convention does not deny Canada the right to tax the income arising on the exercise of the option but it also does not prevent the United States from also taxing such income.
Paragraph 2 of Article XV provides that remuneration derived by a resident of the United States in respect of an employment exercised in a calendar year in Canada will be exempt from tax in Canada if the remuneration for such services does not exceed $10,000 (Canadian) or the U.S. resident is present in Canada for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by a resident of Canada. Paragraph 7(3)(b) of the Act denies CANCO the right to deduct any charge in respect of the stock option benefit in computing its income for the year therefore, no amount will be borne by that company in respect of such benefit. The calendar year in question refers to the year in which the employment was exercised and not to the year in which the stock option was exercised. Accordingly, where the stock option benefit relates to a calendar year in which the taxpayer was present in Canada for a period or periods exceeding in the aggregate 183 days and the taxpayer's remuneration for such employment, including the value of the stock option benefit, exceeded $10,000 (Canadian) the Convention does not grant any relief from Canadian taxation and such a taxpayer will continue to be taxable in Canada on the benefit derived from the stock option.
Where the remuneration for services provided in a calendar year, including the value of the benefit from exercising the stock option, is less than $10,000 (Canadian) the individual will be exempt from tax in Canada pursuant to paragraph 2(a) of Article XV of the Convention. However, where the value of the benefit from the stock option and other remuneration received by the taxpayer for the employment exercised in Canada in a calendar year exceeds $10,000 (Canadian) but the taxpayer was not present in Canada for 183 days in such year, the taxpayer will also be exempt from tax in Canada on such benefit by virtue of paragraph 2(b) of Article XV of the Convention since the stock option benefit, is not borne by the Canadian employer.
It is our view that for the purposes of the Act the income realized by exercising the stock option, where the stock option relates to services performed in Canada, is sourced in Canada. Where Canada has retained its right to tax such income under the Convention by virtue of paragraphs 1 and 3 of Article XXIV of the Convention, and where the United States also taxes such income in the hands of its residents, the United States is obligated to provide its residents with a foreign tax credit for Canadian taxes paid. Accordingly there does not appear to be any basis for Canada granting a foreign tax credit as suggested in paragraph 3 of XXXXXXXXXX letter
We are attaching an example which outlines the treatment of given to stock options based on a particular set of facts in order to demonstrate the operation of Article XV of the Convention (Note the results may differ where the provisions of other Conventions apply). If you have any questions on the example or to the comments set out in this memorandum, you can contact either the writer or Ken Major at 954-2124. We trust the above explanation on the treatment of stock options is adequate so that you may respond to XXXXXXXXXX letter.
for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1993
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1993