2 December 1993 Income Tax Severed Letter 933330A F - Non-Resident Exercises Stock Option (4093-U5-100-15)

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.

EXAMPLE

Facts

Mr. X became resident and employed in Canada on December 1, 1989 with CANCO, a wholly-owned Canadian subsidiary of USCO, a U.S. public company.

Mr. X's salary while employed in Canada was $54,000 (Canadian) per annum.

Mr. X participated in the stock option plan of USCO from December 1, 1989 until he left his employment with CANCO and became a resident of the United States on March 31, 1992.

Mr. X exercised his option in 1993 and the benefit under section 7(1) was $45,000 (Canadian). The schedule below indicates the amount of the benefit which was received by Mr. X in respect of employment exercised in Canada in each of the calendar years in which the stock option plan was in effect.

Note

In a particular case it will be necessary to determine from the stock option plan the actual number of shares that the taxpayer had the option to acquire in respect of the service rendered in Canada in each calendar year.

Treatment

Section 7(1) Months in Canada Salary Benefit Total

1989      1      $ 4,500      $ 1,000      $ 5,500

1990      12      54,000      9,000      63,000

1991      12      54,000      20,000      74,000

1992      3      13,500      15,000      28,500

Totals      28      126,000      45,000      171,000

Mr. X would be required to include in income the total benefit of $45,000 (Canadian) in income in 1993 in accordance with subsections 7(1), 7(4), 2(3) and 115(1) of the Income Tax Act (the "Act").

It is necessary to determine whether any portion of the stock benefit should be exempt from tax in Canada in accordance with paragraph 2 of Article XV of the Canada-U.S. Income Tax Convention (the "Convention).

Since the total of the remuneration for the 1989 calendar year, including the portion of benefit received by Mr. X under subsection 7(1) of the Act in respect of services rendered in 1989 calendar year, is less than $10.000 (Canadian) the benefit of $1,000 (Canadian) will be exempt from tax in Canada in 1993 in accordance with paragraph 2(a) of Article XV of the Convention and paragraph 110(1)(f) of the Act.

Because the total remuneration for the 1990 calendar year, including the portion the benefit from the stock option under subsection 7(1) of the Act in respect of services rendered in the 1990 calendar year, received by Mr. X exceeded $10,000 (Canadian) and since he was present in Canada in excess of 183 days in that year, Mr. X will be subject to tax in 1993 on the portion {$9,000 (Canadian)} of the stock option benefit received in respect of services rendered in 1990 even though the value of the benefit for that year by itself is less than $10,000 (Canadian).

Since the total remuneration, including the stock option benefit received by Mr. X under subsection 7(1) of the Act, for the 1991 calendar year exceeded $10,000 (Canadian) and his presence in Canada exceeded 183 days in that year, he will be liable to tax in 1993 on the portion of the stock option benefit which relates to that year.

In the 1992 calendar year the total remuneration, including the portion of the benefit from the stock option under subsection 7(1) of the Act received by the Mr. X in respect of the employment exercised in Canada in the 1992 calendar year, exceeded $10,000 (Canadian). However, as Mr. X was not present in Canada for a 183 days in that calender year and as such the benefit is not borne by the Canadian employer pursuant to paragraph 7(3)(b) of the Act, Mr. X will be exempt from tax in Canada in 1993 on the $15,000 (Canadian) stock option benefit in respect of that year by virtue of paragraph 2(b) of Article XV of the Convention and paragraph 110(1)(f) of the Act.

In summary, in the 1993 taxation year Mr. X will be required to report a stock benefit under subsections 7(1) and (4) of the Act of $45.000 (Canadian) and will be permitted to claim an exemption pursuant to paragraph 2 of Article XV of the Convention and paragraph 110(1)(f) of the Act of $16,000 (Canadian) ($1,000 for 1989 and $15,000 for 1992).

NOTE It should be noted that the above example applies to Article XV of the Canada-U.S. Income Tax Convention and the results may differ where the wording of either the de minimus rule or the 183 day rule in other tax treaties are different from that in the Canada-U.S. Income Tax Convention.