3 September 1997 Internal T.I. 9714337 - STOCK OPTION BENEFIT EXERCISED BY A NON-RESIDENT

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.

Principal Issues:

Whether a stock option exercised by a non-resident and subsequent gain on disposal of the shares is taxable in Canada

Position:

Taxable under the Act but exempt under Articles XIII and XV of the Canada-U.S. Convention.

Reasons:

Taxpayer resident of U.S. for purposes of the Convention. Stock option not taxable as taxpayer did not spend 183 days in Canada in the calendar year in which the employment was exercised here and cost of benefit not borne by Canadian employer. Gain not taxable pursuant to paragraph 4 of Article XIII unless the underlying value of the shares was due principally to real property in Canada.

			September 3, 1997

	Vancouver Tax Services Office		International Section
	International Audit		David R. Senécal
(613) 957-9796
	Attention:Dat K. Ho
	          Section 446-31
	          5th Floor, Sinclair Centre
			971433

U. S. Resident Exercising Stock Option

This is in reply to your memorandum of May 28, 1997, wherein you request our opinion concerning the tax position of XXXXXXXXXX with respect certain stock options granted to him while he was employed in Canada. Our understanding of the facts is as follows:

Facts

XXXXXXXXXX

Comments

As set out in the following discussion, it is our opinion that the stock option benefit received by XXXXXXXXXX is exempt from tax in Canada.

We agree with your view that, from the perspective of our taxing rights under the Income Tax Act (the "Act"), the benefit which arose as the result of the taxpayer having acquired shares under the share purchase agreement and under the stock option agreement is taxable in the hands of the taxpayer. Furthermore, this would be the case irrespective of whether or not the taxpayer was a resident of Canada at the time he acquired the shares. This is due to the fact that even a non-resident who acquires shares as the result a stock option to which he or she became entitled as a result of employment in Canada, is also taxable in Canada on any benefits which arise due to the combined provisions of subsections 7(1) and 2(3) and subparagraph 115(1)(a)(i) of the Act.

We also agree that the taxpayer did not realize a capital gain of $XXXXXXXXXX as reported. Pursuant to paragraph 53(1)(j) of the Act, the amount of the benefit deemed by section 7 of the Act to have received by the taxpayer is added to the ACB of the shares. As XXXXXXXXXX disposed of XXXXXXXXXX of the XXXXXXXXXX shares in question immediately after having acquired them, the capital gain, if any, should theoretically represent only any increase in value in the XXXXXXXXXX shares acquired on XXXXXXXXXX and subsequently disposed of on XXXXXXXXXX. Having said this, Canada's right to tax the stock option benefit as well as capital gain, nevertheless, remains subject to any exempting provisions of the Convention.

As indicated to you by Ken Major in a recent telephone conversation it would appear from the facts provided in your memorandum and described above that XXXXXXXXXX was most likely a resident of the U.S. for purposes of the Convention. This would be either on the basis that a) the taxpayer never became a factual resident of Canada during the period he carried out his employment duties in Canada and therefore was only a resident of the U.S. for tax purposes or b) the taxpayer was a factual resident of Canada and consequently a resident of both Canada and the U.S. but was nevertheless a U.S. resident for treaty purposes by virtue of the tie-breaker rules in paragraph 2 of Article IV of the Convention.

Therefore, in determining whether there is any restriction on Canada's right to tax: a) the benefit obtained by XXXXXXXXXX on acquiring the shares under the share purchase and under the stock option agreements and b) any capital gain arising on the subsequent disposal of the shares by XXXXXXXXXX, the relevant provisions of the Convention must be read on the basis that XXXXXXXXXX was a resident of the U.S.

With respect to Canada's right to tax the stock option benefit, paragraph 1 of Article XV of the Convention provides that salary, wages and other similar remuneration derived by a resident of the United States in respect of employment may also be taxed in Canada if the employment is exercised in Canada. Since the Convention does not define the term "salary and wages", paragraph 2 of Article III provides that the term is to have the meaning that 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 included in income by virtue of section 7 of the Act.

Since XXXXXXXXXX stock option benefits arose in respect of his employment in Canada, paragraph 1 of Article XV would not deny Canada the right to tax the income arising on the exercise of the option. However, paragraph 2 of that Article then provides that remuneration derived by a resident of the U.S. (i.e., XXXXXXXXXX) in respect of an employment exercised in a calendar year in Canada will be exempt from tax in Canada if the remuneration does not exceed $10,000 or if the U.S. resident is not present in Canada for a period or periods not exceeding in the aggregate 183 days in that year (the year being the calendar year in which the employment was exercised and not the year in which the stock option was exercised) and the remuneration is not borne by an employer who is a resident of Canada.

As set out in the Technical Notes to the Convention, the term "borne by" in the context of Article XV of the Convention means an amount deducted from income for tax purposes. As the stock option benefit received by XXXXXXXXXX is not deductible by XXXXXXXXXX and XXXXXXXXXX was not present in Canada for more than 183 days in either 1996 or 1997, the taxpayer would be exempted from tax in Canada on such income.

With respect to the capital gain, if any, on the disposition of the shares by XXXXXXXXXX, even though the shares would likely constitute taxable Canadian property, Canada would only be entitled to tax any gain on the if the shares were described in paragraph 3(b)(ii) of Article XIII of the Convention. From the limited information at our disposal, it would appear that this is not the case and that XXXXXXXXXX is correct in stating the gain would be exempt from tax in Canada by virtue paragraph 4 of Article XIII.

XXXXXXXXXX

We trust that our comments will be of assistance to you.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch