24 February 1998 Internal T.I. 9800277 - STOCK OPTIONS EXERCISED BY 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.

								February 24, 1998

	Henry Marcotte	Income Tax Rulings 			Assistant Director of Audit	and Interpretations 	                                Regina Tax Services Office	Directorate
T. Harris
		957-2114
	Attention: L. Serdachny
	           Large File Case Manager
		980027

Stock Options Exercised by Non-Residents

We are writing in response to your memorandum of December 19, 1997 concerning the taxation of stock options which were issued by XXXXXXXXXX a taxable Canadian corporation, to certain of its employees. In particular, you are reviewing stock options which were issued to certain employees at a time when the employees were resident in Canada but were exercised at a time when the employees were residents of the United States, having been transferred to one of XXXXXXXXXX U.S. subsidiaries.

You are proposing to tax the non-residents to include the full amount of the benefit arising in the year of exercise as being in respect of employment performed in Canada at the time the option was granted. The primary reason for taxing the full benefit in Canada is that the employee receiving the stock option was employed in Canada when the option was granted and must only stay employed with the company for 2 to 3 years to be entitled to exercise the option. There are no performance standards to be met. In addition, options have only been granted to employees after they have been employed for several years. Finally, additional options have been granted to several employees.

The representatives of XXXXXXXXXX disagree with your proposed basis of reassessment as they maintain that any options granted to employees are granted in respect of future service, not past services. In this regard, they refer to the following extract from the Notice of Annual General Meeting of Shareholders dated XXXXXXXXXX which was forwarded to all XXXXXXXXXX shareholders at that time:

XXXXXXXXXX.

Our Comments

Where an individual exercises a stock option after he has ceased to be resident in Canada, the amount of such benefit which relates to the duties of an office or employment performed in Canada will be included in the individual’s income pursuant to subsection 2(3) and subparagraph 115(1)(a)(i) of the Income Tax Act (the “Act”). It will then be necessary to review the appropriate income tax convention to determine whether the individual will be entitled to relief under the Dependent Personal Services article of the convention. Whether, and to what extent, such stock option benefit can be considered to relate to the duties of an office or employment performed in Canada is a factual determination which must be made on the basis of the facts in any particular case.

We agree with your view that XXXXXXXXXX practice of only granting stock options to senior employees who have been employed by it or one of its affiliates for several years would indicate that the stock options are generally granted in respect of past services. This is consistent with our understanding that stock options are generally granted as compensation for past services. Although XXXXXXXXXX has pointed to the minimum 2 year vesting period to support its position that the stock options are granted solely in respect of future services, it is our understanding that it is standard practice to include a vesting period in stock options to ensure that the employee remains with the company. As pointed out in your memo, the ability of an employee to exercise any stock options is not dependent on successfully meeting any performance standards.

Based on our understanding of the facts, we have no objection to your proceeding with the proposed reassessments to tax the full amount of the benefits as being income from an office or employment performed by the non-resident employees in Canada for the purpose of subparagraph 115(1)(a)(i) of the Act. However, it may be necessary to re-evaluate this position should additional information become available as the reassessments proceed through the objection and appeal process. Should you proceed with the proposed reassessments, we believe that, for the sake of consistency, any subsequent options which have been granted to such employees should also be treated as having been granted in respect of past services.

We trust that our comments will be of assistance.

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