12 September 1990 Income Tax Severed Letter ACC9661 - Stock Option Received 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.

G. Arsenault
                                                  (613) 957-2126

24(1)

19(1)

September 12, 1990

Dear Sirs:

This is in reply to your letter dated May 4, 1990 whereby you requested our opinion concerning the income tax treatment of stock options received by non-resident non-executive directors of Canadian corporations. In particular you requested our opinion in respect of the following hypothetical fact situation:

          1. Mr. X, a non-resident of Canada, is a director of
          Canco, a Canadian public company.  He is not an officer
          of Canco.

          2. Mr. X attends directors' meetings of Canco but is also 
          frequently consulted by senior management of Canco in
          connection with its business affairs.  Mr. X performs
          these services in part inside Canada and in part outside
          Canada.

          3. During Year 1, Mr. X is granted an option to acquire
          shares of Canco at their then current market price.

          4. In Year 5, Mr. X exercises the option with the result
          that a benefit equal to $100,000 arises pursuant to
          subsection 7(1) of the Income Tax Act ("Act").

In our opinion, assuming that Mr. X is never resident in Canada and assuming that during all relevant years his duties of employment are performed in part inside and in part outside Canada, Mr. X would be taxable in Canada on the stock option benefit (calculated under subsection 7(1)) to the extent the granting of the stock option to him related to the duties of employment performed and/or to be performed by him in Canada. It is thus necessary to determine the service performed and/or to be performed by Mr. X for which the stock option was granted. This is obviously a question of fact that can only be determined having regard to all of the circumstances pertaining to the granting of the stock option.

Our administrative position regarding the manner in which remuneration is usually apportioned between employment performed in Canada and employment performed outside of Canada, namely on a per diem basis, as set forth in paragraph 5 of IT-420R2 is generally only applicable to regular salary payable for continuous employment in respect of which there is no reason to allocate on any other basis. This usual method of apportioning remuneration where there is a rate of remuneration applicable to a period of time may not be appropriate in respect of a stock option.

With regard to the proper method of reporting remuneration of directors, we note that generally the technically applicable form is Form T4 Supplementary but that as an administrative policy (paragraph 2 of Information Circular 75-6R) the Department accepts that fees paid to non-resident directors may be subjected to withholding under Regulation 105 rather than Regulation 102 and that in such case Form T4A-NR Supplementary should be utilized.

However, Regulation 105 and Form T4A-NR Supplementary generally only apply in respect of amounts paid and would thus not apply to employee stock option benefits. Accordingly, Form T4 Supplementary should be utilized in respect of stock option benefits and the portion of the benefit taxable in Canada should be reported in Box (O).We do not understand why you consider Canco is unlikely to be in possession of the information necessary to permit it to prepare Form T4 Supplementary. In our opinion Canco has a legal obligation to prepare and file the Form T4 Supplementary and to maintain the information necessary for this purpose.

Yours truly,

K.B. Harding for Director Reorganization and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch