8 September 2011 External T.I. 2011-0393411E5 - Article XV of the Canada-US Tax Convention

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.

Principal Issues: As a consequence of changes to Article XV(2)(b) of the Canada-United States Tax Convention (the "Convention") arising from the Fifth Protocol, does stock option employment income recognized by a United States resident continue to be exempt from tax in Canada under Article XV(2)(b) if the remuneration is not deductible in computing the income (i.e. not "borne by") of a Canadian resident employer?

Position: No. If the stock option remuneration is paid by, or on behalf of, a resident of Canada under the Convention, the remuneration will not be exempt from tax in Canada under Article XV(2)(b).

Reasons: New wording of the provision.

XXXXXXXXXX
									2011-039341
									J. MacGillivray
									(613) 957-2103
Attention:  XXXXXXXXXX 

September 8, 2011

Dear Sir:

Re: Article XV of the Canada-United States Tax Convention

This is in reply to your letter of January 19, 2011, in which you requested our views with respect to the interpretation of Article XV(2)(b) of the Canada-United States Tax Convention (1980) (the "Convention") and its application to stock option benefits derived by residents of the United States from employment exercised in Canada.

You ask whether the views expressed in technical interpretation E 2002-0126537 continue to reflect the Canada Revenue Agency's interpretation of Article XV(2)(b). In that document, it was stated that a resident of the United States for the purposes of the Convention who was employed in Canada for the purposes of the Income Tax Act (Canada) (the "Act") and earned income from that employment under section 7 of the Act would not be subject to Canadian tax on that income by virtue of Article XV(2)(b) of the Convention if (i) the resident was not present in Canada for more than 183 days in the taxation year, and (ii) the stock option benefit was not available to the employer as a deduction in computing taxable income of either a Canadian-resident employer or the permanent establishment of a non-resident employer.

Our Comments

Please note that it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular can be accessed on the Canada Revenue Agency's website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments, which we trust will be of some assistance.

The comments in technical interpretation E 2002-0126537 were made with respect to the previous wording of Article XV(2), which was replaced by Article 10(1) of the Fifth Protocol to the Convention. (footnote 1) The new provision, which applies for taxation years that begin on or after January 1, 2009, states the following:

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) Such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or

(b) The recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by, or on behalf of, a person who is a resident of that other State and is not borne by a permanent establishment in that other State.

Under the new provision, stock option remuneration derived by a resident of the United States that is included in the computation of the United States resident's income under the Act for a taxation year commencing on or after January 1, 2009 as income from an office or employment will be exempt from tax in Canada under Article XV(2)(b) only if:

(i) the resident is not present in Canada for more than 183 days in any twelve-month period commencing or ending in the particular taxation year,

(ii) the stock option remuneration is not paid by, or on behalf of, a person who is a resident of Canada under the Convention, and

(iii) the stock option remuneration is not borne by a permanent establishment in Canada.

While it continues to be the position of the Canada Revenue Agency that remuneration is borne by a permanent establishment in Canada if the remuneration is deductible in the computation of the income attributable to the permanent establishment under the Act, stock option remuneration derived by a United States resident will not be exempt from Canadian tax under Article XV(2)(b) if it is paid by, or on behalf of, a resident of Canada. This conclusion follows even if the remuneration is not deductible in computing the income of the Canadian resident. Accordingly, the comments in technical interpretation E 2002-0126537 which concern the interpretation of Article XV(2)(b) should no longer be relied upon when determining whether stock option remuneration is exempt from tax in Canada under the Convention for taxation years commencing after December 31, 2008.

In a situation where a United States-resident employee of a Canadian-resident corporation holds options to acquire shares of the corporation and acquires shares of the corporation on the exercise of those options, it is our view that the amount of any resulting stock option remuneration will be paid to the United States-resident employee by the Canadian-resident corporation for the purposes of Article XV(2)(b).

Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC-70-6R5.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 Protocol Amending the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital Done at Washington on 26 September 1980, as Amended by the Protocols Done on 14 June 1983, 28 March 1984, 17 March 1995 and 29 July 1997.