4 December 2003 External T.I. 2001-0111775 - Cross-border share apprication rights plans

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: If rights under a share appreciation rights (SAR) plan are granted while an employee is resident in Canada, but redeemed when the employee is a non-resident, will any of the SAR benefit be taxable in Canada?

Position: Yes. The portion attributable to services rendered in Canada (or outside Canada if the employee was resident in Canada at the time) is "taxable income earned in Canada" to the non-resident under subparagraph 115(1)(a)(i), subject to possible treaty relief

Reasons: Our previous position on SAR's and services rendered in Canada.

XXXXXXXXXX 2001-011177
S. E. Thomson
December 4, 2003

Dear XXXXXXXXXX:

Re: Cross-Border Share Appreciation Rights Plans

This is in reply to a letter of November 19, 2001 from Caroline Rhéaume of your office in which she asks for our views on the taxation in Canada of cross-border share appreciation rights plans. We apologize for the delay in responding to the query.

YOUR QUESTION

Under a share appreciation rights plan (a "SAR"), an employer agrees to pay an employee in cash the difference between the value of a real or notional share of the employer corporation on the vesting date, and the value of the share on the date of the initial award of the unit. As a general rule, payments under a SAR are treated as employment income, and the employee is taxed on the appreciation in value of the units when paid, or, when the units vest, if earlier.

You ask about a scenario where a Canadian resident employee renders services in Canada, and, during the course of that employment, is granted units of a share appreciation rights plan. The employee subsequently emigrates from Canada, and continues to render services to the employer abroad. When the employee subsequently redeems the units, you ask if any of benefit will be taxed in Canada, and on what basis it should be prorated, if at all.

OUR COMMENTS

Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request involves a transaction or series of transactions contemplated by a specific taxpayer. We refer you to Information Circular 70-6R5 Advance Income Tax Rulings, which is available at our website at www.ccra-adrc.gc.ca. Although we are precluded from commenting on a proposed transaction except in the context of an advance income tax ruling, we are able to offer the following comments on the general application of the provisions of the Income Tax Act (the "Act") that apply to share appreciation rights plans, which may or may not apply to your situation. As such, these comments are not binding on the Canada Customs and Revenue Agency.

The employment benefit arising from a SAR is subject to the rules in subparagraph 115(1)(a)(i) of the Act. That is, the benefit realized by the non-resident is included in the employee's taxable income earned in Canada to the extent of that portion of the benefit attributable to duties performed in Canada, or if the employee was resident in Canada at the time the duties were performed, outside Canada, subject to possible relief by the application of an income tax convention.

The extent to which SAR income can be attributed to particular duties of employment in any specific situation is a question of fact. However, at the 1988 Canadian Tax Foundation Conference Round Table, we noted that from our review of stock appreciation rights plans where the amount paid to the employee is based on the increase in the value of the underlying shares, the phantom shares were generally granted in respect of the employee's future services.

The Committee on Fiscal Affairs of the Organisation for Economic Co-operation and Development (OECD) is working on the issue of the treatment of stock options under tax treaties, and in connection with this work, released a second public discussion paper entitled "Cross-Border Income Tax Issues Arising From Employee Stock Option Plans". The public was invited to provide comments on the paper to the OECD by October 31, 2003. The draft paper can be accessed at http://www.oecd.org/dataoecd/46/34/4357310.pdf.

Canada is involved in the OECD's work involving cross-border stock options. However, we are unable to comment on how or whether the OECD proposals may impact on the treatment of cross-border SAR's in Canada until the OECD paper is finalized.

We trust that we have been of assistance.

Yours truly,

Olli Laurikainen, Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate

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