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: Tax treatment of stock options issued to non-employees
Position: See below
Reasons: See below
July 15, 2002
COMPLIANCE PROGRAMS BRANCH HEADQUARTERS
International Tax Directorate Income Tax Rulings
International Tax Operations Division Directorate
Attn: Robert Thomson, Pacific Region S.E. Thomson
(613) 957-2122
2002-015124
Stock Options Issued to Non-Employees
We are responding to your July 8, 2002 email to Jim Wilson in which you ask for our assistance on the taxation of stock option benefits to non-employees. You have been presented with a question by XXXXXXXXXX, and were asked if you could answer the question at the upcoming XXXXXXXXXX Meeting on Thursday, July 18, 2002.
The question that has been presented to you is as follows:
Where a Canadian corporation grants stock options to individual consultants, who are not employees, such as in consideration for consulting services, what are the corporation's tax withholding and reporting requirements? Similarly, what are the tax withholding and reporting requirements for non-resident, non-employees, such as non-resident consultants, who are granted stock options in respect of services performed in Canada?
Assume that the stock options are granted under an employee stock option plan and have an exercise price equal to the fair market value of the stock at the time the options are granted. The stock options are non-transferable and there is no market for the options themselves. If the stock options are considered to be business income to the individual, how are the options valued and at what point is the income recognized? Alternatively is the individual considered to be in receipt of a shareholder benefit under subsection 15(1)?
The tax consequences arising from stock options will depend on whether the consultant received the options as an employee, a self-employed consultant, or as a shareholder and whether they pertain to services performed immediately before the time of grant or to services performed after the time of grant and before exercise. Whether the consultant rendered services to the corporation as an employee, or as a self-employed contractor is a question that must be determined by an examination of the surrounding facts. In other situations, it may be determined that the options were issued to the contractor as a shareholder, or in contemplation of his becoming a shareholder. Each situation must be reviewed individually.
In the above case, the consultant was issued options under an employee stock option plan, which suggests that he was in an employer/employee relationship with the Canadian corporation. Nevertheless for the purposes of our reply we have assumed that the options were granted to a self-employed non-resident consultant.
Options Granted for Services Previously Rendered
Where options are issued to a consultant as consideration for services rendered as an independent contractor immediately before the options were granted, section 9 of the Income Tax Act (the "Act") will apply to include in the income of the consultant the fair market value of the option at the time of the grant. If the consultant was a non-resident, and the services were rendered in Canada, the benefit will be included in the consultant's taxable income earned in Canada by virtue of subparagraph 115(1)(a)(ii), and an amount equal to the benefit will be added in computing the cost to the taxpayer of the option pursuant to subsection 52(1). Relief from the income inclusion may be available under a tax convention between Canada and the non-resident's country of residence.
If the option is exercised, subsection 49(3) will deem the exercise of the option not to be a disposition of property and the cost of the option, if any, will be added to the adjusted cost base of the share pursuant to subparagraph 49(3)(b)(ii).
Options Granted for Services to be Rendered
In circumstances where it can be determined (i.e. on examination of all the facts and circumstances, including contracts, etc.) that the options are granted in consideration for services that are to be rendered by a self-employed consultant over a period of time after the time of grant, we may, depending on the facts, take the view that the difference between the fair market value of the shares and the exercise price at the time of exercise, or a portion thereof, is consideration received for the services rendered. Relief may be available under a tax convention between Canada and the non-resident's country of residence.
In these circumstances, the amount included in income as a fee for services would be included in the adjusted cost base of the shares pursuant to subsection 52(1).
Options Granted in Contemplation of Person Becoming a Shareholder
If the stock option was granted by virtue of the consultant's shareholdings, or in contemplation of his becoming a shareholder, subsection 15(1) of the Act will apply to include in the income of the consultant the fair market value of the option at the time of grant. If the consultant was a non-resident, paragraph 214(3)(a) will apply to deem the benefit to be a dividend. Relief may be available under a tax convention between Canada and the non-resident's country of residence.
Valuation
As set out in paragraph 3 of IT-96R6, Options Granted by Corporations to Acquire Shares, Bonds, or Debentures and by Trusts to Acquire Trust Units, the fair market value of an option is the greater of:
? the trading value of the rights received; and
? the amount by which the fair market value of the shares subject to the option at the time of the option's distribution exceeds the exercise price provided in the option.
Therefore, if as set out in the facts, there is no market for the options and the option price at the time of grant is equal to the fair market value of the shares at that time, it would appear that there would be no benefit.
Taxable Canadian Property
If the shares of the Canadian corporation are taxable Canadian property, the options to acquire those shares will also be taxable Canadian property, by virtue of paragraph (l) of the definition of "taxable Canadian property" in subsection 248(1) of the Act. As such, a disposition of the options would generally result in the application of section 116.
Any gain on the subsequent disposition of the shares that are taxable Canadian property would be taxable in Canada by virtue of subparagraph 115(1)(a)(iii) of the Act, subject to any relief under a treaty that Canada has with the non-resident's country of residence.
Withholding & Reporting
Paragraph 153(1)(g) of the Act requires that every person paying fees, commissions or other amounts for services shall deduct or withhold from the payment the amount determined in accordance with prescribed rules. Part I of the Income Tax Regulations (the "Regulations"), prescribes the amounts that are required to be withheld. Section 105 of the Regulations provides that the rate to be withheld from a payment of fees, commission or other amount in respect of the services rendered in Canada by a non-resident is 15%.
Subsection 212(2) of the Act requires a withholding of 25% of dividends paid or deemed paid.
Part II of the Regulations prescribes that every person making a payment under subsection 153(1) or Part XIII of the Act shall make an information return in prescribed form.
Relief from withholding may be available if the payment is either exempt or subject to a reduced rate of tax under a tax convention that Canada has with the country of residence of the non-resident.
We recommend that the withholding and reporting requirements related to stock options be reviewed with the Trust Accounts Division. In particular, we note that they have stated at the July 3, 2002 Canadian Payroll Association Round Table:
If you make a payment to a Canadian resident "for fees and services" you must prepare a T4A even though no withholding is required. However, Canada Customs and Revenue Agency (CCRA) administratively waives this requirement if the amount paid in the year is $500 or less.
A stock option benefit is a non-cash benefit. In accordance with our policy, income tax has to be withheld on non-cash benefits only if there is other remuneration paid to the employee from which to withhold.
We trust that our comments have been helpful.
Yours truly,
Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate
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