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.
Determination of the Source of Stock Option Benefits
The determination of the geographical source of income is necessary in order to establish which country will grant a foreign tax credit where the income is subject to the tax regime of both countries. Through this mechanism, double taxation is usually avoided when both countries have the same sourcing rules.
We are concerned that double taxation might occur in some cases of stock option benefits, as we perceive that the sourcing of the options might differ between the U.S. and Canada. We understand that the U.S. has established a sourcing method on the basis of the number of days worked in each country, between the day the option was granted and the day of the exercise of such option.
On the other hand, based on Hurd v. the Queen [[1981] C.T.C. 209] 81DTC5140, we understand that Canada would determine the source of the option benefit based on the residence of the individual at the time the option was granted to him. Alternatively, one might advance that based on Hurd, the option is to be sourced based on where the individual was working at the time of granting of the option. Nevertheless, given the different reference points at which the options are sourced in each country, differences in the source determination of a stock option benefit could result, namely in the case of an individual whose work situation has changed between the time of the granting of the option and its exercise.
Please confirm for each respective country whether our understanding of the respective country's sourcing rules is correct.
In addition, please confirm whether paragraph 3 of Article XXIV of the Canada-United States Income Tax Convention, 1980 (the "Convention"), which provides for source rules for the purposes of applying that article, would force both countries to adopt the same sourcing rules for the application of the Convention. More specifically, would the IRS abide by the Canadian sourcing rules to the extent the option arose in Canada by virtue of it being granted by a Canadian employer? Inversely, would Canada abide by the U.S. rules should the situation be reversed?
Revenue Canada's Position
Revenue Canada, Taxation does not concur with your understanding that the territorial source of a stock option benefit derived by virtue of employment is based on the residence of the individual at the time the option was granted to him. Generally, as indicated in paragraph 30 of IT-270R, the territorial source of income from an office or employment is considered to be the place where the related duties are normally performed. The duties performed or to be performed for which the stock option was granted is essentially a question of fact.
Our opinion as to the territorial source of income constituted by a benefit derived from an employee stock option as set forth above applies in respect of situations covered by the Canada- United States Income Tax Convention, 1980.
Paragraph 3 of Article XXIV does not apply to force either Contracting State to adopt the sourcing rules of the other. Rather, paragraph 3 of Article XXIV sets forth certain rules to be utilized in determining in which Contracting State income will be considered to arise for purposes of that Article.
Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the Convention, the person may apply to the competent authority pursuant to Article XXVI of the Convention which provides a mechanism whereby such actions can be considered by the Contracting States with a view to avoiding by agreement of the Contracting States taxation which is not in accordance with the Convention.
Prepared by: G. Arsenault September 7, 1990
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