26 November 1992 Income Tax Severed Letter 9122815 - Exercising Stock Option by a Non-resident (4735-1)

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.

912281
24(1) K. B. Harding
957-2111

Attention: 19(1)

November 26, 1992

Dear Sirs:

Re: Stock Options

This is in reply to your letter of August 13, 1991 concerning the treatment of stock options benefits in the following hypothetical situation.

An individual, while resident and employed in Canada, becomes entitled to certain stock option benefits from his Canadian employer and the plan does not terminate when he ceases employment in Canada and returns to the United States. After returning to the United States and becoming a resident of that country, the individual exercised the stock option he acquired from his Canadian employer.

Pursuant to subsections 7(1) and (4) of the Income Tax Act (the "Act") where an individual exercises his stock option after he has ceased to be an employee, he will be taxable in Canada as though he were still an

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employee on any employee stock option benefits which arise in connection with that employment. In accordance with subsection 2(3) and subparagraph 115(1)(a)(i) of the Act, where a non-resident exercises such an option any benefits which arise will be taxable in Canada, subject to the provisions of any tax convention or agreement.

Paragraph 1 of Article XV of the Canada-U.S. Income Tax Convention (the "Convention") provides that salary, wages and other similar remuneration derived by a resident of the United States in respect of employment shall be taxable only in the United States unless the employment is exercised in Canada. If the employment is so exercised in Canada such remuneration as is derived from Canada may be taxed in Canada. Since the Convention does not define the term salary and wages, paragraph 2 of Article III of the Convention provides that any term not defined in the Convention shall, unless the context otherwise requires have the meaning it has under the Act. Subsection 248(1) of the Act defines salary and wages to mean "...the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I..." and therefore the term would include any benefits provided in section 7 of the Act.

Accordingly, since the stock option benefits arose, in your hypothetical situation, in respect to the individual's employment in Canada, paragraph 1 would not deny Canada the right to tax the income arising on the exercise of the option but it also does not prevent the United States from also taxing such income.

Paragraph 2 of Article XV provides that remuneration derived by a resident of the United States in respect of an employment exercised in a calendar year in Canada will be exempt from tax in Canada if the remuneration does not exceed $10,000 (Canadian) or the U.S. resident is present in Canada for a period or periods not exceeding in the aggregate 183 days in that year. The calendar year in question refers to the year in which the employment was exercised and not to the year in which the stock option was exercised. Accordingly, where the stock option relates to a year in which the taxpayer was present in Canada for a period or periods exceeding in the aggregate 183 days and the taxpayer's salary, wages and other remuneration for such employment, including the value of the stock option, exceeded $10,000 (Canadian) the Convention does not grant any relief and such a taxpayer will continue to be taxable in Canada on the benefit derived from the stock option.

Where the value of the benefit from the stock option and other remuneration received by the taxpayer for the employment exercised in Canada in a calendar year exceeds $10,000 (Canadian) but the taxpayer was not present in Canada for 183 days in such year, the taxpayer will be exempt from tax in Canada by virtue of paragraph 2 of Article XV of the Convention since the salary, wages and other remuneration is not borne by the Canadian employer.

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Where both countries tax the income arising on the exercising of the option, the state of residence (United States) would be required to provide a foreign tax credit in the hypothetical situation outlined above.

This position, in our view, is not inconsistent with the Tedmon case.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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