Canada: International employees with stock options
Under Canada's Income Tax Act, a stock option granted by a corporation to an employee is generally subject to tax in Canada only when the employee exercises the option and acquires the shares (or cash in lieu).
This is the case even where the employee is a non-resident of Canada at the time the option is exercised if the option relates to employment services rendered in Canada. A risk of double tax arises for non-resident stock option holders who exercise employment partially in Canada and partially in another country, since each country may seek to tax the benefit on the basis that it relates to employment exercised in its jurisdiction.
To alleviate this risk, the Canadian tax authorities have adopted the principles articulated in paragraphs 12 to 12.5 in the Commentary on Article 15 of the OECD Model Convention to allocate the stock option benefit for Canadian tax purposes. Under the OECD principles, a stock option benefit is generally apportioned to a source country based on the number of days during the vesting period (that is, the required period of employment before the employee can exercise the option) that employment is exercised in that country over the total number of working days in the vesting period.
These principles apply unless the applicable income tax treaty produces a different result. For example, paragraph 6 in Annex B to the Fifth Protocol to the Canada-US tax treaty provides that, where employee services are performed partly in Canada and partly in the US between the grant and exercise of an option, the employee is deemed to have derived the proportion of the benefit in Canada based on the number of days between the date of grant and the date of exercise in which the employee's principal place of employment was situated in Canada.
Carrie Aiken (email@example.com)
Tel: +1 403 260 9775
Dan Jankovic (firstname.lastname@example.org)
Tel: +1 403 260 9725
Blake, Cassels & Graydon, Calgary office