Principal Issues: [TaxInterpretations translation] Having regard to the application of subsection 128.1(1) where a taxpayer immigrates to Canada, how is the taxpayer's taxable benefit calculated, for purposes of applying the provisions of paragraph 7(1)(a), where part of the appreciation in value of those shares occurred during the period while the taxpayer was a non-resident?
Position: Under paragraph 7(1)(a), the benefit is equal to the amount by which the value of the shares at the time the taxpayer acquired them exceeds the amount the taxpayer paid to the corporation for the shares and the right to acquire them.
Reasons: When the taxpayer becomes a Canadian resident, the taxpayer is not deemed to have disposed of the taxpayer's rights to purchase shares under an agreement described in subsection 7(1). The benefit (including the portion that reflects the increase in the value of the share while the taxpayer was not a resident of Canada), calculated under paragraph 7(1)(a), is therefore taxable in Canada as employment income (and not, for example, as a capital gain from the deemed disposition of certain property on immigration) even though the option was granted to the taxpayer while the taxpayer was a non-resident.
XXXXXXXXXX 2009-032315 Danielle Bouffard May 14, 2010
Dear Sir,
Subject: Subsection 128.1(1)(b) of the Income Tax Act (the "Act")
This is in response to your letter of May 4, 2009 in which you requested our opinion regarding certain tax consequences that would arise for an individual upon the exercise of a stock option in a particular situation.
Unless otherwise indicated, any reference in this document to a section of the Act or any of its provisions is to a section of the Income Tax Act (the "Act") or any of its provisions.
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
The Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
Monsieur has worked in China for a Chinese corporation ("Chinaco "), a member of a group of affiliates of Foreign Co. During this period, he received from Chinaco stock options to purchase shares of Foreign Co. exercisable at a unit price equal to their fair market value at that time. These options were given to him free of charge by his employer, China Co, while he was a Chinese resident.
Subsequently, he left China for Canada to work for a Canadian corporation ("Canco"), a member of the Foreign Affiliate Co. group of corporations, and became a Canadian resident. At no time during the period of his employment in China with Chinaco was he resident in Canada or under contract with Canco. At the time of his immigration to Canada, the market price for each share of Foreign Co. was higher than the price established for the exercise of his options. Shortly after arriving in Canada, Monsieur exercised all of his stock options.
In your view, if Monsieur had always been a Canadian resident, he would have had a taxable benefit under paragraph 7(1)(a) that would have been added to the adjusted cost base of those shares under paragraph 53(1)(j) and he would have been entitled to a deduction under section 110 if those shares satisfied certain conditions. In this case, Monsieur, upon his arrival in Canada, already had stock options which had increased in value during the period he was not a resident of Canada. In your view, the portion of the benefit (reflecting the appreciation in value of the shares while Monsieur was a non-resident) should not be taxed in Canada.
Your Question
Having regard to the application of subsection 128.1(1) when Monsieur becomes a Canadian resident, how is the taxable benefit to be calculated, for purposes of applying the provisions of paragraph 7(1)(a), where part of the appreciation in value of those shares occurred during the period while he was a non-resident?
Our Comments
The exception to the deemed disposition rule in subparagraph 128.1(1)(b)(iv) for property of an individual who becomes resident in Canada includes a right of the individual under an agreement referred to in subsection 7(1). Section 7 of the Act applies where a qualifying person, including a corporation, agrees inter alia to issue shares of the corporation to an employee of the corporation and the employee exercises (as in the particular situation, after immigrating to Canada) the employee’s rights to acquire shares under the agreement. That employee is then deemed to have received a benefit because of employment in the taxation year in which the employee exercised the employee’s rights to acquire shares. The benefit is equal to the amount, if any, by which the value of the shares at the time the employee acquired them exceeds the total of the amount the employee paid or to be paid to the corporation for those shares and the amount the employee paid to acquire the right to acquire the shares.
That benefit (including the portion that reflects the increase in the value of the share while the employee was not a resident of Canada) is taxable in Canada as employment income, and not as a capital gain resulting from the deemed disposition of certain property upon immigration, even though the option was granted to the employee in China (by analogy with the Particular Situation, see Craig S. Tedmon, Jr. v. MNR 91 DTC 962). Depending on the nature of the shares, the employee may also be eligible for a deduction under paragraph 110(1)(d) in computing taxable income.
We hope that these comments will be of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.