26 February 1991 Income Tax Severed Letter

24(1)          910138
                                        G. Arsenault
                                        (613) 957-2126

                         19(1)

Feb 26, 1991

Dear Sirs:

Re: Employee Stock Options - Non-Residents

This is in reply to your letter dated January 11, 1991 whereby you raised a supplementary question further to our letter to you of September 12, 1990.

By letter dated May 4, 1990, you requested our opinion concerning the Canadian income tax treatment of stock options received by non-resident non-executive directors of Canadian corporations in the following hypothetical fact situation:

1. Mr. X, a non-resident of Canada, is a director of Canco, a Canadian public company. He is not an officer of Canco.

2. Mr. X attends directors' meetings of Canco but is also frequently consulted by senior management of Canco in connection with its business affairs. Mr. X performs these services in part inside Canada and in part outside Canada.

3. During Year 1, Mr. X is granted an option to acquire shares of Canco at their then current market price.

4. In Year 5, Mr. X exercises the option with the result that a benefit equal to $100,000 arises pursuant to subsection 7(1) of the Income Tax Act ("Act").

By our letter to you dated September 12, 1990, we advised that in our opinion, assuming that Mr. X is never resident in Canada and assuming that during all relevant years his duties of employment are performed in part inside and in part outside Canada, Mr. X would be taxable in Canada on the stock option benefit (calculated under subsection 7(1)) to

                                                       .../cont'd

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extent the granting of the stock option to him related to the duties of employment performed and/or to performed by him in Canada.

You have now advised that in your opinion one must look to where the services that justified the granting of the stock option were actually performed in determining the portion of the benefit arising under the stock option that is taxable in Canada and you have requested that we reconsider our position in light of your views.

Under subparagraph 115(1)(a)(i) of the Act Canada may only impose tax on a non-resident on his incomes from the duties of offices and employments performed by him in Canada. We did not mean to suggest anything different by our letter of September 12, 1990. Our earlier comments were premised on that proposition and were directed at addressing the issue of how a determination is made as to what the benefit related to and whether it was a benefit arising from the duties of Mr. X's employment performed by him in Canada in the context of the hypothetical situation submitted by you. This is of course, essentially a question of fact. As indicated by the Federal Court of Appeal in Vincent N. Hurd v. Her Majesty The Queen,81 DTC 5140 at page 5142:

"To determine this question regard must be had to the option agreement and the circumstances which led to its execution".

The opinions expressed herein and in our letter of September 12, 1990 are not advance income tax rulings and, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, are not considered binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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