“it may be beneficial for non-residents to exercise their employee stock options before becoming resident.”
When a taxpayer becomes a resident of Canada, the taxpayer is generally deemed to have disposed of all of their property at fair market value immediately before becoming resident, and is deemed to have reacquired each such property at the same cost (i.e., fair market value) immediately upon becoming resident. This means that the taxpayer receives a “step up” in the Canadian tax cost of their properties upon immigrating to Canada. The result is a substantial saving in Canadian tax when the property is sold in the future. However, certain types of property are excluded from such treatment.
One property that does not trigger the deemed disposition and reacquisition rule, and therefore is not subject to the step up, is an unexercised employee stock option. As a result, non-residents who received stock options before coming to Canada will be subject to Canadian taxation on the total taxable benefit, including the portion accrued before coming to Canada, if they become resident in Canada before exercising the options. Accordingly, it may be beneficial for non-residents to exercise their employee stock options before becoming resident so that they will have a step up in the cost of the shares they acquired by exercising the options (and no exercise of the options in Canada). Nothing can be done to eliminate the tax on the accrued benefit for taxpayers who have already immigrated with unexercised stock options (other than emigrating from Canada prior to exercising the options). However, the Canada-US tax treaty includes a provision whereby the employment benefit is allocated to each jurisdiction based on the number of days of employment in each location. This is a unique provision that does not exist in other treaties. In most other scenarios, the usual foreign tax credit mechanisms should relieve double tax.
It is interesting to note that a similar deemed disposition and reacquisition rule applies when an individual emigrates from Canada. However, the rule does not apply to unexercised employee stock options. When such options are eventually exercised, the former-resident taxpayer will be subject to Canadian tax on the full taxable benefit (including the gain accrued after departure) but only if the employee stock options were granted for employment performed in Canada.
Employers generally have an obligation to report stock option income that is taxable to a non-resident on a T4.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
