I am a Canadian citizen working in US with TN. I have residental tie to canada and I report income tax to CRA every year. I recently reelize this stock options rule change from CRA.
http://www.canadiansecuritieslaw.com/20 ... ry-1-2011/
http://www.cra-arc.gc.ca/gncy/bdgt/2010 ... s-eng.html
Here is my situation. My company in US offers BOTH ESPP and stock options.
For ESPP, I have been contributing 10% of my salary to this plan and the company has locked the purchase price plus some discount. In the last quarter of 2010, I "execised" at this price for some shares and I have not sold any yet. In US, no income is recognized when we exercise an option under employee stock purchase plan.
For stock option, I am planning to exercise 25% this year, but I am not planning to sell any shares this year. Correct me if I am wrong, but in US, I think it is also true for stock options that no income is recognized until I sell any shares.
So my questions:
1. What is the CRA's rule on ESPP? What is the CRA tax implication for my current ESPP situatioin?
2. How will the new rule on stock options from CRA affect me, if I exercise portion stock options this year and but not going to sell any of the shares?
Thanks
Tax withholding on stock option benefits (CRA)
Moderator: Mark T Serbinski CA CPA
Hi,
I will assume you are a Canadian tax resident.
ESPP: The difference between the FMV and the price you receive the shares at is income, reportable in this tax year. If your employer issues you a T4, the benefit would have been included on that; in the past, they wouldn't have remitted taxes at the time of sale, but sounds like they'll need to now (I think); either way you owe the tax. Later, when you sell, the difference between sale price and the FMV on date of acquisition is your capital gain/loss (or more correctly, the FMV on date of acquisition is used to determine the ACB of your held ESPP shares).
Stock Options: The benefit (difference of FMV and grant price on date of exercise) from your stock options are reportable this year on your Canadian taxes, regardless of whether or not you sell. Presuming these were fair-market value options at the time of grant, you will be eligable for a 50% deduction in the included income. The FMV on the date of exercise sets the ACB for the shares you then hold, and any gain or loss from that point on will be a capital gain/loss.
Note that there is no benefit in Canada to exercising-and-holding stock options. You are better off just holding the optinos until you need to sell, since vesting does not trigger any tax consequences in Canada. If you are also a US tax resident, things are more complicated.
The changes in 2010 basically eliminated the ability to defer tax payment on stock option sales, which wasn't a great idea in the first place (exposes taxpayer to a big downside risk). From a quick glance, it also seems like they changed the withholding requirements (companies have to make sure they withhold taxes from the sale rather than merely relying on the employee to report the sale and pay the tax themselves).
- Paul
I will assume you are a Canadian tax resident.
ESPP: The difference between the FMV and the price you receive the shares at is income, reportable in this tax year. If your employer issues you a T4, the benefit would have been included on that; in the past, they wouldn't have remitted taxes at the time of sale, but sounds like they'll need to now (I think); either way you owe the tax. Later, when you sell, the difference between sale price and the FMV on date of acquisition is your capital gain/loss (or more correctly, the FMV on date of acquisition is used to determine the ACB of your held ESPP shares).
Stock Options: The benefit (difference of FMV and grant price on date of exercise) from your stock options are reportable this year on your Canadian taxes, regardless of whether or not you sell. Presuming these were fair-market value options at the time of grant, you will be eligable for a 50% deduction in the included income. The FMV on the date of exercise sets the ACB for the shares you then hold, and any gain or loss from that point on will be a capital gain/loss.
Note that there is no benefit in Canada to exercising-and-holding stock options. You are better off just holding the optinos until you need to sell, since vesting does not trigger any tax consequences in Canada. If you are also a US tax resident, things are more complicated.
The changes in 2010 basically eliminated the ability to defer tax payment on stock option sales, which wasn't a great idea in the first place (exposes taxpayer to a big downside risk). From a quick glance, it also seems like they changed the withholding requirements (companies have to make sure they withhold taxes from the sale rather than merely relying on the employee to report the sale and pay the tax themselves).
- Paul
BTW, if you received "Restricted Stock Units" rather than stock options, then things are different. RSUs trigger a tax event when they vest, and your employer should be automatically selling enough RSUs to cover your Canadian taxes (which they will withhold). From that point on, the remaining RSUs you hold are just normal shares, acquired at a cost base equal to the FMV on the date of vesting.
Pleventi, thanks for your response.
The employer is a US entity. so, no T4s or Cdn withholing will be performed by the employer
Since he works in US, he no doubt files a US resident return, so pleventi's comment that "If you are also a US tax resident, things are more complicated. " applies. I'm thinking that is why he is posting here.
There is a specific treaty provison that may override CRA rules on this.
The employer is a US entity. so, no T4s or Cdn withholing will be performed by the employer
Since he works in US, he no doubt files a US resident return, so pleventi's comment that "If you are also a US tax resident, things are more complicated. " applies. I'm thinking that is why he is posting here.
There is a specific treaty provison that may override CRA rules on this.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
One over-reaching question is whey our poster considers tha the is Cdn tax resident.
If you work and live in US, you would be US tax resident regardless of any res ties in canada. Unless you commute to work from canada, you are probably not Cdn resident, but a deemed non-resident.
If you work and live in US, you would be US tax resident regardless of any res ties in canada. Unless you commute to work from canada, you are probably not Cdn resident, but a deemed non-resident.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Treaty is pretty clear on stock options -- proportion of the time between grant date and exercise date that you were Canadian resident vs. US resident (as per treaty) will be used to determine how much is Canadian vs. US income.
I believe RSUs are treated similarly.
Note that just because it is a US entity does not preclude the possibility of withholding of Canadian taxes. My employer is a US corporation, and they withhold Canadian taxes on the prorated portion of my RSUs linked back to my period of Canadian residency.
I believe RSUs are treated similarly.
Note that just because it is a US entity does not preclude the possibility of withholding of Canadian taxes. My employer is a US corporation, and they withhold Canadian taxes on the prorated portion of my RSUs linked back to my period of Canadian residency.
I'll bow to your first-hand experience, however the treaty refers to place of work and NOT place of residency.
Your treatment may be related to the fact that you worked for the same firm on both sides of the border, not because you lived in Canada.
A person who has worked solely in the US for a US company will not be treated the same as you, since all income is deemd to have arisen in US, even if they have lived in canada. That was the whiole point of the modification to the treaty.
The only reason you would be paying Cdn tax on your options is because your worked for the firm in canada. This is probably not the case for our poster.
Your treatment may be related to the fact that you worked for the same firm on both sides of the border, not because you lived in Canada.
A person who has worked solely in the US for a US company will not be treated the same as you, since all income is deemd to have arisen in US, even if they have lived in canada. That was the whiole point of the modification to the treaty.
The only reason you would be paying Cdn tax on your options is because your worked for the firm in canada. This is probably not the case for our poster.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Both of us are not quite accurate -- it definitely isn't residency (a mistatement on my part) nor is it where you worked (unlike salary foreign sourcing in the US, which is working days in country vs. outside country). It is split based on your "principal place of employment".
I agree that for this poster, probably none of that is relevant since it sounds like he has worked the whole time in the US.
- Paul
I agree that for this poster, probably none of that is relevant since it sounds like he has worked the whole time in the US.
- Paul
Hi pleventi and nelsona,
Thanks for your response. I really appreciate it.
@ pleventi:
The stock options my company offers are not RSUs. They are just stock options which were offered to me last year. I am allowwed to vest 25% each year.
@ Nelsona:
My employer is a US entity and no T4 or Cdn withholding.
I work and live in US on TN, and my spouse is a Canadian citizen and she lives in Canada. Since I have residential tie in Canada, I cannot declare non-resident for tax purpose, and hence I am still a resident of Canada. I can only claim a foreign tax credit for any taxes paid to IRS.
However, from your post:
"If you work and live in US, you would be US tax resident regardless of any res ties in canada. Unless you commute to work from canada, you are probably not Cdn resident, but a deemed non-resident."
You suggest that I may be a deemeed non-resident of Canada, even though I have residential tie in Canada.
1. What is the rule to become a deemed non-resident?
2. As a deemeed non-resident, what is the tax obligation in Canada?
You also mentioned that "there is a specific treaty provison that may override CRA rules on this." Do you mean a treaty on stock options or ESPP?
Thanks again.
Thanks for your response. I really appreciate it.
@ pleventi:
The stock options my company offers are not RSUs. They are just stock options which were offered to me last year. I am allowwed to vest 25% each year.
@ Nelsona:
My employer is a US entity and no T4 or Cdn withholding.
I work and live in US on TN, and my spouse is a Canadian citizen and she lives in Canada. Since I have residential tie in Canada, I cannot declare non-resident for tax purpose, and hence I am still a resident of Canada. I can only claim a foreign tax credit for any taxes paid to IRS.
However, from your post:
"If you work and live in US, you would be US tax resident regardless of any res ties in canada. Unless you commute to work from canada, you are probably not Cdn resident, but a deemed non-resident."
You suggest that I may be a deemeed non-resident of Canada, even though I have residential tie in Canada.
1. What is the rule to become a deemed non-resident?
2. As a deemeed non-resident, what is the tax obligation in Canada?
You also mentioned that "there is a specific treaty provison that may override CRA rules on this." Do you mean a treaty on stock options or ESPP?
Thanks again.
As long as YOU stay in US and do not make frequent trips to Canada, you CAN become demmed non-resident by treaty, many have.
DNR's are like non-residents. They have a departure date, departure tax, etc.
I was talking about the options. If you maintain Cdn residency however, I think you will end up with taxable income in canada that is not taxable in US, an later vice versa (pleventi can confirm?) which is the worst case for you. You may have to excercise and sell to even things out.
Warrants looking deeper.
DNR's are like non-residents. They have a departure date, departure tax, etc.
I was talking about the options. If you maintain Cdn residency however, I think you will end up with taxable income in canada that is not taxable in US, an later vice versa (pleventi can confirm?) which is the worst case for you. You may have to excercise and sell to even things out.
Warrants looking deeper.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Note that everywhere I refer to stock options below for US purposes, I mean non-qualified stock options.
I *think* in your case you are safe, since the entire time from grant to exercise your principal place of employment was the US company. Thus the bargain element of the stock option will be considered income in the US, and will be reported on your 1040. Your cost basis for this shares for when you later sell will be the strike price + the income reported on 1040, which in your case means it will be the FMV of the shares on the date of exercise-and-hold. Later when you sell, you'll pay capital gains on any further appreciation.
(Not your case, but interesting for others perhaps) If you had exercised-and-held the options while working in Canada, then moved to the US later, you can be exposed to double taxation since the cost-basis of the shares for US tax purposes is just the strike price. But that is not your case.
For ESPP or ISOs, the rules on exercise and hold and then sale are different and more complicated. And if you are a dual-resident, I have no idea how things will work in Canada -- I believe by treaty the stock option income is all attributed to the US since it is your place of principal employment.
I *think* in your case you are safe, since the entire time from grant to exercise your principal place of employment was the US company. Thus the bargain element of the stock option will be considered income in the US, and will be reported on your 1040. Your cost basis for this shares for when you later sell will be the strike price + the income reported on 1040, which in your case means it will be the FMV of the shares on the date of exercise-and-hold. Later when you sell, you'll pay capital gains on any further appreciation.
(Not your case, but interesting for others perhaps) If you had exercised-and-held the options while working in Canada, then moved to the US later, you can be exposed to double taxation since the cost-basis of the shares for US tax purposes is just the strike price. But that is not your case.
For ESPP or ISOs, the rules on exercise and hold and then sale are different and more complicated. And if you are a dual-resident, I have no idea how things will work in Canada -- I believe by treaty the stock option income is all attributed to the US since it is your place of principal employment.