Fifth Protocol – Canada-U.S. Tax Treaty – Stock Options

Volume No. 07-12

“The revised Protocol provides a mechanism for allocating stock option income between the countries.”

In annex B of the fifth Protocol (the “Protocol”) to the Canada-U.S. Treaty, there is an agreement between Canada and U.S. on how to tax employment income from stock options. In the past, there was an inconsistency between the two countries which sometimes resulted in double taxation. In order to alleviate this issue, the two countries have agreed to tax the employment income on an agreed upon ratio. The ratio is based on the number of days in which an individual was employed at the place of employment to the number of days employed between the date of grant and the date of exercise. Assume the following facts:

  1. An individual was granted a stock option on the first day of his employment in Canada.
  2. The individual worked for 300 days in Canada before moving to the United States.
  3. The individual exercised the options 400 days after moving to the United States. 

In a case like that, 300 over 700 of the employment income will be allocated to Canada and the remainder allocated to the United States.

Notwithstanding the above, the competent authorities of both countries can agree to attribute the income in a different manner if both countries agree that the terms of the option were such that the grant was essentially a transfer of ownership. For example, if the options were granted “in the money” or not subject to a substantial vesting period, then the competent authority can reallocate the employment income.


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