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Beyond the Fifth Protocol | Jan 2008
Implications to stock options when the fifth protocol of the US Canada Tax Treaty is ratified
Originating in 1980, the US Canada Tax Treaty has previously undergone four major revisions or "Protocols" (1983, 1984, 1995, 1997) and as of September 21, 2007, the Fifth Protocol was signed by US and Canadian representatives. The new amendments will come into effect once ratified by both nations and when each has been formally notified of completed government procedures by the other. Canada completed the required legislative steps on December 14, 2007.
The fifth Protocol to the Canada-US Tax Treaty is about looking ahead and being innovative.
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In this highly competitive global economy, we need to continually explore ways to grow, expand and compete," explained Canadian Finance Minister Jim Flaherty. "Further improving and refining our relationship with the United States, our largest trading partner, is essential. The fifth Protocol to the Canada-US Tax Treaty is about looking ahead and being innovative. Amongst key measures contained in the fifth Protocol (which includes cross-border tax withholding and measures to avoid double taxations) is clarification on the taxation of stock options for internationally mobile employees. Previously there was no specific rule as to taxation procedures for options that were given in one country and then exercised by the employee in the other country. The fifth Protocol clarifies that the stock option benefit is considered to have been derived in the country to the extent which it was the employee’s principle country of residence from the date of the stock option grant to its exercise date.
For example if an employee is granted stock options while employed in the US, transfers to Canada one year later and then exercises those options three years following the transfer (four years from grant date), 25% of the income is determined to have arisen while in the US and subject to American tax guidelines and the remaining 75% falls under Canadian regulations. Taxation of the benefit will be subject to the same percentage of time residing in each country. This ensures the source of the benefit is clear and double taxation does not occur.
While some provisions of the fifth protocol become effective at various times subsequent to the date it enters into force, the issues regarding stock option taxations are effective immediately upon ratification.
US Canada Tax Treaty with Protocol Five amendments
http://www.treas.gov/press/releases/reports/canadaprotocol07.pdf
Canadian Department of Finance – Summary
http://www.fin.gc.ca/news07/data/07-070_1e.html
US Department of Treasury – Statement
http://www.treas.gov/press/releases/hp569.htm
