Cross-Border Taxation of Stock Options

Most large U.S. corporations have subsidiaries or other, operations in Canada, and many of these firms routinely send domestic employees to work temporarily in Canada. At the same time, many large U.S. firms offer stock options to their employees. Because of the differences in the way Canada and the U.S. tax stock options, expatriate employees are at risk of double taxation. For example, if an individual receives an option while employed by a Canadian firm and is treated as a Canadian resident for tax purposes, Canada often considers the option to be derived from employment with the Canadian firm, regardless of whether the option is vested. Therefore, a U.S. individual receiving Canadian options may move back to the U.S. prior to vesting in those options, yet Canada will treat income from the subsequent exercise of the options as Canadian-source income, subject to Canadian individual income tax (and perhaps social security tax).

Meanwhile, the U.S. will tax the full amount of income realized on exercise of the option and provide a foreign tax credit for income taxes paid to Canada. However, the U.S. will probably treat only a portion of the income from the exercise of the options as foreign-source; specifically, the U.S. will probably apportion the income between Canadian- and U.S.-source in proportion to the time worked in each country during the vesting period. This may result in double taxation.

In addition, the U.S. will impose FICA tax on the gain realized. Presumably, the U.S.-Canada Totalization Agreement could be invoked with respect to FICA tax and Canadian social security tax, but the employee may not have a certificate of coverage at the exercise date, or the certificate may have expired.

By Thomas, Jim Publication: The Tax Adviser

For employee stock options tax questions, please consult a professional accountant who are specialized in cross-border taxation to avoid double taxation and unexpected tax withholdings.