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.

Top Ten US Tax Mistakes by those with Canadian Cross-Border Issues

People with income from both the United States and Canada often find that their Canadian income items were not reported properly on their U.S. income tax return. The following are common errors we find when reviewing returns:

1. Having the incorrect amount of withholding - the US/Canada Tax Treaty specifies the rate of withholding on various types of income. If the correct withholding did not take place, a return must be filed to pay or to receive a refund of the difference in tax.
2. Rental property in Canada - NR6's should be filed at the start of each year to allow withholding on the net income rather than gross. Actual results are reported to Canada via a T1 filed under Section 216. The U.S. return requires a longer period of depreciation on property when located outside of the U.S.
3. Ownership in foreign partnerships and corporations -may require additional filings to be attached to the U.S. return. Passive income realized within the corporation is treated as received by the shareholders or partners whether a dividend has been paid or not.
4. Not reporting worldwide income - citizens and residents of the U.S. are required to report their worldwide income from all sources, foreign and domestic.
5. Disclosure of foreign bank and brokerage accounts - Treasury form TDF 90.22 is used to report the ownership of and balances in any bank or brokerage account that you may have outside the U.S. This includes RRSPs and RRIFs.
6. Not disclosing a treaty-based return position - when contributing to a Canadian charity, disclosure must be made on Form 8833. Also, elections to defer the income within an RRSP or RRIF need to be completed on Form 8833.
7. Foreign Tax Credits - these are often misclassified and carryovers are left to expire. Proper planning can save taxes in future years. Under certain circumstances it may be better to take foreign taxes paid as a deduction rather than a credit. Only proper analysis results in the correct answer.
8. Incorrect reporting of OAS and CPP - as U.S. residents, those payments are taxed in the same way as U.S. Social Security on the Federal return. Adjustments are often necessary for the State returns. Canadian residents receiving U.S. Social Security are taxed differently than on their OAS and CPP. Proper reporting insures the 15% adjustment.
9. Incorrect reporting of RRSPs and RRIFs - if not deferred by a treaty election, the income within the RRSP and RRIF is fully taxable in the U.S. Again, some states do not recognize the treaty deferrals and tax the income regardless of treatment on the Federal return.
10. Not having an experienced cross border tax specialist prepare the return. If the client has foreign income, they need someone familiar with these issues. Penalties for improper reporting or failure to report run as high as $10,000.

US citizen in Canada Tax Tips

The United States taxes its citizens on their worldwide income, whether or not they live in the United States. As a result, if you are a U.S. citizen living in Canada you are required to file a tax return under both systems.

Watch out for tax liabilities

Although there are several mechanisms to prevent double taxation, there are still many differences between the two income tax systems that can lead to unexpected tax liabilities. One of the most glaring differences between the two systems is in the area of capital gains. For this reason, you should always obtain professional tax advice if you have sold, or are considering selling, capital property.

If your income is high enough you may also have to pay a certain amount of U.S. alternative minimum tax even though your income is fully taxed in Canada. Be aware of this potential liability when planning your income.

Filing your returns

For Canadian tax purposes, each taxpayer must file a separate return. For U.S. tax purposes, you have the option of filing a joint return with your spouse. If your spouse has little or no income but you are paying tax to the U.S., filing a joint election will generally be beneficial. If your spouse is not a U.S. citizen, the decision to file jointly can only be made once. This election applies automatically to all subsequent years unless it is revoked. Once revoked, the election cannot be reinstated.

If you are a U.S. citizen, you may be required to file a U.S. tax return even if no U.S. tax is owing. On October 1, 1992, the Internal Revenue Service (IRS) launched a "non-filer program" in an attempt to bring back into the U.S. tax system taxpayers who have not been filing returns. Substantial resources are being devoted to finding non-filers who are likely to owe a significant amount of tax. An IRS information return must now be completed in conjunction with the processing of all passport applications. If you have not been filing a U.S. return, you should obtain professional advice.

As well as filing a tax return, you may also be required to disclose a substantial amount of other financial information to the U.S. government. Contact your professional adviser for further details.

Tax Overseas Canadians

From Globe and Mail:
Tax overseas Canadians, Ottawa told

Critics urge special tax for overseas Canadians
Government must demand more in return for generous passport policy, observers say

Some call the Canadian passport an $87 get-out-of-jail-free card. Others see it as emergency evacuation insurance.

As Ottawa finally begins to review Canada's citizenship policy -- one of the most generous in the world -- critics are calling for a special tax for overseas Canadians.

"People want all the benefits of being Canadian, but none of the burden," said Richard Kurland, a lawyer and immigration policy analyst. "Non-resident citizens should not have a free ride -- business class -- at taxpayers' expense, by flashing a Canadian passport."

Added Don DeVoretz, an economist at Vancouver's Simon Fraser University: "The time has come to look at the citizenship policy and ask, does it serve Canada's interests?"

This summer's $94-million evacuation of 15,000 Lebanese-Canadians from war-torn Lebanon finally prompted Ottawa to announce a review of Canada's citizenship policy. Immigration Minister Monte Solberg won't divulge details about the review, but he has said it is time to review the obligations of citizens who live abroad while drawing on Canada's social programs.

Kurland advocates the introduction of a special new tax for non-resident citizens. Canadians who have been living overseas for more than five years should pay $500 for a passport, he said.

This idea has also been endorsed by John Chant, a retired Simon Fraser University economist, in a study titled the Passport Package, released this month by the C.D. Howe Institute.

"The costs of the non-resident passport package should be shifted from resident Canadians who pay taxes to non-resident citizens who benefit but pay no taxes," Prof. Chant said in an interview.

Such a tax would raise about $200-million a year, based on the estimate that 80% of the 2.7 million overseas Canadians would choose to maintain their citizenship.

The policy would be less cumbersome and bureaucratic than requiring Canadians living abroad to pay income taxes.

"I have spoken to non-governmental organizations who work with South Asians, and they all think this is very fair," Kurland said. "Call it the insurance passport."

There has been a recent rush on applications for passports, as the Jan. 23 deadline approaches for new U.S. rules requiring Canadians to show passports when they fly south.

Canada's current policy, designed to attract newcomers, allows immigrants to become citizens after just three years of residency -- with no requirement to relinquish previous passports.

Non-resident Canadians do not have to pay income tax. Babies born to tourists are also entitled to full citizenship. People can acquire citizenship through ancestry as well, qualifying if a parent was Canadian -- even if this parent never lived in Canada.

This generous policy, meant to lure newcomers, has in many cases actually served to accelerate their departure. Today, an estimated 8% of all Canadians (2.7 million) live outside the country, 1.7 million of them permanent residents elsewhere, according to the Asia Pacific Foundation of Canada. Forty-four% live in the United States; 24% in Asia and 18% in Europe. There are currently 300,000 Canadians in Hong Kong alone.

In his study, Prof. Chant notes that overseas Canadians have a range of government benefits that he calls the "passport package."

The package includes not just one-time evacuations, but a whole list of benefits:

* They pay resident tuition fees and receive university financial assistance;
* Their dependents can become Canadian citizens;
* They have health-care benefits;
* They are eligible for the prisoner transfer program;
* They receive consular services, free entrance into Canada and visa exemptions to travel to many other countries.

Kurland added that if there was political upheaval in Taiwan, Hong Kong or mainland China, the impact on Canada could be enormous in terms of evacuation and resettlement costs. "Those evacuated from Lebanon this summer were given return tickets and within two months, half had returned," he pointed out. "It's time they shared the cost of this."

John Kirton, a University of Toronto political scientist, believes the Canadian diaspora should be considered an asset, not a financial drain. "They are ambassadors promoting Canadian culture and values abroad and also fostering family business networks," he said. "It is the quintessential Canadian experience to carry more than one passport."

Others, however, would like to see overseas Canadians become more politically engaged. Prof. DeVoretz suggests they be encouraged to vote, and serve jury duty. "I'd like to see more political awareness among non-resident Canadians," he said.

Prof. DeVoretz recently returned from Nashan, China, where he interviewed 500 Canadians of Chinese origin about why they decided to return to their country of origin. He discovered that most never intended to stay in Canada. "They just wanted the passports," he said.

"They were fairly successful in Canada but they are more successful in Hong Kong. The conditions had to be right for their return."

They cannot be faulted for taking advantage of a liberal citizenship policy, but the example proves the point, he said: Ottawa needs to ask whether the current citizenship policy is in the interests of tax-paying Canadians.

Around the world

* 150 countries allow dual citizenship.
* China, Cuba and South Korea do not.
* Germany allows dual citizenship, but makes people choose loyalty to one country by the age of 19.
* The United States requires non-resident Americans to file income-tax returns.
* Denmark does not automatically grant citizenship to children of Danish immigrants.
* In India, dual citizens may not vote, and non-resident citizens must file income-tax returns.

Canada's Tax Treaties with other countries

In Force
Algeria

The Canada-Algeria Income Tax Convention, as signed on February 28, 1999. For further details, consult News Release 2001-004.
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Argentina

The Canada-Argentina Income Tax Convention, as signed on April 29, 1993
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Armenia

The Canada-Armenia Tax Convention as signed on June 29, 2004.
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Australia

The new Canada-Australia Income Tax Convention, as signed on May 21, 1980 and amended by the Protocol signed on January 23, 2002.
The Canada-Australia Protocol, as signed on January 23, 2002.
The Canada-Australia Income Tax Convention, as signed on May 21, 1980.
- return -
Austria

The Canada-Austria Income Tax Convention, as signed on December 9, 1976 and amended by a Protocol signed on June 15, 1999.
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Azerbaijan

The Canada-Azerbaijan Income Tax Convention as signed on September 7, 2004.
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Bangladesh

The Canada-Bangladesh Income Tax Convention, as signed on February 15, 1982.
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Barbados

The Canada-Barbados Income Tax Agreement, as signed on January 22, 1980.
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Belgium

The new Canada-Belgium Income Tax Convention as signed on May 23, 2002. This treaty entered into force on October 6, 2004, and replaces the treaty signed in 1975.
The Canada-Belgium Income Tax Convention, as signed on May 29, 1975.
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Brazil

The Canada-Brazil Income Tax Convention, as signed on June 4, 1984.
- return -
Bulgaria

The Tax Convention between Canada and the Republic of Bulgaria, as signed on March 3, 1999.
- return -
Cameroon

The Canada-Cameroon Income Tax Convention, as signed on May 26, 1982.
- return -
Chile

The Convention between Canada and the Republic of Chile, as signed on January 21, 1998.
- return -
China (PRC)

The Canada-China Income Tax Agreement as signed on May 12, 1986.
- return -
Croatia

The Agreement Between Canada and the Republic of Croatia, as signed on December 9, 1997.
- return -
Cyprus

The Canada-Cyprus Tax Convention, as signed on May 2, 1984.
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Czech Republic

The new Convention between Canada and the Czech Republic, as signed on May 25, 2001. This treaty entered into force on May 28, 2002. For further details, consult News Release 2001-052.
The Canada-Czechoslovakia Tax Convention, as signed on August 30, 1990.
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Denmark

The Convention Between Canada and the Kingdom of Denmark, as signed on September 17, 1997.
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Dominican Republic

The Canada-Dominican Republic Tax Convention, as signed on August 6, 1976.
- return -
Ecuador

The Convention Between the Government of Canada and the Government of the Republic of Ecuador, as signed on June 28, 2001. For further details, consult News Release 2002-004.
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Egypt

The Canada-Egypt Tax Convention, as signed on May 30, 1983.
- return -
Estonia

The Canada-Estonia Tax Convention as signed on June 2, 1995. For further details, consult News Release 1996-002.
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Finland

The new Canada-Finland Income Tax Convention as signed on July 20, 2006.
The Canada-Finland Income Tax Convention, as signed on May 28, 1990.
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France

The Canada-France Income Tax Convention, as signed on May 2, 1975 and amended by a Protocol signed on January 16, 1987 and a Protocol signed on November 30, 1995.
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Germany

The new Agreement between Canada and the Federal Republic of Germany, as signed on April 19th, 2001. For further details, consult News Release 2002-030.
The Agreement between Canada and the Federal Republic of Germany, as signed on July 17, 1981.
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Guyana

The Canada-Guyana Income Tax Convention, as signed on October 15, 1985.
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Hungary

The Canada-Hungary Income Tax Convention, as signed on April 15, 1992 and modified by a Protocol signed on May 3, 1994.
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Iceland

The Convention Between Canada and the Republic of Iceland, as signed on June 19, 1997.
- return -
India

The Canada-India Income Tax Agreement, as signed on January 11, 1996 (DFAIT web site).
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Indonesia

The consolidated version of the Canada-Indonesia Income Tax Convention, as signed on January 16, 1979 and modified by a Protocol signed in April 1, 1998.
- return -
Ireland

The new Canada-Ireland Income Tax Convention, as signed on October 8, 2003.
The Canada-Ireland Income Tax Convention, as signed on November 23, 1966.
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Israel

The Canada-Israel Income Tax Convention, as signed on July 21, 1975.
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Italy

The Canada-Italy Income Tax Convention, as signed November 17, 1977 as modified by a Protocol signed on March 20, 1989.
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Jamaica

The Canada-Jamaica Income Tax Agreement, as signed on March 30, 1978.
- return -
Japan

The Canada-Japan Income Tax Convention, as signed on May 7, 1986; amended by a Protocol signed on February 19, 1999 and entered into force on December 14, 2000. For further details, consult News Release 2000-088.
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Jordan

The Canada-Jordan Income Tax Convention signed on September 6, 1999. For further details, consult News Release 2001-005.
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Kazakhstan

The Convention between the Government of the Republic of Kazakhstan and the Government of Canada, as signed on September 25, 1996.
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Kenya

The Canada-Kenya Income Tax Agreement, as signed on April 27, 1983.
- return -
Korea

The new Canada-Korea Income Tax Convention, as signed on September 5, 2006.
The Canada-Korea Income Tax Convention, as signed on February 10, 1978.
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Kuwait

The Canada-Kuwait Income Tax Agreement, as signed on January 28, 2002.
- return -
Kyrgyzstan

The Canada-Kyrgyzstan Income Tax Convention signed on June 4, 1998. For further details, consult News Release 2001-003.
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Latvia

The Convention Between the Republic of Latvia and Canada, as signed on April 26, 1995.
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Lithuania

The Convention between the Government of the Republic of Lithuania and the Government of Canada, as signed on August 29, 1996.
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Luxembourg

The Convention signed on September 10, 1999 between Canada and the Grand Duchy of Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital entered into force on October 17, 2000. For further details, consult News Release 2000-084.
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Malaysia

The Canada-Malaysia Income Tax Agreement, as signed on October 15, 1976.
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Malta

The Canada-Malta Income Tax Agreement, as signed on July 25, 1986.
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Mexico

The Convention Between the Government of Canada and the Government of the United Mexican States, as signed on April 8, 1991.
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Moldova

The Canada-Moldova Income Tax Convention, as signed on July 4, 2002.
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Mongolia

The Canada-Mongolia Income Tax Convention, as signed on May 27, 2002.
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Morocco

The Canada-Morocco Income Tax Convention, as signed on December 22, 1975.
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Netherlands

The Canada-Netherlands Income Tax Convention, as signed on May 27, 1986 and amended by the Protocols signed on March 4, 1993 and August 25, 1997.
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New Zealand

The Canada-New Zealand Income Tax Convention signed on May 13, 1980.
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Nigeria

The Agreement Between the Government of Canada and the Government of the Federal Republic of Nigeria, as signed on August 4, 1992.
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Norway

The new Canada-Norway Income Tax Convention, as signed on July 12, 2002.
The Canada-Norway Income Tax Convention, as signed on November 23, 1966.
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Oman

The Canada-Oman Tax Agreement as signed on
June 30, 2004.
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Pakistan

The Canada-Pakistan Income Tax Convention, as signed on February 24, 1976.
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Papua New Guinea

The Canada-Papua New Guinea Income Tax Agreement, as signed on October 16, 1987.
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Peru

The Canada-Peru Income Tax Convention, as signed on July 20, 2001.
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Philippines

The Canada-Philippines Income Tax Convention, as signed on March 11, 1976.
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Poland

The Canada-Poland Income Tax Convention, as signed on May 4, 1987.
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Portugal

The Convention between Canada and the Portuguese Republic, as signed on June 14, 1999. For further details, consult News Release 2001-087.
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Republic of the Ivory Coast

The Canada - Ivory Coast Income Tax Convention, as signed on June 16, 1983.
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Romania

The new Canada-Romania Income Tax Convention as signed on April 8, 2004. This treaty entered into force on December 31, 2004, and replaces the treaty signed in 1978.
The Canada-Romania Income Tax Convention, as signed on November 20, 1978.
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Russia

The Canada-Russia Income Tax Agreement, as signed on October 5, 1995 (DFAIT web site).
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Senegal

The Canada-Senegal Income Tax Convention, as signed on August 2, 2001.
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Singapore

The Canada-Singapore Income Tax Convention, as signed on March 6, 1976.
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Slovak Republic

The Canada-Slovak Republic Income Tax Convention, as signed on May 22, 2001. For further details, consult News Release 2002-002.
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Slovenia

The Convention Between the Government of Canada and the Government of the Republic of Slovenia as signed on September 15, 2000
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South Africa

The Canada-South Africa Income Tax Convention, signed on November 27, 1995 (DFAIT web site).
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Spain

The Canada-Spain Income Tax Convention, as signed on November 23, 1976 (DFAIT web site).
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Sri Lanka

The Canada - Sri Lanka Income Tax Convention, as signed on June 23, 1982.
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Sweden

The Convention between Canada and Sweden, as signed on August 27, 1996 (DFAIT web site).
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Switzerland

The Convention between Canada and Switzerland, as signed on May 5, 1997.
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Tanzania

The Canada-Tanzania Income Tax Agreement, as signed on December 15, 1995 (DFAIT web site).
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Thailand

The Canada-Thailand Income Tax Convention, as signed on April 11, 1984.
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Trinidad and Tobago

The Convention between the Government of Canada and the Government of the Republic of Trinidad and Tobago, as signed on September 11, 1995.
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Tunisia

The Canada - Tunisia Income Tax Convention, as signed on February 10, 1982.
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Ukraine

The Canada-Ukraine Income Tax Convention, as signed on March 4, 1996 (DFAIT web site).
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United Arab Emirates

The Tax Convention Between Canada and the United Arab Emirates as signed on June 9, 2002.
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United Kingdom

The Canada-United Kingdom Protocol, as signed on May 7, 2003.
The Convention between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland, as signed on September 8, 1978 and amended by a Protocol signed on April 15, 1980 and a Protocol signed on October 16, 1985.
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United States

The Convention between Canada and the United States of America, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995 and July 29, 1997.
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Uzbekistan

The Convention between the Government of Canada and the Government of the Republic of Uzbekistan, as signed on June 17, 1999.
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Venezuela

The Tax Convention Between Canada and Venezuela, as signed on July 10, 2001.
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Vietnam

The Agreement Between the Government of Canada and the Government of the Socialist Republic of Vietnam, as signed on November 14, 1997.
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Zambia

The Canada - Zambia Income Tax Convention, as signed on February 16, 1984.
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Zimbabwe

The Canada - Zimbabwe Income Tax Convention, as signed on April 16, 1992.
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http://www.fin.gc.ca/treaties/in_force-e.html