2014-0529281E5 Employee Stock Option Plan and T1135 reporting

Principal Issues: Where an employee is granted stock options in a foreign corporation, do those stock options have to be reported on the Form T1135?

Position: Yes, where the employee is resident in Canada and the cost amount of the employee's specified foreign property is more than $100,000.

Reasons: In the scenario presented, the employee stock options are options to acquire shares of the capital stock of a non-resident corporation. Such options would fall into the definition of “specified foreign property” in subsection 233.3(1) of the Act by virtue of paragraph (i) of that definition, which states that “property that, under the terms or conditions thereof or any agreement relating thereto, is convertible into, is exchangeable for or confers a right to acquire, property that is specified foreign property”. Where an employee is resident in Canada, owns specified foreign property at any time in the year, and the cost amount to the individual of all the specified foreign property owned totals more than $100,000, then the employee must complete and file the Form T1135.

Author: Deak, Andrew
Section: 233.3

XXXXXXXXXX                                                                                                              2014-052928
                                                                                                                                      Andrew Deak
                                                                                                                                      613-957-2130

August 26, 2014

Dear XXXXXXXXXX:

Subject: T1135 reporting obligations for an Employee Stock Option Plan

We are writing in reply to your email of April 28, 2014, concerning the foreign reporting requirements under the Income Tax Act (the “Act”) of an interest in an employee stock option plan.

Using a hypothetical scenario, a taxpayer is granted the option to acquire shares in the US parent company of the taxpayer’s employer (also known as “stock options”). The stock options are granted pursuant to an agreement between the taxpayer and his or her employer, and/or the employer’s US parent company (the “agreement”).  The rights under the agreement will vest in the taxpayer after a specified time. 

You asked us whether the stock options of the US parent company are “specified foreign property” as defined by subsection 233.3(1) of the Act. You have also asked us whether the taxpayer is required to report stock options on the Form T1135, Foreign Income Verification Statement. You referred to paragraphs (h) and (i) of the definition of specified foreign property in subsection 233.3(1) of the Act, and noted that it appears that the taxpayer would be required to report these stock options on the Form T1135, even though there is no income generated from these stock options.

Our Comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. In the scenario you presented, the taxpayer’s stock options are rights to acquire shares of the capital stock of a non-resident corporation. Such rights would fall into the definition of “specified foreign property” in subsection 233.3(1) of the Act by virtue of paragraph (i) of that definition, which states that “property that, under the terms or conditions thereof or any agreement relating thereto, is convertible into, is exchangeable for or confers a right to acquire, property that is specified foreign property”.

Where an employee is resident in Canada, owns specified foreign property at any time in the year, and the cost amount to the individual of all the specified foreign property owned totals more than $100,000, then the employee must complete and file the Form T1135. Such property must be reported irrespective of whether income is generated from the property or not. For more information on completing the Form T1135, please consult the following link: http://www.cra-arc.gc.ca/E/pbg/tf/t1135/.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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