In a recent technical interpretation (“TI”), the Canada Revenue Agency (CRA) provides details on a new "hybrid methodology" that it considers to be based in part on OECD guidance, used to determine the Canadian taxation of cross-border restricted share units (RSUs).1 Generally, where an employee performs employment duties in Canada and a foreign jurisdiction, this hybrid methodology should be used to source the RSU benefits between these jurisdictions. As a result, taxpayers should use this methodology to determine taxable income earned in Canada, as well as foreign tax credit availability for Canadian residents.
WHY THIS MATTERS
It is important to be familiar with the new hybrid methodology and in some circumstances it may be beneficial depending on an individual's international employment history (e.g., a Canadian nonresident at settlement (payment) who has only been in Canada for a brief period of time after the year of grant).
The hybrid methodology will require additional tracking and taxpayers will need to gather additional information on work-days for the year the RSUs were granted (in addition to data on work-days from grant to vest date).
Then and Now
The CRA's position on sourcing cross-border employee stock option benefits has generally been to source the benefits according to the days of employment during the period between the grant of the option and when it is vested (the vesting period). This has been the CRA's position since 2012, when it changed its view to align with the OECD Model Tax Convention and extended the application of the OECD guidance to non-treaty countries. As RSUs and stock options are both forms of equity-based compensation that typically have a vesting period, this OECD guidance has historically been used for sourcing RSU benefits as well.
The CRA notes that the OECD guidance on the taxation of cross-border stock options is used "in part" to inform its current views on the taxation of RSUs.
Different from previous guidance, the CRA's hybrid methodology separates the "in the money" (“ITM”) portion of RSU benefits at the date of grant, i.e., the fair market value of the underlying shares at the date of grant, and notes that this portion generally relates to past services. The CRA also states that the new guidance applies to RSU benefits received after 2020, and advises that the guidance is subject to any relevant provisions in an income tax treaty between Canada and the foreign jurisdiction.
In this TI, the CRA advises that taxpayers should now use the hybrid methodology to source RSU benefits between Canada and a foreign jurisdiction.
The hybrid methodology requires taxpayers to split the RSU benefits into two parts – the ITM portion at the grant date and the fair market value (FMV) portion that accrues from the grant date to the vesting date.
In the CRA's view, the ITM portion of the RSU benefits generally pertains to past services and is sourced to the jurisdiction in which the employment services were rendered in the year the RSUs were granted. If employment services were rendered in multiple jurisdictions, the ITM portion of the benefits should be sourced to each jurisdiction in proportion to the employee's employment period in each jurisdiction that year. The FMV portion of the RSU benefits generally pertains to services rendered during the vesting period, and is sourced in proportion to the employee's employment period in each jurisdiction during the vesting period, according to OECD guidance.
There are some potential inconsistencies within the CRA's view. For example, with this new TI, the CRA position contradicts its past guidance for sourcing cross-border RSUs. In addition, the CRA's position that the ITM component should be exclusively sourced to the jurisdiction of employment in the year of grant is also contradictory to a previous position, relating RSUs to past services.
Also, depending on what other taxing jurisdictions do, in terms of sourcing, there could end up being a mismatch of income sourcing and, thus, possible double taxation. Companies should consider their RSU grants and provide clarity regarding the services for which the grant is made, to potentially substantiate a future-based sourcing approach.
1 TI 2019-0832211I7.
The information contained in this newsletter was submitted by the KPMG International member firm in Canada.
Connect with us
Want to do business with KPMG?
Stay up to date with what matters to you
Gain access to personalized content based on your interests by signing up todaySign up today
© 2021 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.