CRA indicates that the s. 110(1.1) election is not available if employee stock options on Target shares are purchased by the purchaser rather than surrendered to Target

An employee can claim a s. 110(1)(d) deduction for a stock option benefit realized by the employee on the cash settlement of a stock option if among other things the employer elects under s. 110(1.1) that neither it nor any person not dealing at arm’s length with the employer will take a deduction for the amount.

CRA considers that the election and, therefore, the s. 110(1)(d) deduction, is not available where at the same time as an arm’s length third party purchases all the shares of the employer, it also purchases all the employee stock options. It considers that the employer can only make the election if it or a person with whom it did not deal at arm’s length made the s. 7(1)(b) payment to the employee – whereas here, it is the third party who made that payment, and CRA considers the third party to not be an eligible payer because it dealt at arm’s length with the employer prior to its acquisition of the employer’s shares.

Neal Armstrong. Summary of 7 December 2015 T.I. 2015-0585171E5 F under s. 110(1.1).