Joint Committee, "Employee Stock Option Amendments", 3 September 2019 Joint Committee Letter

Summary Under

effective date/different employer and issuer/successor rules

Both (i) the denial of the s. 110(1)(d) deduction for benefits respecting “non-qualified securities” and (ii) the granting of a corresponding employer deduction under s. 110(1)(e) should apply respecting agreements to sell or issue securities entered into after 2019, rather than (i) coming into force on January 1, 2020 – and the continuity rule in s. 7(1.4) should apply for such purposes.
The conditions for the s. 110(1)(e) deduction should be relaxed to permit the stock option issuer to differ from the deducting employer, to permit the employer not to be a specified person, and to require that the specified person status of the issuer be tested only at the time of grant – but s. 110(1)(e) should not permit multiple employers to each take the deduction.
A successor rule should be added to permit s. 110(1)(e) to apply following a reorganization.

Summary Under

reference to reasonably foreseeable timing/pro rata vesting

Para. (a) of the vesting year definition should refer to an event the timing of which is not reasonably foreseeable.
Para. (b) of the vesting year definition, which utilizes the intractable concept of when vesting may reasonably be expected to occur, should instead provide for deemed ratable vesting over the term of the option.

Summary Under

exclude non-qualified securities/exclusion of under-water securities or where options cancelled

It is inappropriate for D(ii) of the formula to include the FMV of securities to be issued under earlier options where they were non-qualified securities.
Under the formula, the $200,000 limit is applied to the first options granted having a particular vesting year, therefore producing a blocking effect even when they become uneconomic (under water). Where a subsequent option is granted having a lower exercise price, the specified person should be able to designate the securities issuable under the earlier option to be non-qualified securities in order to cleanse the securities issuable under the subsequent option.
Furthermore, where an option is cancelled or replaced (including under s. 7(1.4) or 110(1.7)), the securities which were to be issued under such option should be considered to be options not described in Element D(ii).
Where two options are granted by a specified person to an individual at the same time, each option would preclude the other from benefiting from the s. 110(1)(d) deduction. There should be an ordering rule.

Summary Under

same-day notice requirement - impracticable

Requiring same-day written notification (in para. (a)) can be impracticable – at least 30 days should be allowed.
Re para. (b), non-residents who don’t file returns should be accommodated.

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