CRA indicates that the s. 110(1.1) election is available even if, absent the election, no employer deduction would be claimable

A stock option plan also includes a cashless exercise provision that permits an employee to elect, in lieu of paying the exercise price and acquiring the optioned shares, to receive the in-the-money value of the options in the form of treasury shares. CRA confirmed that, absent a s. 110(1.1) election, the employee would not be eligible for the s. 110(1)(d) deduction, and that a s. 110(1.1) election could be made in order for that deduction to be accessed. CRA stated:

[T]he mechanism in subsection 110(1.1) is available to an employer regardless of whether the employer is already denied a deduction for the stock option expense because of another provision of the Act (such as paragraph 7(3)(b) or 18(1)(b)).

Neal Armstrong. Summary of 18 August 2017 External T.I. 2016-0672931E5 under s. 110(1.1).