Devon – Tax Court of Canada finds that payments made to target’s employees for surrendering their options on target’s acquisition were mostly deductible by it

Two public-companies made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans, with the surrenders occurring on the closing of their acquisition by other public companies.

Sommerfeldt J accepted the taxpayer submissions that the surrender payments were deductible as to 75% under s. 111(5.2) (since supplanted by s. 111(5.1).) Among other considerations, he determined that the surrender payments were made for the purpose of gaining or producing income from the acquired companies’ business given that under this test “it will suffice if the income-gaining purpose is [only] one of the purposes of the outlay or expense” and that, similarly to Imperial Tobacco, the surrender payments had “an employer-compensation-related purpose.”

Furthermore, the exclusion in para. (f) of the definition of eligible capital expenditure for “the cost of … a right to acquire [a share]” did not apply given that “the word ‘cost’ contemplates an acquisition of an asset or other property,” whereas “when a stock option is surrendered to the issuing corporation, the rights represented by that option [instead] are extinguished.”

The latter finding likely is authority for the proposition that (notwithstanding e.g., 2017-0717981E5) there is no liability under s. 116(5) where no clearance certificate has been obtained for the disposition by a non-resident beneficiary of a capital interest (that is taxable Canadian property) in a resident trust by virtue of the extinguishing of that beneficiary’s entitlements thereunder.

Neal Armstrong. Summaries of Devon Canada Corporation v. The Queen, 2018 TCC 170 under s. 14(5) - eligible capital expenditure and s. 20(1)(e)(i).