Joint Committee comments on the draft stock option rules

Comments of the Joint Committee on the June 17, 2019 draft stock option legislation include:

• 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 the first change 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 (e.g., a resident or non-resident parent) 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.
• The vesting year definition in s. 110(0.1) is part of the system for placing a numerical limit on the number of options that can become exercisable in a particular vesting year. Para. (b) of that 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.
• It is inappropriate for D(ii) of the numerical limit formula in s. 110(1.31) to include the FMV of securities to be issued under earlier options where they were non-qualified securities.
• Also, under that 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 (i.e., 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 D(ii).
• Requiring same-day written notification (in s. 110(1.9)(a)) can be impracticable – at least 30 days should be allowed.

Summaries of 13 September 2019 Joint Committee Letter entitled “Employee Stock Option Amendments” under s. 110(1)(e), s. 110(0.1) – vesting year, s. 110(1.31) and s. 110(1.9).