CRA indicates that the non-qualified securities rules are being reviewed by Finance respecting options such as RSUs that can never generate a s. 110(1)(d) deduction

The new non-qualified securities rules regarding specified persons (generally, large non-CCPCs) make the employee deduction under s. 110(1)(d) subject to a $200,000 annual vesting limit and may permit the issuer to take a s. 110(1)(e) deduction for the portion of the benefit realized by the employee. S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security. S. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).

When asked as to why there is a notice requirement where a specified person (as it happened, a non-resident corporation) issues restricted stock units to an employee that can only be settled for shares (so that they are effectively treated as s. 7 stock options with no exercise price and, thus, as options that could never generate a s. 110(1)(e) deduction on exercise), CRA stated:

The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.

The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.

Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.11 under s. 110(1.4).