Non-consolidation where the qualifying person is a portfolio investment (pp. 7-8)
- Since, under GAAP, “investment entities” are required to measure their investments that are controlling interests in another entity (i.e., subsidiaries) at fair value through profit or loss, rather than by way of consolidation, where an option is granted by such a portfolio investment of an investment entity, the portfolio investment entity itself would not appear to fall within the specified person definition, as it would not be part of a group “required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles”, as required under “multinational enterprise group” in s. 233.8(1).
Limited scope of ordering mechanism (p. 10)
- The only ordering that occurs under s. 110(1.31) is ensuring that all other grants contemporaneous with or predating the particular agreement are included in the variable D computation – which, once ascertained, is subject to the ss. 110(1.41) and (1.42) ordering rules.
Ss. 110(1.41) and (1.42) ordering rules (pp. 10-11)
- S. 110(1.41) treats any security that could qualify for the s. 110(1)(d) deduction as being the first to be acquired.
- The only ordering occurring under s. 110.1(1.42) is where options under the same agreement have differing in-the-money or out-of-money values, so that the employee could decide to exercise in the money options in preference to those that were out of the money.
Example of use of ordering rule (p. 11)
- For example, where there is a simultaneous grant of both at the money and out of the money options, designation of the latter (which might never be exercised) would avoid their taking up qualifying room in the relevant vesting year, thereby allowing the employee to access the deduction for the options granted at the money.
Erroneous substitution of “options” for “securities” (pp. 11-12)
- In contrast to the 2021 draft legislation, which referred to “agreements to sell or issue securities.” the final version of s. 110(1.42) refers to “agreements to sell or issue options.” This presumably is an error: the Explanatory Notes do not indicate an intention to apply only in circumstances where an option to acquire a security, instead of the security itself, is the subject of the agreement.
No s. 110(1.1) election necessary where s. 110(1.44) applies
- Since s. 110(1.44) is intended to have the same effect (of making a deduction available to the employee) as s. 110(1.1), no s. 110(1.1) election should be necessary where under s. 7(1)(b) there is a disposition for cash of options on qualifying securities.
Ability to forego a corporate tax deduction on less than all the rights (pp. 12-13)
- S. 110(1.1) has been amended to replace the reference to “rights” by “right” - so that a qualifying person’s election can be in respect of less than all of the rights under any specific option agreement.
Notice where employer is not the plan administrator (p. 13)
- No specific form of notice is prescribed.
- In the common situation where the Canadian subsidiary is the employer and the issuer is its parent whose human resources function is the one involved in the option administration, it may be most expedient for such global plan administrator to provide the notice within the required 30 days of the agreement as agent for the Canadian employer.
Issues respecting availability of the s. 110(1)(e) deduction (pp. 13-15)
- In order for a s. 110(1)(e) deduction to be available to the employer where there is a s. 7(1) benefit to the employee respecting a non-qualified security, an employment relationship must have existed at the time of grant (s. 7(1)(e)(ii)), so that where a non-resident employee of a qualifying person that is non-arm’s length to the taxpayer is transferred to Canada after grant, no such deduction is available, even though the original grant made by the related foreign employer would be subject to s. 7(1).
- There is no requirement under s. 110(1)(e) that the employer have incurred any expense and, in fact, there would be no such expense where the grantor was another non-arm’s length qualifying person and there was no recharge agreement.
- The apparent requirement for the entirety of the s. 7(1) benefit to be included in the employee’s income, would deny the s. 110(1)(e) deduction where the benefit is partially sourced to another jurisdiction.
- The 2021 Explanatory Notes indicate that corporate partners may claim the s. 110(1)(e) deduction in some circumstances involving employees of partnerships, which appear to be those referred to in 2001-0115933, where CRA noted that there were no agreements in place which limited any of the employees’ employment relationship to any of the partners and that "[c]onsequently, each of the employees of the partnership are considered to be employees of each of the partners of the partnership for the purposes of section 7" - so that it should be possible to allocate the deduction among the corporate partners who are treated as employers under such policy.
Potential to free-up annual limit room through exchange of underwater options (pp. 15-16)
- If, for example, in 2022, an option agreement, that had been made in 2021 and provided for even vesting for $200,000 of shares evenly over 2022 to 2026 (so that the vesting room was fully utilized for those years), was exchanged under s. 7(1.4) for options whose vesting was all to occur in 2026, it would appear to remain the case that a new option agreement had been made, so that s. 110(1.3) likely would require the re-application of the annual vesting limit – so that with all the vesting occurring in 2026, only $200,000 of such vesting would be within the limit.
- However, such an exchange of options might be desirable where options, with gradual vesting over a number of years have gone underwater and it would be useful to compress them into a single vesting year, thereby freeing up annual limit room.
Potential ability to issue cash-settled RSUs early in a year (pp. 29-30)
- In 2020-0864831I7, CRA seemed to indicate that RSUs granted to an employee early in a year would generally be regarded as representing compensation for services rendered in a prior year (so that the 3-year bonus exception period would start running one earlier) “unless all the facts and circumstances established that the grant was wholly unrelated to past services.”
- It would appear reasonable to consider this exception to be satisfied where a signing bonus or a retention bonus is paid by way of the grant of RSUs.
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