Taxpayers are now grappling with the new stock option rules in practice

Comments on the revised stock-option rules include:

  • 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 a specific option agreement.
  • 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 required notice under s. 110(1.9) (that the optioned shares are non-qualified securities) within the required 30 days of the agreement as agent for the Canadian employer.
  • 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, 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.
  • An exchange of an option agreement under s. 7(1.4) would appear to give rise to a new option agreement, so that s. 110(1.3) likely would require the re-application of the annual vesting limit.

Although 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.

Neal Armstrong. Summaries of Paul Carenza and Chirs D’Iorio, “Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments,” draft 2021 Conference Report paper (Canadian Tax Foundation) under s. 110(0.1) – specified person, s. 110(1.42), s. 110(1.44), s. 110(1.1), s. 110(1.9), s. 110(1)(e), s. 110(1.3) and s. 248(1) - SDA – (k).