5 May 1992 Roundtable, 9211610 F - Stock Option Allows Employee To Choose Cash

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

April 24, 1992

May 5, 1992

1992 TEI CANADIAN CONFERENCEDRAFT RESPONSE

10.     In technical opinion  # S-910888 dated May 1, 1991 and dealing with an employee electing to receive the value of stock options in cash in lieu of exercising the stock option, Revenue Canada opined that:

     a) the amount so received by the employee would be included in his income pursuant to paragraph 7(1)(b) of the Act,

     b) where the provisions of paragraph 110(1)(d) of the Act are otherwise met, the employee would be entitled to a 110(1)(d) deduction in respect of cash payments received in lieu of shares and

     c) paragraph 7(3)(b) of the Act would not be applicable to deny a deduction in computing the income of a corporation in respect of such a cash payment. 

Do the opinions in b) and c) apply in the case where the employee, upon his election, has received a cash payment in lieu of exercising the stock options in a company stock option plan?  (The wording "in lieu of shares" in the opinion seems strange).  How can employees, who have elected to receive cash instead of exercising stock options in past years, but who have not claimed 110(1)(d) deductions, best claim the deduction (and ensuing tax refund) for those past years?  Can requests be made for all years back to and including 1985?

RESPONSE

Our comments as expressed in the letter referred to in the question apply to the situation where an employer has agreed to issue shares to an employee but the employee has subsequently elected to receive cash in settlement of the rights previously established under the plan.  Provided that it is the employee and not the employer who has the right to choose cash instead of shares, it is our view that paragraph 7(1)(b) of the Act applies in respect of the cash received by the employee in satisfaction of his or her rights under the plan.  Accordingly, provided that the conditions set out in paragraph 110(1)(d) of the Act are otherwise met, the employee would be entitled to the deduction.  Furthermore, the employer would not be restricted in its deduction for the payout under paragraph 7(3)(b) since no shares would have been sold or issued under the plan. 

The reason we used the expression "in lieu of shares" was to highlight the fact that our position only applies where it is the employee and not the employer who has the option to choose cash.  If the employer can choose to pay cash rather than shares, it is our view that the employer has not agreed to sell or issue shares and section 7 does not apply to the transaction.

Employees who have not claimed a deduction under paragraph 110(1)(d) and who wish an adjustment to a prior year's return are advised to submit the details of the request in writing, including their social insurance number and the taxation year or years involved, to the Taxation Centre serving their area.  Information Circular IC 92-3 "Guidelines for Refunds beyond the Normal Three Year Period" outlines our position with respect to such requests.