CRA indicates that significant employer discretion as to stock option vesting will oust an “agreement” to acquire the shares

CRA considers that in order for there to be a s. 7/110(1)(d) agreement to issue shares, there must be “legally binding rights and enforceable obligations” respecting the covered shares. CRA has provided various examples illustrating the implications of this view.

For example, where under a fully discretionary stock bonus plan, the shares are issued when the employer’s discretion is exercised, the plan will not be considered to be a s. 7 plan, so that it generally will be required to qualify as a three-year bonus plan or deferred share unit plan. On the other hand, “if the eventual issuance of the shares is subject to time or other objective vesting conditions,” the share issuance will be governed by s. 7 (because there was an agreement between the time of the grant and the issuance).

A second example is where employees are granted options with FMV exercise prices but which are exercisable only upon the corporation subsequently notifying the employees of its decision on the number of options that each employee may exercise. CRA considers that the employee would not have a legal agreement to acquire the shares before receiving such notification, so that the s. 110(1)(d) deduction would not be available if the shares had appreciated over the exercise price in the interim.

A third example (similar to the second) is where a trust is established by the employer to acquire and hold shares of the employer for employees, but allocations among the employees are entirely at the discretion of the trustees – so that CRA would consider that there is no agreement to acquire the shares until such discretion is exercised.

Neal Armstrong. Summaries of 19 September 2016 Internal T.I. 2016-0641841I7 under s. 7(3)(b), s. 110(1)(d) and s. 7(2).