Section 110

Subsection 110(1) - Deductions permitted

Paragraph 110(1)(d) - Employee options

See Also

McAnulty v. The Queen, 2001 DTC 942 (TCC)

unauthorized grant of rights

The time at which the taxpayer's employer agreed to issue shares to her was the time at which the president called her to his desk and told her that he was going to issue to her 45,000 stock options at a $1.50, rather than at the later date when a written stock option agreement was signed by the president and a related directors' resolution was passed. The president had ostensible authority to commit the company to issue shares to her (notwithstanding that the Board of Directors in fact had not delegated this authority to him as required by the stock option plan), and failure to comply, on the earlier date, with a stipulation in the stock option plan that the options be granted to her pursuant to a written and approved stock option agreement related to failure to comply with administrative rules rather than invalidating the grant. Bowman T.C.J. noted (at p. 948) that "the words 'agree' or 'agreement' generally connote to a lawyer a binding contractual commitment" but then stated (at p. 950) that "a broader approach to the interpretation of 'agree' and 'agreement' in paragraph 110(1)(d) is required if the object of that paragraph is to be achieved".

Words and Phrases
agree agreement
Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date stock option agreement effective time of oral agreement (not yet ratified by board) 146

Bernier v. The Queen, 97 DTC 317 (TCC)

The taxpayer's employer issued employee stock options to the taxpayer and others. Later in the same year, the Quebec Securities Commission notified the employer that the options did not comply with the Quebec Securities Act, and the employer responded by notifying the Commission that it would treat the options that had been awarded as null and void.

In finding that the taxpayer was not entitled to any deduction under s. 110(1)(d) in respect of a lump sum she received in the following year in consideration for the waiver of her rights under the stock option, Lamarre Proulx TCJ. found that the shares subject to the option could not be prescribed shares when they could never be issued or purchased.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality 119

Amirault v. MNR, 90 DTC 1330 (TCC)

Increase to exercise price did not create new option

The taxpayer originally was granted options to acquire shares of his employer at an exercise price equal to 90% of the market price of the shares at the date of granting of the option. A subsequent amendment of the option to provide for an exercise price equal to the fair market value of the share at the date of original granting of the option was found to entail merely a variation of the original option agreement, rather than the rescission of the original option agreement and its replacement by a new option agreement, in light of the fact that the options would have continued for the benefit of the taxpayer even if he had chosen not to accept the proposed variation in the exercise price. Because the revised exercise price became an integral part of the option as at the date that it was granted, the varied option complied with the fair market value test in s. 110(1)(d).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date retroactive amendment to option price accepted 39

Administrative Policy

2005 Ruling 2005-0120771R3 - Stock option plan

stock option rules apply to common shares tracking a closely-held partnership interest

The two equal partners (“PartnerCo1” and “PartnerCo2”) of “Partnership” subscribe for voting redeemable retractable preferred shares of a corporation (“ManagementCo”) which had been newly formed by them. ManagementCo hires employees to fulfill its new contract to manage the Partnership and grants the employees options to acquire non-voting common shares of ManagementCo (the “Option Shares”) with an exercise price equal to their current modest fair market value and specified vesting and forfeiture conditions. In general, vested options may be exercised on the occurrence of a specified exit event (e.g., IPO or sale of the Partnership assets), or after XX years of service (or earlier “not for cause” termination or death. The options may be physically exercised, or cash-surrendered for their in-the-money value, at the optionee’s election. The preferred share proceeds will then be used by ManagementCoto acquire shares of a newly-incorporated subsidiary (“ManagementSubCo”) which, in turn, will use those proceeds to acquire an interest in the Partnership. The optionees will have the right to sell Option Shares to PartnerCo1 and PartnerCo2 for an amount not exceeding their fair market value.

Ruling re s. 110(1)(d) deduction for 50% of s. 7(1)(a) or (b) benefit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) full deductibility of cash surrender payment made on surrender of options granted on common shares tracking appreciation in partnership interest 200

19 September 2016 Internal T.I. 2016-0641841I7 - Employee stock option rules

no agreement to issue shares if vesting in employer's discretion

CRA first stated that Placer Dome, Chrysler and McAnulty “stand for the proposition that an arrangement to issue or sell shares need not be a detailed written contract to fall within the scope of section 7 or paragraph 110(1)(d), but nonetheless must create legally binding rights and enforceable obligations.”

Respecting options with FMV exercise prices granted by the corporate employer which expire on a pro-rata basis over a five-year period, and which are exercisable upon the corporation subsequently notifying of its decision on the number of options that each employee may exercise, the Directorate stated:

[A]n agreement to issue shares… would be considered to arise only at the time the notice is sent by the corporation to the employee and only in respect of the number of shares set out in the notice. Before that time, the employee had no enforceable right to acquire the shares and the corporation had no binding obligation to issue the shares. Consequently, the employee would not qualify for the paragraph 110(1)(d) deduction where the share price had increased from the date of the grant to the date of the notice.

A further situation discussed was where a trust is established by the employer to acquire and hold shares of the corporation 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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) discretionary share bonus plans have no s. 7 agreement unless there is delayed vesting 323
Tax Topics - Income Tax Act - Section 7 - Subsection 7(2) no agreement if allocation of shares in trustee's discretion 242

3 August 2016 External T.I. 2015-0572381E5 - Employee Stock Option-CCPC Shares

no 110(1)(d) where share payment of in-the-money value

A Canadian-controlled private corporation issues treasury shares to the employee holder of a stock option (with a fair market value exercise price) equal in value to the in-the-money value of the option. After finding that s. 7(1)(b) rather than s. 7(1)(a) applied to this disposition of the employee’s rights, CRA stated:

[S]ubparagraph 110(1)(d)(i) will not be satisfied as an employee does not “acquire the share under the agreement”, as required under subparagraph 110(1)(d)(i). As mentioned above, the employee does not exercise the employee’s right to acquire shares under the stock option; rather, the employee disposes of their right to acquire shares under the stock option.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) s. 7(1)(a) inapplicable where shares issued equal to in-the-money value 85
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d.1) not available where share payment of in-the-money value 65

21 December 2012 Internal T.I. 2009-0327221I7 - Paragraph 7(1)(e) - Death of a Taxpayer

In response to a question regarding an employer's reporting requirements where a deceased employee was deemed to have disposed of unexercised stock options under s. 7(1)(e), CRA commented:

[A]s a result of the amendment to subparagraph 110(1)(d)(i) that requires a taxpayer to acquire shares under the stock option agreement, a deduction pursuant to paragraph 110(1)(d) may not be available in circumstances where paragraph 7(1)(e) applies after March 4, 2010.

Income Tax Technical News No. 19, 16 June 2000

"... Where an employee disposes of his or her rights under a securities option agreement in exchange for shares of the capital stock of the employer having a fair market value equal to the fair market value of the rights under the securities option plan, the employee may qualify for the deduction under paragraph 110(1)(d)."

2004 Ruling 2004-007382 -

An employee stock option plan is amended by providing that each of the existing options will have an associated SAR added which entitles the holder of the SAR to surrender the stock option to which the SAR relates for a cash payment equal to the value of the option.

8 March 2001 External T.I. 2001-007044 -

Where an employee has transferred employee stock options to a controlled corporation, the deduction under s. 110(1)(d) may not be available to the corporation if the employee dies before exercise given the requirement in s. 110(1)(d)(ii)(B) that the taxpayer (the corporation) had been dealing at arm's length with the grantor of the option immediately after the option was granted. This requirement cannot be met if the corporation did not exist at the time the option was granted.

15 October 1997 T.I. 972531

Although a reduction in the exercise price for an employee stock option would not give rise to a disposition of the option, such reduction would result in the condition in s. 110(1)(d)(iii) not being satisfied.

28 April 1995 T.I. 9850344

(See also 21 October 1996 T.I. 5-963321.)

Where an annuitant transfers an employee stock option having an accrued gain to his RRSP with the RRSP then exercising and selling the shares, the annuitant is entitled to the 25% deduction under s. 110(1)(d) provided the conditions in that paragraph are met.

May 1995 Executive Institute Revenue Canada Round Table, Q. 24 (C.T.O "Employee Stock Option")

A deduction under s. 110(1)(d) may be deducted from a benefit included in income under s. 7(1)(e).

11 June 1993 T.I. (Tax Window, No. 31, p. 10, ¶2519)

Where an employee surrenders her rights under a phantom stock plan and receives an option to acquire shares in the employer company with an exercise price equal to the difference between the fair market value of the shares at the time the option was granted and the value of the units under the phantom stock plan surrendered by her, the value of the surrendered units will be included in her income, but such amount will be considered to be paid by her for the right to acquire the shares under the stock option plan for purposes of ss.7(1) and 110(1)(d)(ii).

13 January 1993 External T.I. 5-923395 -

RC does not as a general rule express an opinion on the reasonableness of a method proposed to be used in arriving at the fair market value of a property at a particular point in time, and will become involved only after the fact if it considers the value assigned to the property to be unreasonable in the circumstances.

Words and Phrases
reorganization

92 C.R. - Q.46

Where a Canadian employee participates in a stock option plan where the relevant amounts are denominated in U.S. dollars, the requirements of s. 110(1)(d)(iii) will not be met where there is an increase in the value of the Canadian dollar relative to the U.S. dollar between the time the option is granted and the time of exercise.

4 May 1992 Tax Executive's Round Table, Question 10 (December 1992 Access Letter, p. 48)

Where the provisions of s. 110(1)(d) otherwise are met, an employee will be entitled to the deduction in respect of cash payments received by the employee in lieu of exercising a stock option.

5 March 1991 T.I. (Tax Window, No. 2, p. 19, ¶1184)

For the purposes of determining the fair market value of the share, RC will not permit the deduction of a discount to reflect savings resulting from the avoidance of brokerage fees or issuance costs that might have been incurred on a public offering.

8 September 89 Memorandum (February 1990 Access Letter, ¶1114)

An option to acquire shares of a U.S. corporation with an exercise price expressed in U.S. dollars will cease to qualify if the Canadian dollar appreciates.

87 C.R. - Q.22

The expression "at the time the agreement was made" in s. 110(1)(d)(iii) refers to the date on which an option to acquire a specific number of shares at a specific price was granted to the employee.

Articles

Colin Smith, "Re-pricing Employee Stock Options", Taxation of Executive Compensation and Retirement, December/January 2002, p. 63.

Eva Krasa, "Participation by Canadian Employees in U.S. Stock Option Plans: Some Issues", Taxation of Executive Compensation and Retirement, Vol. 12, No. 9, May 2001, p. 429

Includes a list of features of U.S. plans that may be problematic for the deduction.

Julie Y. Lee, "Attracting and Retaining Executives and Employees With Tax-Efficient Incentives", Canadian Petroleum Tax Journal, Vol. 14, No. 1, 2001

Includes discussion of tandem share appreciation rights.

Michael F.T. Addison, Gil J. Korn, "Employee Stock Options: An Up-Date", Personal Tax Planning, 2000 Canadian Tax Journal, Vol, 48, No. 3, p. 778.

Subparagraph 110(1)(d)(ii)

Clause 110(1)(d)(ii)(A)

Articles

Peter Lee, Paul Stepak, "PE Investments in Canadian Companies", draft 2017 CTF Annual Conference paper

Difficulty of determining FMV of management’s optioned shares where they rank lower in the waterfall (pp.20-21)

[S]tock options are typically priced at a specific point in time (that is, when issued). This point in time pricing can be difficult to reconcile with the "waterfall" return that PE investors expect, whereby they are entitled to a repayment of their original investment plus a specified hurdle rate of return before other stakeholders (including management, through their management incentives) begin to participate in profits. To account for the waterfall, the pricing of stock options would ideally need to be based on the fair market value of the shares at the time the options are granted, net of the value, discounted back to that time, of the anticipated return of PE investors' original investment and the hurdle rate. However, there is some uncertainty as to whether this pricing approach is justified as a valuation matter, since the waterfall is not normally incorporated into the terms of the shares and hence may not justify a discount in value of the Holdco shares or options. Also, from a practical perspective, it is also not possible to know in advance how many years will elapse before an exit….

An alternative approach is to price the options without taking into account the waterfall. In principle, this is reasonable, since the waterfall normally does not directly affect the value of the Holdco shares. However, the options would need to be re-priced once the original investment and the hurdle rate have been extracted from Holdco and distributed to the PE investors, since this extraction will reduce the value of the shares.

In principle, such re-pricing of stock options is permitted (on a tax-deferred basis and without resulting in a denial of the paragraph 110(l)(d) deduction for employees), provided among other things the "in-the-money amount" of the options does not increase. [fn 99: See subsections 7(1.4) and 110(1.7).]

Paragraph 110(1)(d.1)

Administrative Policy

3 August 2016 External T.I. 2015-0572381E5 - Employee Stock Option-CCPC Shares

not available where share payment of in-the-money value

A Canadian-controlled private corporation issues treasury shares to the employee holder of a stock option (with a fair market value exercise price) equal in value to the in-the-money value of the option . After finding that s. 7(1)(b) rather than s. 7(1)(a) applied to this disposition of the employee’s rights, CRA found that for this reason a deduction under s. 110(1)(d.1) would not be available.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) s. 7(1)(a) inapplicable where shares issued equal to in-the-money value 85
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) no 110(1)(d) where share payment of in-the-money value 110

30 August 2000 External T.I. 2000-003252 -

Contrary to the earlier position in an 18 October 1999 TI (No. 991926), the Agency now is of the view "that paragraph 110(1)(d.1) of the Act could apply to the disposition of shares acquired under a securities option that was exchanged for a securities option issued by a Canadian-controlled private corporation and the exchange was subjected to the provisions of subsection 7(1.4) of the Act. Even though subsection 7(1.4) of the Act does not include a specific reference to paragraph 110(1)(d.1) of the Act, the disposition of a security acquired under an exchanged security option which results in an income inclusion under paragraph 7(1)(a) by virtue of subsection 7(1.1) would satisfy the condition in subparagraph 110(1)(d.1)(i) of the Act".

Paragraph 110(1)(f) - Deductions for payments

See Also

Whitney v. The Queen, 2001 DTC 423 (TCC)

Although the taxpayer's employer (the New Brunswick provincial government) was a self-insured employer for workers compensation purposes, the making of a claim, and the processing and assessment of a claim, occurred in the same manner as four claims that were paid directly by the New Brunswick Workers' Compensation Board. Accordingly, an amount equal to what the taxpayer would have received from the Workers' Compensation Board had his employer not been self-insured was eligible for the deduction under s. 110(1)(f).

Subparagraph 110(1)(f)(i)

Administrative Policy

16 May 2016 External T.I. 2015-0571591E5 - Employees Provident Fund of Malaysia

Treaty-exempt receipts must be included in income and deducted from taxable income under s. 110(1)(f)(i)

In connection with the possibility that the a lump sum payment received by a recent Canadian resident out of a Malaysian pension plan (namely, the Employees Provident Fund of Malaysia, which is administered by the Ministry of Finance Malaysia) might be Treaty exempt, CRA stated that in such event:

the individual who receives it still has to include the amount in income under clause 56(1)(a)(i)…but that individual can claim an offsetting deduction under subparagraph 110(1)(f)(i)… in computing the individual’s taxable income.

30 October 2014 External T.I. 2013-0500491E5 - Pension from XXXXXXXXXX

EU Treaty does not engage s. 110(1)(f)(i) exemption

Tax is withheld by the European Union on a pension received by a Canadian resident from an EU organization and which is exempt from national tax under a European Union Treaty. Before discussing the non-availability of a foreign tax credit (see summary under s. 126(1), CRA stated:

[The] pension income received … is not subject to tax in a member state of the European Union, such as XX. However, the Treaty on European Union does not have the force of law in Canada. Therefore, the deduction provided by 110(1)(f)(i) would not be applicable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) EU withholding does not qualify as state tax 116
Tax Topics - Income Tax Act - Section 126 - Subsection 126(3) pension income not employment income 70

30 January 2013 External T.I. 2012-0449621E5 F - Belgian pension

Treaty-exempt receipt required to be reported, but with offsetting s 110(1)(f)(i) deduction

Belgian social security payment received by Canadan resident , which were exempt under the Canada-Belgian Convnetion, were required to be included in the personal return of the resident individual, but with an offsetting s 110(1)(f)(i) deduction claimed.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18 Belgian social security payment received by Canadan resident must be included in the personal return, but with offsetting s 110(1)(f)(i) deduction claimed 142

Subparagraph 110(1)(f)(iii)

See Also

Lapierre v. The Queen, 2019 TCC 18

a Canadian resident working for a UN-authorized agency in Afghanistan was not exempted

A Canadian resident, who was an employee of the International Security Assistance Force (ISAF) in Afghanistan serving as an international civilian consultant, would have been exempted on his salary if the ISAF had qualified as a UN-affiliated agency or if it was a non-military body that was a subsidiary body to the NATO Council. The ISAF did not so qualify because it instead was merely authorized by the UN rather than being a UN agency, and it also was a military body that was not a subsidiary body of NATO. His salary was taxable. This case essentially confirms 2012-0461051E5 F.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 8900 - Subsection 8900(1) - Paragraph 8900(1)(b) UN-authorized agency was not a UN agency 114
Tax Topics - Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(a) agency was not a NATO subsidiary non-military body 128

Subparagraph 110(1)(f)(ii)

Administrative Policy

11 October 1991 and 21 January 1992 T.I. (Tax Window, No. 11, p. 18, ¶1519)

A New Brunswick worker who (following the payment of worker's compensation benefits for 24 consecutive months) has an amount equal to 80% of the payments for the 25th of following months deposited into a pension fund and who, upon reaching the age of 65 years, is entitled to periodic payments out of the pension fund, will not be entitled to a deduction under s. 110(1)(f)(ii) because the inclusion in his income is under s. 56(1)(a)(i) (pension benefits) rather than s. 56(1)(b) (workers' compensation).

Paragraph 110(1)(j) - Home relocation loan

Administrative Policy

25 May 1994 T.I. 941081 (C.T.O. "Home Relocation Loans")

Where an employee in receipt of a home relocation loan is transferred again and pays off the first loan, and receives another loan which will qualify as a home relocation loan, the deduction under s. 110(1)(j) will be available. Nothing in the legislation precludes back-to-back home relocation loans if an employee is indeed transferred and a new loan entered into after the previous one is extinguished.

27 July 1989 T.I. (Dec. 89 Access Letter, ¶1049)

An employee is entitled to a deduction for a reimbursement by the employer of interest cost on a loan or mortgage taken out from a related party to acquire a residence upon relocation, where the employer was involved in the initial granting of the loan, for example, negotiating, recommending it, guaranteeing it or agreeing to pay part of the interest.

Subsection 110(1.1) - Election by particular qualifying person

Administrative Policy

21 November 2017 CTF Roundtable Q. 9, 2017-0724191C6 - Stock Option Deduction

s. 110(1.1) mechanism is available where employer is exempt employer deduction denied under s. 18(1)(b) or 7(3)(b)

Where the employer files a valid election under s. 110(1.1), is the stock option deduction still available where the employee was issued treasury shares having a value equal to the in-the-money value of the options upon surrender, despite there being no deduction for the employer to “give up” as contemplated by s. 110(1.1)? CRA stated:

The CRA has reviewed the application of subsection 110(1.1) to situations where the employer is already denied a deduction for the stock option expense either because of another provision of the Act (such as paragraph 7(3)(b) or 18(1)(b)) or because the employer is not subject to Canadian taxation. We have determined that there is nothing in subsection 110(1.1) that restricts its application to instances when the employer is otherwise entitled to a deduction. Therefore we can confirm that the mechanism in subsection 110(1.1) would be available to an employer in these situations to ensure the availability of the stock option deduction.

18 August 2017 External T.I. 2016-0672931E5 - Election

s. 110(1.1) election is available even if, absent the election, no employer deduction would be claimable
2016-0674411E5 is similar

A stock option plan also includes a cashless exercise provision that permits an employee to elect, in lieu of paying the exercise price and acquiring the optioned shares, to receive the in-the-money value of the options in the form of treasury shares. Can the employee remains eligible for the s. 110(1)(d) deduction by filing an election under s. 110(1.1). In responding affirmatively, CRA stated:

…[T]he issued shares represent consideration for the employee surrendering their rights under the agreement. Consequently, the requirement [in s. 110(1)(d) absent a s. 110(1.1) election] that the underlying shares be acquired is not met.

However … the filing of a valid election pursuant to subsection 110(1.1) would enable the employee in this situation to claim a deduction under paragraph 110(1)(d) provided that all of the other conditions of this paragraph are met.

…[T]he mechanism in subsection 110(1.1) is available to an employer regardless of whether the employer is already denied a deduction for the stock option expense because of another provision of the Act (such as paragraph 7(3)(b) or 18(1)(b))… .

7 December 2015 External T.I. 2015-0585171E5 F - 7(1)(b) benefit and 110(1.1) election

election not available if employee stock options on Target shares are purchased by the purchaser rather than surrendered to Target

On the acquisition of all the shares of a CCPC (the “Corporation”) by an arm’s length third party, it also acquired all of the stock options of an employee who dealt at arm’s length with the Corporation. Is the employee entitled to the s. 110(1)(d) deduction? CRA responded (TaxInterpretations translation):

[S]ubsection 110(1.1) provides that the condition in subparagraph 110(1)(d)(i) is not required to be met if the particular qualifying person elects that neither it nor a person with whom it does not deal at arm’s length will deduct an amount in respect of a payment to or for the benefit of a taxpayer for the taxpayer’s transfer or disposition of rights under the agreement.

In this regard, we are of the view that a particular qualifying person can make the election provided in subsection 110(1.1) to the extent that it or a person with which it does not deal at arm’s length makes a payment to an employee respecting a disposition described in paragraph 7(1)(b). Furthermore, the fact that no deduction would be available in computing the income of the person having made the payment would not prevent the particular qualifying person from making the election. …

The Corporation appears to be the particular qualifying person which has agreed to issue or sell the shares. In contrast, the Third Party could not qualify as a qualifying person for purposes of the application of subsection 110(1.1) prior to the purchase of the shares of the Corporation because there is not, at that time, a non- arm’s length relationship between the Corporation and the Third Party.

Consequently, the election in subsection 110(1.1) cannot be made and the employee would not be eligible for the deduction under paragraph 110(1)(d)… .

4 May 2015 External T.I. 2013-0484181E5 - 7(1)(e) benefit and 110(1.1) election

s. 110(1.1) election can be made to allow s. 110(1)(d) deduction for s. 7(1)(e) death benefit

Can an employer make the s. 110(1.1) election where s. 7(1)(e) deems a deceased employee to have received an employment benefit in the year of death? After noting that in 2011-0423441E5 F (infra) and 2009-0327221I7 "we indicated that, as a result of the amendment to subparagraph 110(1)(d)(i)… that requires a taxpayer to acquire shares under the stock option agreement, a deduction pursuant to paragraph 110(1)(d)… may not be available in circumstances where paragraph 7(1)(e)…applies after March 4, 2010," CRA stated:

The Canada Revenue Agency accepts, on an administrative basis, that an election be made pursuant to subsection 110(1.1) of the Act in order to allow a deduction pursuant to paragraph 110(1)(d) of the Act in circumstances where paragraph 7(1)(e) of the Act applies and the other conditions of paragraph 110(1)(d) of the Act are met (such that a deduction could have been claimed under paragraph 110(1)(d) of the Act as it read prior to the 2010 amendment referred to above).

11 December 2012 External T.I. 2011-0423441E5 F - Options d'achat d'actions et décès

no 110(1)(d) deduction available for deemed s. 7 benefit on death

In response to a question on the consequences when a deceased individual owned options to acquire the shares of a public company, CRA stated (TaxInterpretations translation):

[S]ubparagraph (i) [of s. 110(1)(d) provides] that the taxpayer (or a person with whom the taxpayer does not deal at arm's length in the circumstances described in paragraph 7(1)(c)) must acquire the securities under the agreement in order for the deduction in computing taxable income to apply. ...[I]t was by virtue of paragraph 7(1)(e) that the deceased taxpayer would be deemed to have received a benefit in the taxation year of the taxpayer’s death. Even if the estate of the deceased taxpayer or a beneficiary of that estate subsequently exercised the options and acquired the securities, the requirement under subparagraph 110(1)(d)(i) would not be satisfied respecting the benefit which the deceased taxpayer was deemed to have received. Consequently, no paragraph 110(1)(d) deduction would reduce the benefit included in the deceased employee's income by virtue of paragraph 7(1)(e) ... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) cost to estate of employee stock options determined under s. 69(1)(c) 90

Subsection 110(1.4) - Replacement of home relocation loan

Administrative Policy

27 July 1989 T.I. (Dec. 89 A.L.)

S.110(1.4) permits a taxpayer to replace a home relocation loan with a new loan, but prohibits him from extending the five-year period in which the deduction authorized by s. 110(1)(j) will be available.

Subsection 110(1.5) - Determination of amounts relating to employee security options

Administrative Policy

13 January 1993 External T.I. 5-923395 -

"it is our view that where a corporation's existing capital structure provides for it, the issuance of additional shares by the corporation would not of itself be ... a reorganization whether the additional shares are issued pursuant to a rights offering or otherwise. In this regard, we note that one of the meanings given to the word 'reorganization' in Black's Law Dictionary is:

'General term describing corporate ... readjustments occurring, for example, ... when ... a corporation makes a substantial change in its capital structure'".

Paragraph 110(1.5)(a)

See Also

Ferlaino v. The Queen, 2016 TCC 105 (Informal Procedure)

purpose of satisfying exe4rcise price test

Smith J rejected arguments of the taxpayer that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent of his employer should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise.

He then stated (at paras. 72-73):

[T]he deduction of one-half the employment benefit made available under paragraph 110(1)(d) is only available where the exercise price of the stock option is set at a price that is above the fair market value of the stock at the time it is granted and that the purpose of paragraph 110(1.5)(a) is to ensure that stock options that are out-of-the-money when they are granted, are not, through no fault of the taxpayer, later found to be in-the-money as a result of currency fluctuations occurring after the date of the grant.

Moreover, since I have already concluded that section 7 provides a complete code for the taxing of employment benefits arising out of the exercise of stock options, there is nothing that compels me to agree with the Appellant’s suggestion that paragraph 110(1.5)(a) somehow relates to the expression “the amount paid or to be paid . . . by the employee for the securities” in subparagraph 7(1)(a)(ii) and suggests that the exercise price should be converted into Canadian dollars using the exchange rate effective as of the date of the grant.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) exercise price of employee stock options to be translated at the exercise-date spot rate 201
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) exercise price of employee stock options to be translated at the exercise-date spot rate 109

Subsection 110(1.8) - Conditions for subsection (1.7) to apply

Articles

Dov Begun, "Equity Based Compensation and Stock Options", 2017 Annual CTF Conference draft paper

Retaining s. 110(1)(d) deduction following exercise price reduction (p. 15)

The paragraph 110(1)(d) deduction can also be preserved if, rather than an exchange of options, the existing stock option is amended to reduce the exercise price. The effect of subsections 110(1.7) and (1.8) is to deem an exercise price reduction to have been effected by way of an exchange, thus ensuring that the employee remains eligible to claim the paragraph 110(1)(d) deduction.

Steve Suarez, Firoz Ahmed, "Public Company Non-Butterfly Spinouts", 2003 Conference Report, c. 32.

Subsection 110(2) - Charitable gifts

Cases

Aubry v. The Queen, 76 DTC 6343, [1976] CTC 598 (FCTD)

A member of the Society of Jesus who had taken the vow of poverty was not entitled to the deduction because he paid some of his expenses directly rather than paying all his income to the order.

Administrative Policy

11 July 1991 T.I. (Tax Window, No. 6, p. 13, ¶1348)

RC will allow a taxable benefit under s. 6(1)(a) to be deducted under s. 110(2).

IT-86R "Vow of Perpetual Poverty".

Articles

Strain, "Capital Gains Exemption: To Crystallize or not to Crystallize - Emerging Income Tax Issues", 1991 Conference Report, p. 8:7.

Subsection 110(2.1) - Charitable donation — proceeds of disposition of employee option securities

Administrative Policy

6 December 2016 External T.I. 2015-0605971E5 - Paragraph 110(1)(d.01) deduction

broker must immediately pay sales proceeds of the stock option shares directly to the charity

Would a taxpayer be entitled to the s. 110(1)(d.01) deduction by virtue of s. 110(2.1) if he directed the approved broker to dispose of his shares acquired on exercise and donates the proceeds to a qualified donee personally instead of directing the broker to do so? What is the meaning of “immediately” in s. 110(2.1). CRA responded:

[I]f the broker or dealer pays the proceeds of disposition directly to the taxpayer who then donates all or some of the proceeds… the requirements of subsection 110(2.1) are not met and thus a deduction under paragraph 110(1)(d.01) would not be available. …

“[I]mmediately” in the phrase “to immediately dispose of the security and pay all or a portion of the proceeds” in subsection 110(2.1)…refers to both the disposition of the security and the payment of the proceeds to the qualified donee.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.31) s. 7(1.31) election also effective where a broker sale under s. 110(2.1) 146

8 October 2010 Roundtable, 2010-0370481C6 F - Don, vente d'actions acquises en vertu 7(1)

Where there is a gift of the proceeds from a short sale of optioned shares on the same day as the option is exercised in a cashless exercise, the conditions in s. 110(2.1) will not be considered to have been satisfied.

Articles

Maureen Y. Berry, "Properly Structured Charitable Donations May Mitigate Source Deduction Woes", Taxation of Executive Compensation and Retirement, 2011, p. 1367

There is a source deduction advantage to a broker-directed donation of the proceeds received upon the disposition of optioned securities as opposed to donating the securities themselves.