Subsection 110(0.1)
Specified Person
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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).
Vesting Year
Articles
Joint Committee, "Employee Stock Option Amendments", 3 September 2019 Joint Committee Letter
- Para. (a) of the vesting year definition should refer to an event the timing of which is not reasonably foreseeable.
- Para. (b) of the vesting year definition, which utilizes the intractable concept of when vesting may reasonably be expected to occur, should instead provide for deemed ratable vesting over the term of the option.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(e) | effective date/different employer and issuer/successor rules | 136 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.31) | exclude non-qualified securities/exclusion of under-water securities or where options cancelled | 165 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.9) | same-day notice requirement - impracticable | 28 |
Subsection 110(1) - Deductions permitted
Paragraph 110(1)(d) - Employee options
See Also
McAnulty v. The Queen, 2001 DTC 942 (TCC)
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".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | stock option agreement effective time of oral agreement (not yet ratified by board) | 147 |
Bernier v. The Queen, 97 DTC 317, [1997] 1 CTC 2028 (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 | 125 |
Amirault v. MNR, 90 DTC 1330, [1990] 1 CTC 2432 (TCC)
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 | 41 |
Administrative Policy
15 June 2022 STEP Roundtable Q. 17, 2022-0929511C6 - Deceased Taxpayer and Stock Options
Although 2009-0327221I7 and 2011-0423441E5 indicated that the 50% deduction under s. 110(1)(d) is not permitted to a deceased taxpayer, s. 110(1)(d) was since amended to make specific reference to s. 7(1)(e).
CRA indicated that, as a result of this amendment, the deduction is now available to a deceased taxpayer in circumstances where s. 7(1)(e) applies, provided that all of the conditions of s. 110(1)(d) are met.
CRA also indicated that the 2017 amendments also included consequential amendments to s. 110(1.1) in order to ensure its proper application in circumstances where s. 7(1)(d) applies.
2005 Ruling 2005-0120771R3 - Stock option plan
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 | 204 |
19 September 2016 Internal T.I. 2016-0641841I7 - Employee stock option rules
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 | 371 |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(2) | no agreement if allocation of shares in trustee's discretion | 284 |
3 August 2016 External T.I. 2015-0572381E5 - Employee Stock Option-CCPC Shares
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 | 91 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(d.1) | not available where share payment of in-the-money value | 67 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 164 - Subsection 164(6.1) | 223 | |
| Tax Topics - Income Tax Act - Section 164 - Subsection 164(6.4) | 99 | |
| Tax Topics - Income Tax Act - Section 54 - Capital Property | 105 | |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) | FMV basis for stock options received by estate | 105 |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(e) | 99 |
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)."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) | 40 | |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.3) | 12 |
2004 Ruling 2004-0073821R3 - Stock Option Plan Amendment - SAR
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. 2001-0070445 - Stock options exercised by a corporation
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 External T.I. 9725315 - CCPC OPTIONS
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) | 8 | |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.3) | 67 |
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).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | 85 | |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) | 103 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.5) | 87 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) | 35 |
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
Joint Committee, "Stock Option Changes Announced in 2019 Federal Budget", 14 May 2019 Submission of Joint Committee
The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:
- The need for an adequate consultation period and subsequent transition period
- The desirability of clarity as to the distinction between “large, long-established, mature firms” and “rapidly growing Canadian businesses” (stating in this regard that "The references to 'start-ups' and 'long-established' suggest factors having to do with time and age, while the reference to 'rapidly growing Canadian businesses' suggests a more functional approach that is not limited by age) while at the same time having the distinction be grounded in the policy objective (and notes as to the somewhat intractable nature of this distinction).
- The need for a methodology for distinguishing between options that are within the $200,000 annual cap and those that are not where only a portion of the employee’s options are exercised, stating in this regard:
It is not clear from the Budget 2019 commentary whether the proposed $200,000 restriction is confined to claims for deductions under paragraph 110(1)(d) in respect of stock option benefits or whether it would also apply to claims under 110(1)(d.1) in respect of a benefit that relates to shares of, or rights to acquire shares of, a CCPC. Presumably at least part of the underlying rationale for the existing distinct treatment of CCPC options is a general lack of liquidity coupled with significant valuation uncertainty, which would seem to support excluding CCPC options from the new restrictions, particularly in light of the $200,000 “bright line” cap being contemplated. This should be considered and clarified before the details of the proposal are released.
- The desirability of rectifying the prescribed share definition (as described in the Committee’s November 15, 2016 submission) at the same time as the introduction of the new rules.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) | submission re confirmation of employer deductibility where full employee benefit | 269 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) | 0 |
Subparagraph 110(1)(d)(ii)
Administrative Policy
31 May 2004 Internal T.I. 2004-0077341I7 F - Déduction de 110(1)d) de la Loi
Before going on to find that the s. 110(1)(d) deduction was not available where the employee was entitled to a discount in purchasing shares of his employer, the Directorate stated that in the context of the s. 110(1)(d)(ii) requirement, it:
generally uses the price at which the shares trade on the stock exchange as the fair market value, but this does not preclude another value being used if it is more appropriate in all the circumstances and if it represents the actual fair market value of the shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Fair Market Value - Shares | market price is a prima facie indication of share FMV | 74 |
Clause 110(1)(d)(ii)(A)
Administrative Policy
29 May 2007 Internal T.I. 2006-0217401I7 F - 110(1)d): Moment de la conclusion de la convention
Employees of Opco (Participants”) were granted stock options by Opco pursuant to “Grant Agreements” which specified the number of Options granted and their exercise price (which equaled the FMV of the subject shares at the time of such grant), but provided that such Options were not exercisable (and could not be surrendered to Opco for their cash surrender value) until the compensation committee of Opco had issued an “Exercise Notice” to the Participant. The Directorate found that the “time the agreement was made” in s. 110(1)(d)(ii)(A) referenced the time of the sending of the Exercise Notice to the Participant, so that the s. 110(1)(d) deduction was not available on a subsequent cash surrender of the Participant’s Options if the FMV of an Opco share at that time was lower than the exercise price. The Directorate stated:
Prior to the issuance of the Exercise Notices, it is our view that Opco had no obligation to issue shares of its capital stock … .
The Directorate also noted that some of the Participants did not receive Exercise Notices, so that their Options expired.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(5) | not giving exercise notice to employees who are not shareholders (so that they cannot exercise their options) may engage s. 7(5) | 271 |
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.01)
Administrative Policy
7 October 2020 APFF Financial Strategies and Instruments Roundtable Q. 6, 2020-0851631C6 F - Options d’achat d’actions - disposition au décès
Can the s. 110(1)(d.01) deduction be made from a benefit deemed to have been received by a deceased employee under s. 7(1)(e) where, following the death, any of the persons referred to in s. 110(1)(d)(i)(B) acquires the securities under the agreement, if those securities are securities described in s. 38(a.1)(i) and that person donates them to a qualified donee during the year and no later than the 30th day following the day on which that person acquired the securities? CRA responded:
[T]he preamble to paragraph 110(1)(d.01) refers only to a benefit deemed to have been received under paragraph 7(1)(a).
In addition, the preamble to paragraph 110(1)(d.01) requires, in particular, that the taxpayer who wishes to claim the deduction, must dispose of the security acquired under an agreement referred to in subsection 7(1) by making a gift of the security to a qualified donee within the time limit set out in subparagraph 110(1)(d.01)(iii). That condition cannot be satisfied where it is a person other than the employee deemed to have received a benefit by virtue of subsection 7(1) who acquires the securities and disposes of them by way of gift to a qualified donee.
Consequently, the deduction provided for in paragraph 110(1)(d.01) is not applicable in respect of a benefit deemed to have been received by a deceased employee by virtue of paragraph 7(1)(e).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(e) | s. 110(1)(d.01) gift deduction is unavailable against a s. 7(1)(e) stock option benefit | 81 |
7 October 2011 Roundtable, 2011-0407951C6 F - Options, don d'actions
Where a private corporation issues stock options to its employees, which are "in the money" at the time of issuance, and it subsequently becomes a public corporation, employees may exercise their options. Would a gift of the acquired shares allow the employee to benefit both from a s. 110(1)(d.1) and s. 110(1)(d.01) deduction?
After noting that “subparagraph 110(1)(d.01)(iii) provides that the gift must be made in the year and on or before the day that is 30 days after the day on which the taxpayer acquired the security” and that “A taxpayer who wishes to benefit from the deduction provided in paragraph 110(1)(d.1) must inter alia hold the securities … for a minimum period of two years,” CRA stated:
[A] taxpayer who is only eligible for the deduction under paragraph 110(1)(d.1) will not be eligible for the deduction listed in paragraph 110(1)(d.01) because it will be impossible for the taxpayer to satisfy both the requirement of subparagraph 110(1)(d.01)(iii) and that of subparagraph 110(1)(d.1)(ii).
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 ss. 110(2.1) and 110(1)(d.01) will not be considered to have been satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(2.1) | donation funded with proceeds of short hedge put on immediately on s. 7 exercise does not qualify | 136 |
8 October 2010 Roundtable, 2010-0370501C6 F - Options, don, coût moyen, PBR
Options are exercised and the shares donated to a charity within 30 days. After noting that a taxpayer who does not make the s. 7(1.31) identification is subject to s. 7(1.3), CRA stated:
In order to qualify for the deduction under paragraph 110(1)(d.01), the gift must be made in the year and on or before the day that is 30 days after the day on which the taxpayer acquired the security. However, under subsection 7(1.3) a taxpayer is deemed to have disposed of securities that are identical property in the order in which the taxpayer acquired them. … In addition, paragraphs 7(1.3)(a) and (b) include presumptions with respect to the timing of the acquisition of such securities. As well, pursuant to paragraph 7(1.3)(a), "a taxpayer holding both deferral and non-deferral securities is considered to dispose of the non-deferral securities first.” … Depending on the circumstances, the application of the presumptions in subsection 7(1.3) could result in the requirement of paragraph 110(1)(d.01) in respect of the acquisition of securities in the year of disposition not being satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.31) | taxpayer who does not make the s. 7(1.31) identification is subject to s. 7(1.3) | 146 |
Paragraph 110(1)(d.1)
Administrative Policy
3 August 2016 External T.I. 2015-0572381E5 - Employee Stock Option-CCPC Shares
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 | 91 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) | no 110(1)(d) where share payment of in-the-money value | 116 |
31 August 2000 External T.I. 2000-0032525 - Exchanged CCPC option, 110(1)(d.1)
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)(e)
Articles
Amelie Desrocher, Chris D’Iorio, Alison Lantos, Fola Ogunamkin, Serena Hou, "Unlocking Value: Corporate Tax Deductions and Share-Based Compensation Strategies", Draft 2024 CTF Annual Conference paper
Recharge agreement not required for s. 110(1)(e) deduction (p. 10)
- The amount of the s. 110(1)(e) deduction is equal to the benefit deemed to have been received by the employee under s. 7(1).
- Where a foreign parent has issued non-qualified securities to employees of its Canadian subsidiary, the Canadian subsidiary/ employer would be entitled to a deduction under s. 110(1)(e) even in the absence of a recharge of the costs to it.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) | 442 | |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b.1) | 52 |
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
Joint Committee, "Employee Stock Option Amendments", 3 September 2019 Joint Committee Letter
- Both (i) the denial of the s. 110(1)(d) deduction for benefits respecting “non-qualified securities” and (ii) the granting of a corresponding employer deduction under s. 110(1)(e) should apply respecting agreements to sell or issue securities entered into after 2019, rather than (i) coming into force on January 1, 2020 – and the continuity rule in s. 7(1.4) should apply for such purposes.
- The conditions for the s. 110(1)(e) deduction should be relaxed to permit the stock option issuer to differ from the deducting employer, to permit the employer not to be a specified person, and to require that the specified person status of the issuer be tested only at the time of grant – but s. 110(1)(e) should not permit multiple employers to each take the deduction.
- A successor rule should be added to permit s. 110(1)(e) to apply following a reorganization.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(0.1) - Vesting Year | reference to reasonably foreseeable timing/pro rata vesting | 54 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.31) | exclude non-qualified securities/exclusion of under-water securities or where options cancelled | 165 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.9) | same-day notice requirement - impracticable | 28 |
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).
Administrative Policy
3 March 2011 Internal T.I. 2010-0387281I7 F - Déduction - personnel des Forces canadiennes
In response to a query as to whether the taxpayer is considered a member of the Canadian Forces and if the missions in which the taxpayer has participated qualify as either international operational missions or prescribed missions, CRA responded:
Under the Act, it is the responsibility of the Department of National Defence to identify international operational missions that have a risk premium of level 3 or higher. As for the missions covered for the purposes of subclause 110(1)(f)(v)(v)(A)(II), they are provided for in [Reg.] 7500 … . The Canada Revenue Agency therefore does not have the authority to make those determinations. Furthermore …, it would appear that the … operations in which the taxpayer participated are missions referred to for the purposes of subclause 110(1)(f)(v)(A)(A)(II).
… [T]he question of whether someone is a member of the Canadian Forces must be resolved in light of the relevant provisions of the National Defence Act. It provides that a member of the Canadian Forces is an officer or non-commissioned member who is a member of the Regular or Reserve Force.
Subparagraph 110(1)(f)(i)
Administrative Policy
16 May 2016 External T.I. 2015-0571591E5 - Employees Provident Fund of Malaysia
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit | pension plan characteristics | 168 |
| Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j) | paraphrase | 57 |
30 October 2014 External T.I. 2013-0500491E5 - Pension from XXXXXXXXXX
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 | 124 |
| Tax Topics - Income Tax Act - Section 126 - Subsection 126(3) | pension income not employment income | 76 |
30 January 2013 External T.I. 2012-0449621E5 F - Belgian pension
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 | 148 |
Subparagraph 110(1)(f)(ii)
Administrative Policy
22 February 2012 External T.I. 2011-0421671E5 F - Loss of retirement income benefit - death
An injured worker was entitled to receive monthly payments from the Ontario Workplace Safety and Insurance Board ("WSIB") until 65, with a lump sum paid to the worker at 65 as compensation for the loss of the monthly payments – or to the worker’s survivors if he did not attain that age. What is the treatment of such sum paid to the worker’s estate where the worker (the correspondent’s father) did not attain 65? CRA responded:
Such compensation would first be added to the net income of the person who received it under paragraph 56(1)(v). However, in a situation like yours where the recipient is not the employer or former employer of your father, that person would be entitled to an equivalent deduction in computing that person’s taxable income under subparagraph 110(1)(f)(ii). Consequently, that amount should be reflected in the tax return of the person who received it in two places.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(v) | inclusion under s. 56(1)(v), offsetting deduction under s. 110(1)(f)(ii), for Ontario WSIB lump sum on death | 48 |
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).
Subparagraph 110(1)(f)(iii)
See Also
Lapierre v. The Queen, 2019 TCC 18
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 | 131 |
| Tax Topics - Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(a) | agency was not a NATO subsidiary non-military body | 152 |
Administrative Policy
3 March 2005 External T.I. 2004-0096371E5 F - Revenu tiré d'un emploi et 110(1)f)(iii)
CRA indicated that the determination of whether the income was from employment or self-employment (a business) was to be made in accordance with the usual tests.
Paragraph 110(1)(j) - Home relocation loan
Administrative Policy
25 May 1994 Internal T.I. 9410817 - 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
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
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
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
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
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) | 96 |
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
Subsection 110(1.3)
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
Subsection 110(1.31)
Administrative Policy
17 May 2022 IFA Roundtable Q. 11, 2022-0926411C6
The new non-qualified securities rules regarding specified persons (generally, large non-CCPCs) make the employee deduction under s. 110(1)(d) subject to a $200,000 annual vesting limit and may permit the issuer to take a s. 110(1)(e) deduction for the portion of the benefit realized by the employee. S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security. S. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).
When asked as to why there is a notice requirement where a specified person (as it happened, a non-resident corporation) issues restricted stock units to an employee that can only be settled for shares (so that they are effectively treated as s. 7 stock options with no exercise price and, thus, as options that could never generate a s. 110(1)(e) deduction on exercise), CRA stated:
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.4) | requirement to issue s. 110(1.9) notice to employees re RSUs could be avoided by designating them as non-qualified securities under s. 110(1.4) | 357 |
Articles
Joint Committee, "Employee Stock Option Amendments", 3 September 2019 Joint Committee Letter
- It is inappropriate for D(ii) of the formula to include the FMV of securities to be issued under earlier options where they were non-qualified securities.
- Under the formula, the $200,000 limit is applied to the first options granted having a particular vesting year, therefore producing a blocking effect even when they become uneconomic (under water). Where a subsequent option is granted having a lower exercise price, the specified person should be able to designate the securities issuable under the earlier option to be non-qualified securities in order to cleanse the securities issuable under the subsequent option.
- Furthermore, where an option is cancelled or replaced (including under s. 7(1.4) or 110(1.7)), the securities which were to be issued under such option should be considered to be options not described in Element D(ii).
- Where two options are granted by a specified person to an individual at the same time, each option would preclude the other from benefiting from the s. 110(1)(d) deduction. There should be an ordering rule.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(e) | effective date/different employer and issuer/successor rules | 136 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(0.1) - Vesting Year | reference to reasonably foreseeable timing/pro rata vesting | 54 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.9) | same-day notice requirement - impracticable | 28 |
Subsection 110(1.4) - Replacement of home relocation loan
Administrative Policy
17 May 2022 IFA Roundtable Q. 11, 2022-0926411C6
S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security, s. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).
If a non-resident corporation (or any other specified person) issues restricted stock units to an employee that can only be settled for shares, and therefore are effectively treated as s. 7 stock options with no exercise price, and the shares to be issued are non-qualified securities, in policy terms it should not have to comply with the s. 110(1.9) notice requirements because no deduction can be claimed under s. 110(1)(e). Will CRA provide administrative relief from the s. 110(1.9) notice requirements if no amount is deductible under 110(1)(d) or (e)?
CRA responded:
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
CRA went on to note:
In the interim, employers can avoid this problem by designating securities that do not give rise to a paragraph 110(1)(d) deduction as non-qualified securities under subsection 110(1.4). This would exclude the securities from the annual vesting limit with respect to any options that are subsequently issued to the employee with the same vesting year. However, pursuant to paragraph (b) in variable D of the formula in subsection 110(1.31), such designation must be made prior to the issuance of the subsequent options.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.31) | the non-qualified securities rules are being reviewed by Finance respecting options such as RSUs that can never generate a s. 110(1)(d) deduction | 285 |
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(1.42)
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
Subsection 110(1.44)
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
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'".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) | 61 |
Paragraph 110(1.5)(a)
See Also
Ferlaino v. The Queen, 2016 TCC 105 (Informal Procedure)
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 | 215 |
| 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 | 115 |
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) | 0 | |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) | 0 |
Subsection 110(1.9)
Articles
Paul Carenza, Chris D’Iorio, "Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments", draft 2021 Conference Report paper (Canadian Tax Foundation)
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.
Joint Committee, "Employee Stock Option Amendments", 3 September 2019 Joint Committee Letter
- Requiring same-day written notification (in para. (a)) can be impracticable – at least 30 days should be allowed.
- Re para. (b), non-residents who don’t file returns should be accommodated.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(e) | effective date/different employer and issuer/successor rules | 136 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(0.1) - Vesting Year | reference to reasonably foreseeable timing/pro rata vesting | 54 |
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1.31) | exclude non-qualified securities/exclusion of under-water securities or where options cancelled | 165 |
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".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts | 67 |
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
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) | 155 |
8 October 2010 Roundtable, 2010-0370481C6 F - Don, vente d'actions acquises en vertu 7(1)
An investor short sells the same number of shares as those exercised on the same day as the exercise of the s. 7 options, and donates the proceeds of the short sale to the registered charity. The short position is closed when the shares are received following the exercise of the options. Does the donation of the proceeds of the short sale qualify under ss. 110(1)(d.01) and 110(2.1)? CRA responded:
[T]he taxpayer must, when exercising the option, direct a broker or dealer appointed or approved by the particular qualifying person referred to in that paragraph to immediately dispose of the security and pay all or a portion of the proceeds of disposition of the security to a qualified donee.
In the situation described … those two conditions are not satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(d.01) | cashless exercise does not satisfy ss. 110(2.1) and 110(1)(d.01) | 44 |
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.