2015-0572381E5 Employee Stock Option-CCPC Shares

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

Principal Issues: Will a 110(1)(d) or 110(1)(d.1) deduction be available where an employee is granted a stock option by a CCPC and does not exercise their right to acquire shares under the option, rather, is paid the in-the-money or intrinsic value of the option in treasury shares of the CCPC?

Position: No.

Reasons: The conditions of subparagraphs 110(1)(d)(i) and 110(1)(d.1)(i) are not satisfied.

Author: Allen, Gary

Section: 7(1)(a), 7(1)(b), 110(1)(d), 110(1)(d.1)

XXXXXXXXXX                                                                                                                            2015-057238
                                                                                                                                                    G. Allen
August 3, 2016


Re:  Employee Stock Option - CCPC

We are writing in response to your email sent to us on February 13, 2015 concerning employee stock options granted to employees of a Canadian Controlled Private Corporation (CCPC) where the exercise price under the option is equal to the fair market value (FMV) of the CCPC’s shares on the date the options are granted. You describe a scenario where an employee does not pay the exercise price to acquire shares under the stock option and subsequently sell the shares at the shares’ FMV; rather, the CCPC issues treasury shares to the employee equal to the intrinsic or in-the-money value of the stock option.  You refer to this scenario as the “cashless exercise” formula. We apologize for the delay in our response.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Our understanding regarding how the “cashless exercise” method applies when an employee exercises a stock option, which is different from the scenario you have described, is provided in technical interpretation 2004-0070361E5.  In our view, the scenario you have described does not result in an employee exercising the employee’s right to acquire shares at the exercise price under a stock option.  The scenario you have described results in an employee disposing of the employee’s rights under a stock option for consideration equal to the stock option’s intrinsic or in-the-money value where the consideration is paid in employer treasury shares.  In this scenario, paragraph 7(1)(b) of the Act will apply and not paragraph 7(1)(a).

Concerning the availability of the paragraph 110(1)(d) deduction, it is our view that subparagraph 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.  It is also our view that a deduction under paragraph 110(1)(d.1) would not be available as subparagraph 110(1)(d.1)(i) will not be satisfied because an employee will not be “deemed under paragraph 7(1)(a) by virtue of subsection 7(1.1) to have received a benefit in the year”.  In the scenario you have described, an employee will be deemed to have received a benefit under paragraph 7(1)(b) as a result of the disposition of the stock option.

We trust that our comments will be of assistance.


Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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