2016-0672931E5 Election

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: Whether the mechanism in subsection 110(1.1) is available in a situation where paragraph 7(3)(b) already applies to deny the employer a deduction for the stock option expense, and thus there is no deduction for the employer to “give up” as contemplated by subsection 110(1.1)?

Position: Yes

Reasons: There is nothing in subsection 110(1.1) that restricts its application to situations in which the employer is otherwise entitled to a deduction.

Author: Wurtele, Dave

Section: 7(3)(b), 110(1)(d), 110(1.1)

XXXXXXXXXX                                                                                                 2016-067293
                                                                                                                         D. Wurtele
August 18, 2017


Re: Election under subsection 110(1.1) of the Act

We are writing in response to your letter concerning your request for an advance income tax ruling.

As discussed by telephone (Baldwin/XXXXXXXXXX), we are not in a position to consider the ruling request because it involves a completed transaction. We can, however, provide general comments on the following situation you asked us to consider.

An employer provides a stock option plan for its employees. The options are issued under terms that ensure employees qualify for the 50% stock option deduction under paragraph 110(1)(d) (footnote 1) when they exercise their options and acquire the optioned shares.

The plan also includes a cashless exercise provision that operates on a net settlement basis. It 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 shares (i.e., the difference between total market price of the optioned shares at the time of exercise and the total exercise price payable on the optioned shares) less applicable source deductions. In effect, the employee surrenders their options to the employer in exchange for receiving the shares issued by the employer under the cashless exercise provision.

You asked whether the employer can ensure that the employee remains eligible for the stock option deduction by filing an election under subsection 110(1.1). We understand that your enquiry is further to Technical Interpretation 2015-057238, which did not comment on the potential application of subsection 110(1.1).

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. 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.

One of the requirements for an employee to be eligible to claim a deduction under paragraph 110(1)(d) is that the employee exercise their rights under the stock option agreement by acquiring the shares that are the subject of the agreement. Where this requirement is not met because the employee has transferred or disposed of their option rights, subsection 110(1.1) provides a mechanism for the employer to maintain the employee’s eligibility for the stock option deduction. In general terms, the requirement that the underlying shares be acquired will not apply if the employer makes an election that neither the employer, nor a person with whom the employer does not deal at arm's length, will deduct any amount in respect of a cash or in-kind payment to or for the benefit of the employee in respect of the transfer or disposition of the employee's rights under the stock option agreement and certain other administrative conditions are met.

In the situation you have described, the shares that are issued by the employer to the employee under the cashless exercise provision are not the shares that are the subject of the stock option agreement. Rather, the issued shares represent consideration for the employee surrendering their rights under the agreement. Consequently, the requirement that the underlying shares be acquired is not met.

However, we can confirm that 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.

It is our view that the 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)) or because the employer is not subject to Canadian taxation.

We trust these comments will be of assistance to you.

Yours truly,


Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch


Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  In this letter, all legislative references are to the Income Tax Act.

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