2017-0724191C6 2017 CTF - Q9 - Stock Option Deduction

Principal Issues: Whether the 110(1.1) election can be available in situations where there is no deduction for the employer to "give up."

Position: Yes.

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

Author: Kravetz, Faye
Section: 110(1)(d), 110(1.1)

2017 CTF Annual Conference
CRA Roundtable

Question 9: Stock Option Deduction

In technical interpretation 2015-0572381E5, the CRA concludes that the stock option deduction in paragraph 110(1)(d) is not available where an employee is issued treasury shares of a corporation having a value equal to the in-the-money value of the options upon surrender of the options. This appears to be because no shares are acquired under the option agreement as required by subparagraph 110(1)(d)(i).

The technical interpretation did not comment on the potential application of subsection 110(1.1).  In general, subsection 110(1.1) provides a mechanism for an employer to ensure the availability of the deduction for the employee when shares are not acquired under the option agreement if, among other requirements, the employer elects to forego its deduction for the stock option expense.

Question

Can the CRA confirm that where the employer files a valid election under subsection 110(1.1) the stock option deduction can still be available in a situation such as the one above, despite the fact that there is no deduction for the employer to “give up” as contemplated by subsection 110(1.1)?

CRA Response

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.

Faye Kravetz
2017-072419
November 21, 2017

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