Subsection 110(1) - Deductions permitted
Paragraph 110(1)(d) - Employee options
See Also
McAnulty v. The Queen, 2001 DTC 942, Docket: 2000-420-IT-G (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".
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.
Amirault v. MNR, 90 DTC 1330 (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).
Administrative Policy
21 December 2012 Memorandum 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 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 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.
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.
Paragraph 110(1)(f) - Deductions for payments
See Also
Whitney v. The Queen, 2001 DTC 423, Docket: 1999-756-IT-G (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
30 October 2014 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.
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
4 May 2015 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 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):
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) even if the other conditions of paragraph 110(1)(d) were satisfied.
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 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'".
Subsection 110(1.8) - Conditions for subsection (1.7) to apply
Articles
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
8 October 2010 Roundtable Q. , 2010-0370481C6 F
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.
Paragraph 110(d.1)
Administrative Policy
30 August 2000 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".