Two public-company predecessors by amalgamation of the taxpayer made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans. Such surrenders occurred (and were previously contemplated in agreements with purchaser corporations to occur) in connection with the acquisition of all their shares by unrelated corporate purchasers.
The taxpayer did not argue that the surrender payments were fully deductible under s. 9, but instead successfully argued that they were deductible as to 75% under s. 111(5.2). Before concluding that the surrender payments were eligible capital expenditures, Sommerfeldt J found that the surrender payments satisfied the requirements in the preamble of the definition in s. 14(5) that:
- they were “in respect of a business” given inter alia that they “were made to employees who had been granted their options while working in the business of their respective employers and who, for the most part, continued to work in those businesses after the respective acquisitions” (para. 86)
- they were capital expenditures having regard to Kaiser Petroleum and Imperial Tobacco
- they were made for the purpose of gaining or producing income from the business given that under this test “it will suffice if the income-gaining purpose is [only] one of the purposes of the outlay or expense” (para. 92) and that, similarly to Imperial Tobacco, they had “an employer-compensation-related purpose” (para. 96)
Furthermore, the exclusion in para. (f) of the ECP definition for “the cost of … a right to acquire [a share]” did not apply given that “the word ‘cost’ contemplates an acquisition of an asset or other property” (para. 103), whereas “when a stock option is surrendered to the issuing corporation, the rights represented by that option [instead] are extinguished” (para. 122).