Pubco (a Canadian public corporation) issues stock options (the “Options”) to certain employees (the "Participants") with an exercise price not less than the FMV of the shares on the date of grant. Pubco accounts for the transactions surrounding the granting and exercise of an Option in accordance with Section 3870 of the CICA Handbook, such that it records a "stock-based compensation expense" when an Option is granted and when a share is issued on Option exercise. The Directorate stated that the presumption s. 7(3)(b):
prevents Pubco from deducting in computing its income an amount of expense calculated on the exercise of an Option and the issue of a share that results in a taxable benefit under paragraph 7(1)(a) … [so that] the "stock-based compensation expense" … is not deductible by Pubco in computing its income for income tax purposes … .
[Alcatel] does not alter our interpretation of paragraph 7(3)(b) set out above.