Employees of Opco (Participants”) were granted stock options by Opco pursuant to “Grant Agreements” which specified the number of Options granted and their exercise price (which equaled the FMV of the subject shares at the time of such grant), but provided that such Options were not exercisable (and could not be surrendered to Opco for their cash surrender value) until the compensation committee of Opco had issued an “Exercise Notice” to the Participant. The Directorate found that the “time the agreement was made” in s. 110(1)(d)(ii)(A) referenced the time of the sending of the Exercise Notice to the Participant, so that the s. 110(1)(d) deduction was not available on a subsequent cash surrender of the Participant’s Options if the FMV of an Opco share at that time was lower than the exercise price. The Directorate stated:
Prior to the issuance of the Exercise Notices, it is our view that Opco had no obligation to issue shares of its capital stock … .
The Directorate also noted that some of the Participants did not receive Exercise Notices, so that their Options expired.