Principal Issues: [TaxInterpretations translation]
Deductibility of cash payments under a stock option agreement
Position:
Deductible by employer
Reasons:
IT-113R4, paragraph 11
December 7, 2000
Laval Tax Services Office Headquarters
A. St-Amour, CA
Attention: Sylvain Lefrançois (613) 957-89532000-002320
Stock options
This is in response to your email received on May 2, 2000, asking us to reconsider our position regarding the deductibility of cash amounts paid by an employer under a stock option agreement as a result of an election made by the employee.
At the 1994 APFF Roundtable on Federal Taxation, the Agency indicated that this issue was under review (F9422500). This review was carried out in consultation with the Department of Finance and was completed in 1995. At the 1995 APFF Roundtable, we announced that the Agency's position on stock option agreements that allow an employee to receive a cash payment rather than shares had not changed (F9522780). We stated that paragraph 7(3)(b) does not prevent an employer from deducting the amounts paid since no shares were sold or issued under the agreement. Paragraph 11 of Interpretation Bulletin IT-113R4 dated August 7, 1996 is consistent with that position.
In our view, to be deductible, an expense must have been incurred for the purpose of gaining or producing income (18(1)(a)) and must not have been disbursed on account of capital (18(1)(b)). Principles have been established in case law to determine whether an expense is a capital expenditure or an income expense. However, an examination of the specific facts of each case is required to make that determination. In a telephone conversation (St-Amour/Lefrançois), you indicated that you do not currently have a specific situation.
XXXXXXXXXX. One of the tax principles is that an expense can only be claimed by the person who carries on the business related to that expense. According to the facts set out in the advance ruling letter (F9818203), the subsidiary's employees do not provide a service to XXXXXXXXXX, from whom they receive the remuneration in question.
We hope you find these comments helpful. We would be pleased to consider your request at a later date if you have a specific case.
for the Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch