S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security, s. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).
If a non-resident corporation (or any other specified person) issues restricted stock units to an employee that can only be settled for shares, and therefore are effectively treated as s. 7 stock options with no exercise price, and the shares to be issued are non-qualified securities, in policy terms it should not have to comply with the s. 110(1.9) notice requirements because no deduction can be claimed under s. 110(1)(e). Will CRA provide administrative relief from the s. 110(1.9) notice requirements if no amount is deductible under 110(1)(d) or (e)?
CRA responded:
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
CRA went on to note:
In the interim, employers can avoid this problem by designating securities that do not give rise to a paragraph 110(1)(d) deduction as non-qualified securities under subsection 110(1.4). This would exclude the securities from the annual vesting limit with respect to any options that are subsequently issued to the employee with the same vesting year. However, pursuant to paragraph (b) in variable D of the formula in subsection 110(1.31), such designation must be made prior to the issuance of the subsequent options.