The taxpayer's predecessor ("Imasco") agreed with the owner of 42.5% of its common shares ("BAT") that it would encourage all the holders of options under the taxpayer's employee stock option plan to exercise or surrender their options on the acquisition by a Canadian subsidiary of BAT of all the other common shares of the taxpayer; and in this regard the taxpayer amended the plan to permit option holders to surrender their options for cash and to provide for accelerated vesting of unvested options.
Sharlow J.A. stated (para. 29):
In my view, there are three factors that point to the conclusion that the payments in issue were on capital account. First, they coincided with a reorganization of the capital of Imasco (the going private transaction and amalgamation). Second, the arrangements put in place for making the payments facilitated and were intended to facilitate the capital reorganization. Third, the payments were intended to and did end all future obligations of Imasco to deal with its own shares, which can fairly be described as a once and for all payment that resulted in a benefit to Imasco of an enduring nature.