On the acquisition of all the shares of a CCPC (the “Corporation”) by an arm’s length third party, it also acquired all of the stock options of an employee who dealt at arm’s length with the Corporation. Is the employee entitled to the s. 110(1)(d) deduction? CRA responded (TaxInterpretations translation):
[S]ubsection 110(1.1) provides that the condition in subparagraph 110(1)(d)(i) is not required to be met if the particular qualifying person elects that neither it nor a person with whom it does not deal at arm’s length will deduct an amount in respect of a payment to or for the benefit of a taxpayer for the taxpayer’s transfer or disposition of rights under the agreement.
In this regard, we are of the view that a particular qualifying person can make the election provided in subsection 110(1.1) to the extent that it or a person with which it does not deal at arm’s length makes a payment to an employee respecting a disposition described in paragraph 7(1)(b). Furthermore, the fact that no deduction would be available in computing the income of the person having made the payment would not prevent the particular qualifying person from making the election. …
The Corporation appears to be the particular qualifying person which has agreed to issue or sell the shares. In contrast, the Third Party could not qualify as a qualifying person for purposes of the application of subsection 110(1.1) prior to the purchase of the shares of the Corporation because there is not, at that time, a non- arm’s length relationship between the Corporation and the Third Party.
Consequently, the election in subsection 110(1.1) cannot be made and the employee would not be eligible for the deduction under paragraph 110(1)(d)… .