SR&ED Claim for Stock Option Benefit

“Stock option benefit can be used for ITC calculation.”

The CRA has recently issued a bulletin accepting the position in Alcatel (2005 TCC 149).The CRA accepts that, where stock options are exercised by an employee, the resulting benefit will be allowed as”salary or wages” and the corporation will be entitled to an investment tax credit in respect of the value of the resulting benefit. As always, however, there are a number of conditions in order for this to occur:

  1. The stock options must be granted to the employee in a fiscal year during which the employee was involved in the SR&ED activities of the claimant;
  2. The options must be received by reason of the employee’s employment, not because the individual is a shareholder;
  3. All, or a portion of, the employee’s salary was an allowable SR&ED expenditure in the year that the options were granted;
  4. The employee has exercised or disposed of the option; and
  5. The claimant files within the 18-month reporting deadline all of the prescribed forms and prescribed information for the year during which the stock option benefits were earned.

The CRA bulletin explains that the stock option benefit is an eligible expenditure for investment tax credit purposes in the same proportion that the employee’s salary was allowed as an SR&ED expenditure in the year that the options were issued. For example, if the employee’s salary in the year that the stock options were issued was 80% eligible as an SR&ED expenditure, then 80% of the stock option benefit would qualify as an SR&ED expenditure. The value of the stock option benefit will not be an allowable SR&ED expenditure for purposes of subsection 37(1) (SR&ED deduction). The stock option benefits are only to be considered in calculating the investment tax credit.

One of the difficult issues with this bulletin is that the stock option benefit calculation is based on matters relating to the year in which the options were issued. This could be a difficult tracking exercise if the options were exercised five years after they were granted. The corporation would have to determine how much of the employee’s salary was allowed as an SR&ED expenditure five years ago in order to determine how much of the stock option benefit is allowable for the investment tax credit calculation.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Posted in

Cadesky Tax