SR&ED/Stock Option #2

“Proposed Amendments to deny stock option benefit in ITC calculation.”

In a previous Tax Tip (05-22), it was discussed that the CRA had issued a bulletin accepting the position in Alcatel (2005 TCC 149), that a corporation will be entitled to an investment tax credit (ITC) in respect of the “stock option benefit” that arises when an employee exercises stock options.

In response to Alcatel, the Minister of Finance tabled a Notice of Ways and Means Motion on November 17, 2005 proposing amendments to the Income Tax Act to deny an ITC on the value of the benefit realized by an employee on the exercise of stock options. More specifically, the amount of expenditure allowable to a corporate taxpayer, and upon which a tax credit or deduction may be claimed, is limited to the amount actually dispersed by the corporate taxpayer. This proposal applies to options granted and shares issued on or after November 17, 2005.

The Minister’s position is that the stock option benefit does not represent an outlay of a corporation. Instead, it represents a dilution of the value of the share equity of the other shareholders of the corporation. Such excesses were not intended to be considered to be expenditures under the SR&ED tax incentive program.

When making an SR&ED tax credit claim, the prescribed form is due to be filed with the Minister no later than 12 months after the filing due date for the tax return in respect of the taxation year in which the expenditures were made (i.e., 18 months after year end). Currently, the Minister has the ability to waive the 12-month filing requirement. The Minister has proposed that it will no longer grant a waiver of the 12-month filing requirement. Therefore, no SR&ED deduction or ITC can be claimed if the taxpayer takes more than the additional 12 months allowed.

Given the short time period between the CRA’s acceptance of the position in Alcatel and the issuance of the proposed amendments denying the benefits realized in Alcatel, it is evident that the Minister intends to act swiftly to amend the Income Tax Act in response to unfavourable positions rendered by the Courts. If this trend continues and is widespread, apparent taxpayer victories will be short lived, as the government tries to close any perceived loopholes in the Income Tax Act.

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