Stock Option Deductions
Volume No. 06-07
“Payments to an employment consultant are not permissible deductions from stock options.”
The case of Morin (2006FCA 25) is a very interesting case recently decided by the Federal Court of Appeal. In computing his tax liability, Mr. Morin had deducted payments to a consulting firm (“Bobsan”), as a deduction under the stock option rules in section 7 of the Income Tax Act. Bobsan had agreed to help Mr. Morin find employment in exchange for a fee based on the value of any employee stock options that Mr. Morin received. When Mr. Morin found a job, he was issued stock options by his new employer, to which the normal stock option rules applied. The issue to be adjudicated was whether amounts paid to Bobsan by Mr. Morin were deductible from his stock option benefits under section 7. Bobsan’s only involvement was providing a list of possible career opportunities to Mr. Morin.
The Tax Court had decided that the amounts paid to Bobsan were deductible under subparagraph 7(1)(a)(iii), as a cost of acquisition of the stock options.
The Federal Court of Appeal reviewed the word “acquire” in some detail and determined that payments made to Bobsan, totalling over $133,000, were not made to acquire the stock options. Bobsan did not transfer title, nor the incidence of title, to Mr. Morin in exchange for the payment, nor did Mr. Morin purchase stock options from Bobsan. Moreover, Mr. Morin would have received the options even if he had failed to pay Bobsan. Based on these facts, the Federal Court of Appeal determined that the payments to Bobsan were not made to acquire the stock options and therefore were not deductible.
The Federal Court of Appeal buttressed their conclusion by adding that “Expenses incurred in the course of searching for employment, including amounts paid to a consultant, are not deductible from employment income under section 8 of the Act.”
The Federal Court of Appeal had great sympathy for the taxpayer, as he was exposed to tax liability on his entire employment income despite using a large portion of the stock option benefit to pay Bobsan for consulting services.
The Federal Court of Appeal’s decision clarifies that amounts paid to a consultant are not deductible expenses, even if the payments are pursuant to an agreement.
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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.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
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