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:
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.
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