In this case, the Federal Court of Appeal held that payments made by a company to its own employees for surrendering options to acquire the appellant’s shares in the context of a capital reorganization were payments "on account of capital" and therefore could not be treated as employee compensation for income tax purposes and deducted pursuant to the federal Income Tax Act.
The payments were made to employees who held rights under an employee stock option plan in order to facilitate a “going private transaction” under which an acquirer would acquire all of the appellant’s shares held by public shareholders. Justice Sharlow found that terminating the appellant’s obligations under the stock option plan facilitated the proposed capital organization, and this constituted a payment on account of capital, being a “once and for all payment” that resulted in a benefit “of an enduring nature.” Accordingly, Justice Sharlow upheld the decision of the Tax Court that the payments were on account of capital, finding no palpable and overriding error in the Tax Court’s conclusions on such a question of mixed law and fact.
November 10, 2011
Link to Decision
Grant Bishop
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