Tax Insights: Deductibility of employee share plan costs: CRA's new guidance - what it means for you

Issue 2017-23

In brief

The Canada Revenue Agency (CRA) has updated its position on employer deductions for share plans that settle in newly issued stock. The CRA now accepts that an employer should be entitled to a deduction if it: 

  • awards share-based compensation to an employee
  • has the right to determine whether the award will be settled in cash or previously unissued or treasury shares
  • does not commit to delivering shares at any time before settlement, and
  • actually delivers shares

The CRA’s current view reverses its historical position, which had been to deny a corporate deduction in most circumstances when the employee receives newly issued stock.1 The new guidance paves the way for more equitable treatment of share-based compensation plans in Canada.

In detail


Paragraph 7(3)(b) of the Income Tax Act (ITA) denies any person a deduction in respect of the benefit conferred when that person has “agreed” to sell or issue securities to an employee.  

The CRA’s historical position was that, once an employer had decided to issue shares under an award, an agreement came into existence and the employer could not claim a deduction in respect of the resulting benefit.


The CRA’s position was rejected in Transalta Corporation v. The Queen, 2012 TCC 86, in which Transalta had a performance share unit plan that was entirely discretionary, in terms of both settlement and whether any amount would be ultimately payable.

The Tax Court of Canada (TCC) disagreed with the Crown’s argument that Transalta “agreed” to issue shares, on the grounds that Transalta’s employees had no right, up to the time of receipt of the shares, to receive anything under the share plan.

The CRA responded by confining Transalta to its facts.

The CRA clarifies its position

The CRA’s latest guidance endorses the TCC’s rationale in Transalta.

A CRA technical interpretation released on April 12, 2017, signals that when an employer has the right to choose between settling an award in cash or shares, no agreement to issue shares exists and, therefore, paragraph 7(3)(b) should not apply to deny a corporate deduction.

The technical interpretation considers a situation in which the employees of a Canadian subsidiary (Canco) were offered deferred stock, restricted stock, performance shares, stock appreciation rights (SARs) and stock options; each of which allowed for the issue of shares in Canco’s US parent (USco).

Canco claimed deductions for reimbursements to USco in respect of these awards.

The CRA agreed with Canco’s position that Transalta applied and paragraph 7(3)(b) did not deny Canco a deduction.

The technical interpretation notes that to be subject to section 7 of the ITA, Transalta requires an arrangement to create legally-binding rights and enforceable obligations. It further states that a discretionary arrangement is not an agreement for the purposes of section 7.

Except for the SAR grants, the CRA found that section 7 applied to all of the awards because they created legally-binding obligations to issue shares by USCo (assuming that the conditions for vesting were met).

The CRA states that the SAR awards provided a right to receive a payment in cash or shares (or a combination thereof) at the discretion of the plan sponsor.

The takeaway

We expect that the CRA’s updated position means that the CRA will accept that paragraph 7(3)(b) should not apply to share-plans when the employer or payor of the benefit has the discretion to settle in cash or shares – there is nothing specific to SAR plans that would limit the CRA’s finding that no legally enforceable agreement was created.

If the amounts are otherwise deductible under normal corporate tax principles and no legally enforceable rights to shares are created, Canadian employers should be able to claim a deduction going forward. As well, they should consider amending previously filed tax returns.

A discussion of related issues follows.

Post-grant agreements 

It is important to ensure that an employer or payor of share-based compensation does not create a unilateral contract by committing to issuing shares after an award has been granted but before settlement.

Salary deferral arrangements (SDAs)

Employers should ensure that the share plan is not an SDA, which can trigger an immediate employee income inclusion if deferrals of compensation do not meet specific exemptions.

Also note that a plan that provides an employer with the discretion to settle in cash cannot qualify for the 50% employee stock option deduction.

Market-purchased shares

It is uncertain whether the CRA will accept that there is no section 7 agreement when an employer has the discretion to issue previously unissued shares or shares purchased on the market.  

The CRA has permitted market-purchased share plans to be deductible and found them to fall outside section 7, so it would be consistent for the CRA to permit a deduction when there is a choice between previously unissued shares and market-purchased shares, i.e. to treat this choice as one between previously unissued shares and cash.

An arrangement that always results in shares being issued would typically preserve certain desirable accounting outcomes, but it remains to be seen whether this type of arrangement would be acceptable to the CRA.

Timing of a chargeback

If a corporate parent charges a Canadian subsidiary the fair value amortized over the vesting period and accounts for the compensation cost on an equity (i.e. fixed) basis, the fair value could be charged during each period and would be fixed, based on the fair value at the date of grant.

When shares are issued, there would be no change to the expense at settlement. It is possible that the chargeback to Canada, based on the accounting expense, could exceed the fair market value of the shares eventually settled.

While the CRA has accepted that repayments of these fair value accounting costs do not constitute a shareholder benefit, it is unclear how payments, made in years before settlement, should be treated in light of the CRA’s updated position.

Perhaps they should be considered contributions to an employee benefit plan, in which case they would not be deductible until the awards are settled.

Employee benefit plan treatment may also provide a statutory basis for a deduction of the full amount of the charge in a previous year, even if the share value has declined by the time the shares are released to employees.

Accounting vs. tax treatment

The CRA’s updated position will eliminate permanent differences created by an accounting charge or cash chargeback for what was previously treated as a non-deductible share plan.

1.  The CRA’s new guidance does not affect employee share plans that settle in cash or shares acquired on the open market through an employee benefit plan; these settlement costs have always been deductible.

Contact us

Jerry Alberton

Partner, PwC Canada

Tel: +1 416 365 2746

Chris D'Iorio

Senior Manager, PwC Canada

Tel: +1 416 869 2415

Doug S. Ewens

Counsel, PwC Law LLP

Tel: +1 403 441 6366

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