Tax Insights: The Transalta case: Can stock plans be deductible in Canada?

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Issue 2013-13

In Transalta Corporation v. The Queen, the Tax Court of Canada (TCC) found that shares issued under a performance share unit plan were a deductible corporate expense. The plan gave the employer the unusual right to determine, at the end of the service period, both the amount of the award and whether any compensation would be paid at all.

The TCC found that the share plan rules under the Income Tax Act (ITA) that deny a corporate deduction require the existence of a legal contract. The TCC allowed a deduction, finding that no agreement existed at any time under the Transalta plan and that the issuance of the shares was an outlay or expense.

The Canada Revenue Agency’s (CRA's) response to the case so far indicates that it will be reviewing any similar circumstances to determine whether an agreement to issue shares exists. While the case appears to create a planning opportunity, employers must ensure that any plan intended to fall within the reasoning of Transalta is, in fact, truly discretionary.

In Transalta, the TCC ruled on the deductibility of shares issued under a performance-based share unit plan.

Although the CRA has traditionally held that shares issued by an employer under such a plan are not a deductible expense, the TCC found that no agreement to issue shares existed under the plan and therefore the prohibition against an employer deduction in paragraph 7(3)(b) of the ITA did not apply. (Subsection 7(3) denies a deduction when an agreement to sell or issue securities exists.)

Transalta paid bonuses to some of its own and its subsidiaries' employees under its Performance Share Ownership Plan (PSOP) as follows:

  • for 2001 and 2002 – in shares
  • for 2003 and 2004 – partly in cash and partly in shares

Transalta deducted all payments from its income in these years. Not surprisingly, the Minister of National Revenue (the Minister) disallowed the deductions, arguing they were denied by paragraph 7(3)(b).