Agreement to issue shares to employees

In Dino Infanti “Employee Stock Option Rules and Legally Binding Agreements” Tax for the Owner-Manager 17:2 (April 2017), the author summarizes CRA technical interpretation 2016-0641841I7 (September 19, 2016). The technical interpretation, in light of Transalta Corporation v R, 2012 TCC 86, states that s 7 and s 110(1)(d) of the Income Tax Act (Canada) apply only if there is a legally binding agreement to issue shares.

The author writes:

Generally, if a share-based compensation plan does not create a legally binding agreement, employees cannot claim a stock option deduction but the employer can deduct the expense incurred. Conversely, if there is a legally binding agreement, employees can claim a deduction but the employer cannot deduct the expense incurred.

The following are examples of plans that do not constitute a binding agreement:

  • a discretionary share bonus plan (employer can deduct the expense even if the plan does not have a cash option; SDA rules might apply)
  • SAR or deferred share unit plan (employer can chose form of payment and deduct the bonus expense)

The following is an example of a plan that constitutes a binding agreement:

  • employee share purchase plan

The following might constitute a binding agreement:

  • stock options with discretionary vesting conditions (probably no agreement at the time the options are issued; agreement arises only when the employer confirms the number of shares to which the employee was entitled)
  • discretionary employee stock trust (7(2) can’t apply until a specific number of shares have been allocated to a specific employee
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