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
