Tax Court Allows Deduction for Employee Stock Bonus Plan

In Transalta Corp. v. The Queen (2012 TCC 86), the Tax Court of Canada (TCC) ruled that a corporate employer can deduct the fair market value of shares issued to employees as bonuses.

From 2001 to 2004, Transalta issued treasury shares with a fair market value in excess of $6 million to its employees under a performance share ownership plan (PSOP) and claimed deductions equal to the same amount. Under the PSOP, each participant received a notice of the potential range of bonus compensation for the next three years. At the end of the three year period, a decision was made as to the amount of the bonus and whether to pay the bonus in cash, by the issuance of treasury shares or as a combination of both.

The Crown argued that no deduction could be taken in respect of the issuance of the shares, relying on paragraph 7(3)(b) of the Income Tax Act which effectively prevents an employer from claiming a deduction in relation to the issuance of securities pursuant to an employee stock option agreement. That provision applies where a corporate employer “agrees” to issue securities to an employee.

Transalta argued that paragraph 7(3)(b) did not apply because it never “agreed” to issue shares to its employees. Transalta argued that since the PSOP was purely discretionary, no agreement existed because it had no obligation to issue the shares and its employees had no rights to the shares.

The TCC agreed that “agree” and “agreement” requires a legally-binding agreement that creates rights and obligations and that as a purely discretionary bonus plan, the PSOP was not a legally-binding agreement between Transalta and its employees.

As a result of this decision, purely discretionary stock bonus plans, in the model of Transalta’s PSOP, may become more prevalent in the compensation packages offered by corporate employers to high-level and senior employees.

Prepared by: Kim Ho

Kim Ho received a B.A.(Honours) in economics from Queen’s University and a LL.B from the University of Victoria. While at the University of Victoria, he was awarded the 2008 Stikeman Elliot/Carswell National Tax Award, the British Columbia Superior Court Judges… more »