CRA indicates that stock-compensation expenses may be relevant to pricing cross-border services charges even where s. 7(3)(b) prohibits their deduction

We have published the text of written questions that were posed, and abbreviated summaries of the CRA oral responses, at the CRA Roundtable held yesterday at the IFA Conference in Calgary.

In Q.1, CRA confirmed that it was appropriate to consider taking into account stock-option compensation expenses incurred by Canco in relation to its Canadian employees as a component of what would be a charge complying with the s. 247(2) transfer-pricing rules for their services to a non-resident affiliate, even where such stock compensation costs were non-deductible pursuant to s. 7(3)(b). Conversely, stock-based compensation expenses of a non-resident affiliate (e.g., expenses recognized by a foreign parent regarding options on its stock issued to employees of Canco) could be relevant in determining what was a charge by the parent to Canco that accorded with the arm’s length principle under s. 247(2).

Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.1 under s. 247(2) and s. 7(3)(b).