CRA finds that entering into an employment contract indemnifying an employee against reportable-transaction penalties was not a reportable transaction

Under an employment contract, the employer agreed to indemnify (through a “Payment”) for any penalty imposed under s. 237.3(8) or s. 237.4(12). In finding that the execution of the employment agreement (or the employee's tax planning work) would not meet the s. 237.3(1) definition of a reportable transaction, CRA first indicated that it was reasonable to conclude that signing the employment agreement would not, because of the indemnification clause, be an avoidance transaction, given that the “Payment would not reduce, avoid or defer the Penalty imposed under the Act as it would only reimburse or satisfy the employee’s economic cost under a private agreement,” and that “[a]lthough the Payment might provide the employee with an economic benefit, it would not appear … to result in a tax benefit to the employee.”

In further finding that the indemnification clause did not constitute “contractual protection,” CRA stated:

[T]he relevant question is whether the indemnification clause protects against a failure of a transaction or series to achieve a tax benefit from that transaction or series, or reimburses an amount incurred in the course of a dispute in respect of such a tax benefit. In the hypothetical scenario described, any economic benefit associated with the Payment would arise from indemnification against a Penalty, not from the failure of a transaction or series to achieve a tax benefit, and not from a dispute in respect of such benefit.

Neal Armstrong. Summaries of 1 May 2026 External T.I. 2026-1086241E5 under s. 237.3(1) – reportable transaction, – contractual protection.