McNeeley – Tax Court of Canada finds that a substantial distribution from an EBP to the founding shareholder was made to him qua employee, and was taxable
A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. However, there is a carve-out from the EBP definition which, as explained by Russell J, effectively indicates that s. 6(1)(g) does not render, as taxable, a distribution which, in the absence of the EBP rules, would not have been taxable to the beneficiary under s. 6(1)(a).
The founding shareholder (Mr Baker) of a software company, who received the lion’s share of a distribution of the company shares held by an EBP, argued that he was not taxable on the distribution because it was received by him qua founding shareholder rather than qua CEO (he received about 70% of the distribution so that there was no unacceptable dilution.)
In rejecting this argument, Russell J, after first citing Savage, stated:
[T]he broad wording of paragraph 6(1)(a) requires only the slightest connection between the benefit and employment. That does not preclude benefits received where, in addition to the required connection between benefit and employment, there also may have been considerations extraneous to employment.
Here, the absence of the slightest connection to Mr. Baker’s employment was not established given that the EBP, by its very terms, restricted beneficiaries to employees, and Mr Baker had not established that the two other trustees making the unanimous distribution decision had not taken into account his substantial contribution to the company over the past 12 years qua CEO.