CRA finds that the EBP rather than s. 7 rules applied to a share plan for employees where share distributions were discretionary

We have published full-text translations of all the CRA preliminary written answers for the 2021 APFF federal (general) Roundtable, together with our summaries of the questions posed.

Turning to Q.1. a discretionary trust for present and future employees of a company that had held shares of the company since January 1, 2021, will add Mr. X as a discretionary beneficiary when he is hired on January 1, 2022 (without any change to its shareholdings). The questioner submitted that this was a s. 7(2) trust and seemed to suggest that the shares allocated to Mr. X could be treated as satisfying the 24-month holding period for purposes of the deduction for gains from the disposition of qualified small business corporation shares.

After referring to Transalta for the proposition “that a discretionary arrangement was not an agreement to issue or sell shares for the purposes of section 7 since no legal rights or obligations were created,” CRA stated:

[A] trust plan providing that the allocation and distribution of the corporation's shares to its employees, who are beneficiaries of the trust, will be made on an entirely discretionary basis would not be governed by s. 7. …

[S]ubsection 7(2) does not serve to deem the existence of an agreement to issue or sell shares for the purposes of section 7 where such an agreement does not, in fact, exist. …

Since this was such a discretionary plan under which the employee had no legally enforceable entitlement to the shares until they were distributed to him in the exercise of the trustees’ discretion, so that s. 7 was inapplicable, the employee benefit plan rules instead applied, i.e., the fair market value of the shares was to be included in the employee’s income under s. 6(1)(g) when distributed to him.

Neal Armstrong. Summaries of 8 October 2021 APFF Roundtable, Q.1 under s. 7(2) and s. 248(1) – EBP.