CRA continues to apply advantage tax where employee registered plans subscribe for post-freeze common shares of the employer
2009-0320311I7 considered that where, following a freeze transaction, a key employee subscribed for new common shares through a TFSA, the requirements of s. (b)(i) of the “advantage” definition in s. 207.01(1) were satisfied (namely, that such transaction “would not have occurred in an open market where parties deal with each other at arm’s length”), so that the advantage tax would apply to any increase in the total FMV of those shares.
An observed more-recent application of this approach occurred where the shareholders of a widely held private company exchanged their common shares for fixed-value preferred shares and numerous employees (all dealing with each other and the company at arm’s length) then subscribed for new common shares at a low subscription price. The “CRA’s position was that the new common shares were available for purchase solely due to the subscribers’ employment status, and thus the advantage tax was payable by each employee-shareholder who acquired new common shares through their TFSA.”
Neal Armstrong. Summary of Tyler Berg, “Registered Plan Taxes: Recent Experiences,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 3 under s. 207.01(1) – advantage – (b)(i).