Various issues regarding trusts holding employer shares for employees are discussed

Elizabeth Boyd and Jeremy Herbert have provided an extensive discussion of issues regarding the holding of shares for employees by trusts, so that only a few facets can be mentioned.

Regarding employees profit sharing plans:

• EPSPs seem to be used quite frequently to facilitate employee share purchase plans to which both the employees (by way of payroll deduction) and employers contribute on the open market.
• When so used, advantages of the EPSP over an employee benefit plan (EBP) trust include that the increase in the shares’ value from their acquisition can be received by the employee as a capital gain (in contrast to employment income under an EBP) and dividends and capital gains generated by the EPSP can retain that character when allocated to an employee – and the employer’s deduction of contributions to an EPSP is more immediate and straightforward (i.e., no need for the trustee to determine the employer’s deduction nor is it offset by income earned in the trust).
• The taxation of participants in the year in which contributions are made to an EPSP (in contrast to an EBP trust whose participants are not taxable regarding contributions to or earnings of the trust until they receive a distribution) means that EPSPs will usually be most useful in connection with employee share plans under which the contributions are relatively small.
• Most EPSP employee share purchase plans seem to be “out of profit” EPSPs under which the employer can base contributions on a percentage of employee earnings or a dollar amount.

Conclusions regarding an arrangement under which the resident corporate employer settles shares of its capital on a trust for the benefit of specific employees (free of charge to them), with the employees’ entitlements vesting after a specified period of employment, include:

• Since such trust is not a fully discretionary trust and allocations to the trust are for specific employees, the requirement in s. 7(1) for there to be an agreement to issue securities should be met, so that the s. 7 rules as modified by s. 7(2) can apply.
• In the non-CCPC context, such a trust does not provide material advantages over a traditional employee stock option structure.
• In the CCPC context this type of arrangement can be beneficial in that the clock starts running once the trust acquires the shares regarding both the s. 110(1)(d.1) 50% deduction and the hold period required to access the employee’s lifetime capital gains deduction for qualified small business corporation shares, even though vesting does not occur until three years later – and, conversely, If the vesting conditions are not met and the shares are forfeited back to the corporation, the s. 8(12) deduction to offset the s. 7 inclusion is available in the same year such employment benefit is recognized.
• However, uncertainty of tax treatment of distributions of shares or proceeds realized by the trust on a sale of shares (regarding whether and to what extent in this regard the s. 7 rules should prevail over the EBP regime) materially impacts the utility of this structure.

Various considerations for structuring a market maker trust (i.e., a trust established by the private corporate employer, with itself as beneficiary, to effect purchases and sales of shares of employees other than specified employees so as to give them capital gains rather than deemed dividend treatment) are discussed.

Neal Armstrong. Summaries of Elizabeth Boyd and Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper under s. 248(1) – employee benefit plan, s. 144(4), s. 144(7.1), s. 144(9). s. 144(3), s. 7(6), s. 7(2), s. 8(12) and s. 15(2.5).