Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Where an employer contributes to a trust established for the benefit of its employees and the trust uses the contributions to acquire treasury shares of a corporation related to the employer, would section 7 apply to the plan or arrangement?
Position: Yes.
Reasons: There is an agreement to sell or issue shares of the employer or of a corporation related to the employer.
XXXXXXXXXX 2000-004188
M. P. Sarazin
Attention: XXXXXXXXXX
October 24, 2000
Dear Sirs:
Re: Section 7 and Proposed Employee Benefit Plan
This is in reply to your letter of August 4, 2000, requesting our views regarding the application of section 7 of the Income Tax Act (the "Act") to a proposed employee benefit plan.
In your letter you have outlined what is an actual fact situation related to proposed transactions. As noted in Information Circular 70-6R3 (information circulars and interpretation bulletins are available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html), this directorate can only provide an opinion concerning the tax consequences associated with specific proposed transactions in the form of an advance income tax ruling. Consequently, we can only provide you with the following general comments.
Whether a proposed plan or arrangement would be subjected to section 7 of the Act or be considered an employee benefit plan, within the meaning assigned by subsection 248(1) of the Act, is a question of fact. The Canada Customs and Revenue Agency's general views regarding employee benefit plans are contained in Interpretation Bulletin IT-502. You should also note that Advance Tax Ruling ATR-17 discusses the tax consequences resulting where an employer contributes to a trust and the trust uses the contributions to purchase shares of the employer on the open market.
Where employer contributions to a trust established for the benefit of its employees are used to acquire treasury shares of the employer corporation or a corporation related to the employer corporation, we have concluded that the plan or arrangement will be considered to constitute an agreement to sell or issue shares as contemplated by subsection 7(1) of the Act. Note also the impact of subsection 7(2) of the Act. Therefore, in accordance with paragraph 7(3)(a) of the Act, the employee will incur a taxable benefit under section 7 and not under any other Part I provision and, in accordance with paragraph 7(3)(b) of the Act, the employer will be denied a deduction. This result is in accordance with the judgments in M.N.R. v. Chrysler Canada Ltd. et al. (92 DTC 6346 Federal Court, Trial Division) and The Queen v. Placer Dome Inc. (92 DTC 6402 Federal Court of Appeal).
Where employer contributions to a trust established for the benefit of its employees are used to acquire treasury shares of a corporation related to the employer corporation, the trust holds the shares until there will be a distribution to the employees, the trust acquires shares of the corporation related to the employer corporation on the open market to distribute to the employees and the trust sells the same number of its shares of the corporation related to the employer corporation to pay for the shares acquired on the open market, we would conclude that section 7 of the Act would apply to the plan or arrangement. We believe that this situation does not differ from one described above.
We trust the above comments will be of assistance to you.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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