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.
Principal Issues: Whether shares of a company given by the primary shareholder and director of a company to an employee for doing a good job is a taxable benefit.
Position: Question of fact, but likely yes.
Reasons: Paragraph 6(1)(a) includes in employment income "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, ..."
XXXXXXXXXX T. Young, CA
2004-005648
February 18, 2004
Dear XXXXXXXXXX:
Re: Gift of Shares
We are writing in response to your letter of January 8, 2004, wherein you asked us to clarify our position in technical interpretation letter E2003-0038897, wherein we commented on the taxation of a gift of shares of a corporation from the principal shareholder to an employee. We also acknowledge our conversations (Young / XXXXXXXXXX) of November 13, 2003, and January 30, 2004. You also asked us if our conclusion would be different if the recipient of the shares were not an employee of the corporation.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. It is our understanding your query relates to a completed transaction involving one of your clients. However, we are prepared to provide the following comments, which may be of assistance to you.
We confirm that in the scenario outlined in your letter, the employee will be in receipt of a taxable benefit equal to the fair market value ("FMV") of the shares, the employee's adjusted cost base ("ACB") of the shares will be equal to their FMV, and the principal shareholder will have a disposition of the shares with proceeds of disposition equal to their FMV. There is no provision in the Income Tax Act to increase the employee's ACB beyond the FMV of the shares to account for the fact that the shareholder has also been taxed on the disposition of the shares.
We agree that there would have been a different income tax result had the corporate employer paid a bonus to the employee and the employee used the funds to acquire shares in the company.
Without sufficient facts, we are unable to provide general comments on the tax implications of a hypothetical situation where a shareholder of a corporation gifts shares in the corporation to another shareholder.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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