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 84.1 applies to deem a dividend in employee buyco structures
Position: It is our view that, generally, the employees and the Buyco are not dealing at arm's length.
Reasons: Previous positions and jurisprudence.
2012 Canadian Tax Foundation Annual Conference CRA Panel
November 2012
Recent files of interest
Employee "Buyco" Rulings
In the late 1990s and early 2000s, advance income tax rulings were issued on transactions which were designed to allow departing employee/shareholders of private corporations to realize a capital gain, as opposed to a deemed dividend, on the disposition of their shares.
In a typical transaction, employees of a corporation ("Opco") would have received Opco shares as incentives under an Opco employee share ownership plan ("ESOP"). Under the terms of the ESOP, on retirement or other termination of employment, the employees would be required to dispose of these shares.
To facilitate the disposition, Opco would incorporate and fund another corporation ("Buyco"). Buyco would use those funds to purchase the departing employee's Opco shares.
In the advance income tax rulings issued in respect of these transactions, we had provided assurance that section 84.1 of the Income Tax Act would not apply to deem departing employees to receive a dividend on the disposition of their Opco shares. However, this assurance was based on representations that the employees would deal at arm's length with Buyco and that Buyco was not an agent of Opco.
In our opinion, given the degree of accommodation provided by Buyco to the departing employees and the parties' lack of separate interests, the better view is that the employees and Buyco are generally not dealing at arm's length. This view is consistent with several of our published documents (2007-0243171C6, 2002-0166655, and 2004-0103061E5) as well as the jurisprudence (Petro-Canada v. The Queen (2003 DTC 94) (confirmed by the Federal Court of Appeal (2004 DTC 6329)) and RMM Canadian Enterprises Inc. et al. v. The Queen (97 DTC 302)). Accordingly, in ruling requests on this type of transaction, considered in 2012, we refused to confirm that section 84.1 would not apply to deem employees to receive a dividend from a Buyco on the disposition of their Opco shares.
Katie Campbell
2013-047940
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