14 November 2013 External T.I. 2013-0500641E5 - Subsections 7(6) and 153(1) - Withholding

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: Where an arrangement described in subsection 7(6) of the Income tax Act (the "Act") exists, is it the employer/corporation or the trustee who has the obligation to withhold tax for purposes of subsection 153(1) of the Act?

Position: The corporation/employer.

Reasons: The provisions of subsections 7(6), 7(1), 153(1.01) and 153(1) of the Act.

XXXXXXXXXX
2013-050064
G. Allen

November 14, 2013

Dear XXXXXXXXXX:

Re: Subsections 7(6) and 153(1) – Withholding Tax Obligation

This letter is in response to your emails of August 7 and 8, 2013 concerning the withholding tax obligations under subsection 153(1) of the Income Tax Act (the "Act") in a situation where an arrangement described in subsection 7(6) of the Act exists. Specifically, you enquire whether the obligation to withhold tax rests with the corporation/employer or the subsection 7(6) trust.

Unless otherwise stated in this letter, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Suppl.), as amended to the date of this letter.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Our Comments

In general, subsection 7(6) provides that where a corporation has entered into an arrangement where the corporation's shares are issued or sold to a trustee to be held for sale to the corporation's employees, for purposes of section 7 and paragraphs 110(1)(d) and (d.1), the following apply:

(i) the arrangement is deemed to be a section 7 agreement to issue shares between the corporation and the corporation's employee;
(ii) shares acquired under the arrangement are deemed to be acquired under the section 7 agreement, and
(iii) amounts paid to the trustee under the arrangement by the employee are deemed to be paid to the corporation under the section 7 agreement.

Subsection 153(1.01) provides that amounts deemed to be received by a taxpayer under paragraphs 7(1)(a) to (d.1) are remuneration for purposes of paragraph 153(1)(a). Paragraph 153(1)(a) requires every person paying salary, wages, or remuneration to withhold and remit the appropriate amount of tax to the Receiver General.

Although under an arrangement described in subsection 7(6) a trustee will sell a corporation's shares to the corporation's employees, the provisions of subsection 7(6) make it clear that the arrangement is deemed to be a section 7 agreement to issue shares. Accordingly, the employment benefit being conferred on the corporation's employees for purposes of section 7, and which must be included in the employee's income as salary, wages or remuneration in accordance with subsection 6(1), is being conferred by the corporation and not the trustee. As a result, in our view, the corporation is paying the section 7 employment benefit as remuneration for purposes of paragraph 153(1)(a) and therefore, the corporation has the obligation to withhold and remit the appropriate amount of tax.

We trust that our comments will be of assistance.

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch