13 September 1989 Income Tax Severed Letter 58438 F - Employee Share Purchase Plan

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.

Subject:  24(1) Employee Share Purchase Plan (the "Plan")

Further to our meeting with 19(1) on August 23, 1989, we are writing to confirm the income tax consequences of the Plan.

At the taxpayer's request we have reviewed the provisions of the Plan again.  Based upon our review, we confirm our previous position that the Plan will be governed by the provisions of Section 7 of the income Tax Act (the "Act") to the extent that the Company's contributions can reasonably be considered to have been used to purchase shares out of treasury.  As a consequence thereof, the benefit conferred upon the employees by virtue of the Company's contributions will be included in their income under paragraph 7(1)(a) of the Act at the time when the trust commenced to hold the shares for the employees.  Furthermore, the Company's costs will not be deductible pursuant to subsection 7(3) of the Act.

To the extent that the Company's contribution may reasonably be considered to have been used to purchase shares on the open market, it is our view that this amount will be taxable in the employee's income at the time the shares vested in the employee pursuant to paragraph 6(1)(g) of the Act and deductible to the Company, at that time, to the extent permitted by section 32.1 of the Act.  Our review of the Plan indicates that the shares vest in the employees at the time the trustee acquires the shares.  The distribution of the shares to the employees will be subject to the rules contained in section 107.1 of the Act.

The taxpayer contends that the Plan is an employee savings or thrift plan and therefore excluded from the rules governing Employee Benefit Plans ("EBP").  Interpretation Bulletin 502 states that in order for an employee savings or thrift plan not to be an EBP, the plan must be structured in such a way that the employer's contribution is a payment of salary which is paid to the plan at the direction of the employee.  Pursuant to the provisions contained in the Plan, it is our view that the Company's contribution does not represent a payment of salary since the employee is not entitled to receive this amount directly.  We direct your attention to Article IV of the Plan wherein it states that the Company's contribution will be paid by the Company to the trustee of the Plan.  While the Plan does accord the employee the right to withdraw cash in certain circumstances, this provision, in itself, will not exclude the Plan from the EBP rules.

The taxpayer further contends that the Plan would be excluded from the EBP rules by virtue of the parenthetical clause contained in the definition of EBP under subsection 248(1) of the Act "(other than a payment that, if section 6 were read without reference to subparagraph (1)(a)(ii) and paragraph (1)(g) thereof, would not be required to be included in computing the income of the recipient)". Based upon our review of our files, we have concluded that this parenthetical clause is a "fail-safe" provision designed to ensure that, should some payment that should not be taxable be found to be taxable under the definition of EBPs, this clause will restore the payment to a non-taxable status.  In our view, this clause has no applicability in respect of the Plan.

Consistent with the foregoing comments, it is our opinion that the rules under section 7 of the Act will apply to the extent that the shares are purchased from the Company and EBP rules will apply to the extent that the shares are purchased on the open market.

We trust that the above comments will be of assistance to you.

for DirectorFinancial Industries DivisionRulings Directorate