22 February 1990 Ministerial Correspondence 59554 F - Definition of Designated Shareholder - Meaning of "Any Group of Employees"

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.

February 22, 1990

Dear Sirs:

This is in reply to your letter dated January 12, 1990 in which you requested clarification of this Department's interpretation of "any group of employees" as used in paragraph (d) of the definition of "designated shareholder in subsection 4901(2) of the Income Tax Regulations ("Regulations"), and provided the following two examples for our consideration.

     In the first example, a Canadian-controlled private corporation ("CCPC") has implemented an employee share ownership plan, and several employees own voting shares while another unrelated employee owns 49% of the voting shares while another unrelated employee owns 5% of the voting shares.  The remaining voting shares are widely held with no individual employee owning more than 2% of the shares.

     In the second example, a CCPC has implemented an employee share ownership plan, and the shares of the corporation are held by a group of 50 unrelated employees, each of whom owns 2% of the voting shares of the corporation.

Our comments follow.

We are of the view that it is a question of fact whether a group of employees controls the relevant corporation under paragraph (d) of the definition of "designated shareholder" in subsection 4901(2) of the Regulations.  Further, unlike the acquisition of control rule in subsection 111(50 of the Income Tax Act ("Act") referred to in your letter, the designated shareholder rules in subsection 4901(2) of the Regulations may apply at any time.

In example one, it is our view that all of the shareholder/employees would be designated shareholders or the corporation within the meaning of subsection 4901(2) of the Regulations unless the corporation is factually controlled by the shareholder/employee who owns 49% of the voting shares.  This latter point can only be determined by an examination of the facts of the situation at a particular time.

In example two, it is our view that all of the shareholder/employees would be designated shareholders of the corporation within the meaning of subsection 4901(2) of the Regulations.

Concerning your request for an advance income tax ruling on the group of employees issue, as indicated in paragraph 14(1) of Information Circular 70-6R, we do not rule on questions of fact.

You suggested that "Form a policy perspective, it seems that the Department would not want to encourage employees to acquire an equity interest in their employer through employee share ownership plan incentives, while denying them the ability to contribute those shares to a self-directed RRSP."  Since tax policy is the responsibility of the Honourable Michael H. Wilson, Minister of Finance, we suggest that you pursue your concerns on this issue by writing to relevant officials in his Department for their consideration.

We trust that our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate