8 November 1989 Ministerial Letter 74488 F - Tax Executive Institute Conference

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:  Tax Executive Institute Conference

Attached is our suggested reply to the questions submitted to us relating to the taxation of stock purchase plans.

for Director Financial Industries Division Rulings Directorate

Vancouver District OfficeTax Executive Institute Conference

Question:

Large public companies have employee share purchase plans as an incentive to keep long-term employees. Under such a plan, an eligible employee can decide, on an annual basis, to use a percentage of his salary through the plan to purchase the company's shares from the market or from treasury at the market price.  If an employee chooses to do so, the company will also contribute a fixed percentage to buy the company's shares for that employee.  The shares acquired with the employer's contribution are usually subject to a vesting period of two years. After that period the company's shares will be vested in the employee and the employee can either take the shares out of the plan or leave them in.

Can the Department confirm an arrangement as described above will not be treated as a salary deferral arrangement as defined in subsection 248(1)?

How will the employee be taxed on the benefits received under the share purchase plan?

Answer:

Based on the facts provided above, it is our view that the plan would not be a salary deferral arrangement since the deferral of taxes would not be one of the main purposes of the arrangement.

To the extent that the Company's contributions can reasonably be considered to have been used to purchase shares from treasury, it is the Department's position that the provisions of section 7 of the Income Tax Act (the "Act") will be applicable to the Plan. As a consequence thereof, the benefit conferred on the employees by virtue of the Company's contributions will be included in their incomes under paragraph 7(1) of the Act at the time the shares are acquired by the trust and the Company's contribution will not be deductible pursuant to subsection 7(3) of the Act.

Where the Company's contributions are used to purchase shares from the market, it is our view that the plan would be an employee benefit plan and an employee would be required to report the benefit at the earliest of the date the shares vested indefeasibly and the shares were given to the employee. The provisions of section 32.1 of the Act would be applicable in determining the Company's deduction with respect to the contribution.