25 August 1992 External T.I. 9222975 F - Employee Investment 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.

Attention:  19(1)

August 25, 1992

Dear Sirs:

Re: Employees Share Savings Plan

We refer to your letter of July 23, 1992, and the enclosures thereto, in which you requested our views as to whether employees of 24(1) would be entitled to receive capital gains treatment, and not be subject to the deemed dividend provisions of subsection 84(3) of the Income Tax Act (the "Act"), in relation to transactions which would take place within the proposed structure of an employees share savings plan (the "Plan"), which would permit employees of

24(1)

24(1)

Opinions

It is our opinion that the sale of the Plan Shares to Newco by an employee who participates in the Plan would result in a tax benefit, within the meaning of subsection 245(1) of the Act, to the employee.  We are also of the opinion that the transaction which results in the tax benefit is an avoidance transaction within the meaning of paragraph 245(3)(b) of the Act, since such transaction could not reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. 

Consequently, it is our view that the provisions of subsection 245(2) of the Act would apply to deny the tax benefit that would result from the series of transactions referred to above unless it may reasonably be considered that the particular transaction which gives rise to the tax benefit would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act, read as a whole, within the meaning of subsection 245(4) of the Act. 

The Act contains several provisions designed to prevent the conversion of dividend or other income into proceeds of disposition of property.  As is more specifically described in paragraph 25 of Information Circular 88-2, two of these provisions, sections 84.1 and 183.1 of the Act, indicate the circumstances under which amounts received by a shareholder from a corporation on the disposition of shares or other property are to be accounted for as a dividend, and subsection 245(2) of the Act would be applied to give this result if a particular transaction or series of transactions had the effect of avoiding the provisions in question. 

In the circumstances described in your letter and the enclosures thereto, it would appear that neither section 84.1 nor section 183.1 of the Act would apply to the Plan, and consequently, it could not be said that these provisions have been improperly avoided in the manner contemplated in paragraph 25 of Information Circular 88-2.  Consequently, we are of the view that the provisions of subsection 245(2) of the Act would not generally be applicable to the Plan. 

At this time, we would also mention that if Newco could be considered to be acting as agent for 24(1) in the acquisition of the Plan Shares, and this of course is a question of fact, then we would be of the opinion that by virtue of the law of agency, 24(1) would be considered to have redeemed the Plan Shares at the time they would be acquired by Newco.  Consequently, an employee who disposed of Plan Shares to Newco would be deemed to have received a dividend pursuant to subsection 84(3) of the Act to the extent that the amount paid to the employee by Newco exceeds the paid-up capital of the Plan Shares held by the employee.

The opinions expressed in this letter are given only in relation to the  question of whether any provision of the Act may apply to deem an employee of 24(1) to have received a dividend at the time he would dispose of his Plan Shares, and are not intended to imply that the Department would not have any concerns under any other provision of the Act which may apply to the Plan.  Also, as stated in paragraph 21 of Information Circular 70-6R2 dated September 28, l990, the opinions so expressed are not rulings and are consequently not binding on the Department.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch