20 January 1994 External T.I. 9400765 - EPSP'S, EBP'S, GROUP RRSP'S, DPSP'S AS SECTION 7 PLANS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion

Principal Issues:

Whether section 7 applies to EPSP, EBP, DPSP, group RRSP where plan investments in treasury shares take place.

Position TAKEN:

Section 7 does not apply to DPSP's or group RRSP's; it will apply to EPSP's, EBP's and ancillary employer/employee agreements restricting the employee's investments in his RRSP to treasury shares.

Reasons FOR POSITION TAKEN:

See Review Committee submission 930689.

LEGAL:

FINANCE OPINION:

JURISPRUDENCE:

RCT PUBLICATIONS:

HAA NUMBER:

HAA 4735-1

XXXXXXXXXX 940076

Attention: XXXXXXXXXX

January 20, 1994

Dear Sirs:

Re: Contributions by Employer to Various Employee Plans

This is further to your letter of February 21, 1992, and our reply of April 8, 1992 (920552), in which we discussed our position concerning the impact of Placer Dome Inc. v. The Queen (91 DTC 5261) on various plans implemented by employers to benefit their employees. Since that date, the Federal Court of Appeal allowed the Crown's appeal from this decision (92 DTC 6402) and the Federal Court, Trial Division, addressed similar issues in MNR v. Chrysler Canada Ltd. et al. (92 DTC 6346). We wish to take this opportunity to advise you of our position as affected by these two cases.

Your query concerned the denial of a deduction under paragraph 7(3)(b) of the Income Tax Act (the "Act") for employer contributions to various plans (i.e. employees profit sharing plans (EPSP's), employee benefit plans (EBP's), deferred profit sharing plans (DPSP's) and group registered retirement savings plans (RRSP's)). In your submission you described the following facts as common regardless of the plan implemented by the employer:

1)the plan would be on-going

2)there would be regular cash payments by the employer to the custodian or trustee of the plan for the employee contributions

3)the employer would withhold employee contributions from the payroll and pay them on behalf of the employees directly to the trustee

4)the terms of the plan would require the custodian or trustee to use the employer's contribution to acquire common shares of the employer from treasury for the benefit of the employees, and

5)all shares issued from treasury to the custodian or trustee of the plan would be issued for fair market value consideration based on the trading price reported by the listing stock exchange on the date of issue.

(Note that fact 3 is not a prerequisite to a finding that the plan will be treated by the Department in the fashion described below. Payments by the employees may be made directly or through payroll deduction.)

Our position with respect to each of the plans is explained below.

EPSP's

Where an EPSP is structured as a profit sharing plan but has as a purpose the sale or issuance of shares to employees, section 7 of the Act will apply to the extent that employer contributions are used to purchase from treasury shares of the employer or of a corporation with which the employer does not deal at arm's length ("employer shares"). As a consequence, a deduction for the expenses incurred by the employer in connection with the EPSP will be denied pursuant to paragraph 7(3)(b) of the Act. If, however, employer contributions can only be used to purchase employer shares on the open market, section 144 of the Act will apply and an employer deduction allowed to the extent permitted by subsection 144(5) and paragraphs 18(1)(k) and 20(1)(w) of the Act.

In our view, the Federal Court of Appeal in Placer Dome emphasized the need for an employer to incur an expense or be "out-of-pocket" in order that a deduction should flow under the Act. The use of employer contributions by the trustee to acquire treasury shares did not give rise to an expense.

Please see our comments under EBP's below concerning hybrid plans.

EBP's

As decided in Chrysler an EBP under which employees can obtain employer shares will be subject to section 7 of the Act, with the consequential denial of a deduction to the employer under paragraph 7(3)(b). The case dealt with a plan to which treasury shares of the employer's parent were contributed and the cost of the treasury shares was reimbursed by the employer to the parent.

Chrysler will apply to those EBP's where treasury employer shares are acquired through employer contributions. If an EBP restricts the use of employer contributions to the purchase of employer shares on the open market, subsection 32.1(1) of the Act will apply to allow the employer a deduction. Hybrid plans, as described in ATR-17, will continue to be treated as described in that publication.

DPSP's

Although DPSP's can invest in employer shares, it is our view that the provisions of section 147 of the Act are more specific than those contained in section 7 of the Act and, therefore, applying the rationale in Chrysler, section 147 takes precedence. Employer deductions in accordance with subsection 147(8) and paragraph 20(1)(y) of the Act will be permitted.

RRSP's

Only a trusteed RRSP as described in clause 146(1)(j)(ii)(A) of the Act can invest in employer shares. As defined therein, such an arrangement is between the trust company and the annuitant. Section 7 of the Act requires that there be an agreement by the employer to issue or sell employer shares and, in our view, any such agreement will not form part of the RRSP arrangement. The relationship between the employee and the trustee under a group RRSP will be unaffected by section 7. All third-party contributions to RRSP's, including employer contributions, are subject to the employee's RRSP deduction limit and may give rise to the Part X.1 tax relating to over-contributions.

An ancillary arrangement between the employer and employee whereby the employee agrees that all employer contributions to the employee's RRSP will be used to purchase employer shares will be subject to section 7 with the result that, if treasury shares are purchased by the trustee or contributed directly by the employer into the RRSP trust, the employer will be denied a deduction under paragraph 7(3)(b) of the Act. The employee would be subject to tax under paragraph 7(1)(a) with respect to such employer contributions.

The foregoing comments are an expression of opinion only and are not binding on the Department. We trust, however, that they are helpful.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate