19 April 1994 External T.I. 9405695 - EMPLOYEE PROFIT SHARING 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.

5-940569
										                                          April 19, 1994

Principal Issues:

Does section 7 apply to an EPSP which uses employer contributions to purchase treasury shares, when the employer has bought its own shares on the open market and cancelled them in accordance with corporate law?

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

See Review Committee submission 930689 (also 5-940074, 5-940075, etc)

XXXXXXXXXX 940569

Attention: XXXXXXXXXX

April 19, 1994

Dear Sirs:

Re: Employee Share Purchase Plans

This is in reply to your letter of March 4, 1994 concerning employer contributions to employee share purchase plans and amounts paid by an employer to purchase its own shares on the open market, in follow-up to our letter to you of January 20, 1994.

Although it is not clear from your letter, we assume your concerns are related to Employees Profit Sharing Plans ("EPSPs"). You describe a situation where an employer purchases its own shares on the open market, cancels the shares in accordance with corporate law, and then reissues the shares to an EPSP. The employer would make a cash contribution to the EPSP to enable it to purchase the treasury shares.

In your view paragraph 7(3)(b) of the Income Tax Act (the "Act") should not apply to the amounts paid by the employer to the EPSP. We disagree. In our opinion, the employer is agreeing to sell or issue shares of its own capital stock as provided in section 7 of the Act. It is also our view that section 7 would be more specific than section 144 of the Act in its application. As stated in our January 20 letter, "...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")". Accordingly, the employer would be denied a deduction pursuant to paragraph 7(3)(b) of the Act.

As you are aware, the purchase by the employer of its own shares on the open market is also not deductible.

In contrast, if employer contributions can only be used to purchase, on the open market, employer shares and the EPSP purchases those shares, section 7 of the Act will not apply.

Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate