4 October 1994 External T.I. 9421415 - EMPLOYEE SHARE OWNERSHIP 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.

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.

Principal Issues:

Tax consequences in particular situations relating to Employee Share Ownership Plan.

Position TAKEN:

Cannot provide tax consequences as it depends on the facts of the particular case.

Provided general comments on subsection 7(6). Where employer contributions can only be used to buy shares on the open market section 7 does not apply as the employer did not agree to sell or issue shares of its capital stock.

Reasons FOR POSITION TAKEN:

File 930689 dated January 6, 1994

					5-942141
XXXXXXXXXX							A. St-Amour

Attention: XXXXXXXXXX

October 4, 1994

Dear Sirs:

Re: Employee Share Ownership Plan ("ESOP")

This is in response to your letter of August 22, 1994 in which you requested the tax consequences on the above plan as it relates to factual situations.

The tax implications of participating in a particular ESOP are addressed by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

There are no provisions in the Income Tax Act (the "Act") which specifically deal with ESOP. The tax implications vary depending on the intent and terms of the particular plan. It is the Department's position that generally section 7 of the Act will not be applicable when there is a plan set up that will acquire shares of the employer only from the market. In such plans there is no agreement by the employer "to sell or issue shares".

Subsection 7(6) of the Act applies where a corporation has entered into an arrangement with a trustee whereby shares of the capital stock of the corporation are acquired by the trustee to be held in trust for sale to an employee. Paragraph 7(6)(a) of the Act has the effect, for the purposes of section 7 of the Act, of treating an employee who acquires rights under such an arrangement in the same manner as an employee who acquires such rights directly from the corporation. The amount of the benefit received by an employee is calculated under subsection 7(6) of the Act by reference to the value of the shares at the time he acquires them from the trustee. Any tax consequences for the trustee depend on the terms of the particular plan. For instance, you may refer to the Department published Income Tax Ruling ATR-15 (copy attached) which discusses tax implications in a particular situation where subsection 7(6) of the Act applies.

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions do not hesitate to contact us.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch