13 May 1997 Internal T.I. 9710997 - T4PS, CAPITAL GAIN EXEMPTION

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:

Can a beneficiary of an EPSP claim the capital gains exemption with respect to gains reported on a T4PS?

Position:

Yes, if conditions satisfied.

Reasons:

Situation would rarely apply and it would be difficult to differentiate treatment between EPSP trust and personal trust rules.

				May 13, 1997

	TORONTO NORTH TAX SERVICES	HEADQUARTERS
G. Troy, Interim Director	M.P. Sarazin
(613) 957-3499
	Attention: K. Ho
			971099

EPSP and Capital Gains Exemption

This is in reply to your telephone request of April 21, 1997, wherein you asked for our comments regarding the automatic disallowance of the capital gains exemption with respect to capital gains reported on T4PS Supplementary slips. In this regard, we acknowledge receipt of the facsimile from XXXXXXXXXX dated April 23, 1997, wherein they provided us with a copy of a technical interpretation (#5-943213) issued by this Directorate suggesting that a capital gain reported on a T4PS could be eligible for the capital gains exemption. You would like to know whether the capital gains reported on the T4PS qualify for the capital gains exemption under subsection 110.6(2.1) of the Income Tax Act (the "Act").

Where a capital gain reported on a T4PS relates to shares of a qualified small business corporation and the particular employee profit sharing plan ("EPSP") qualifies as a personal trust, the capital gain reported on the T4PS Supplementary slip would qualify for the capital gains exemption under subsection 110.6(2.1). However, the determination of whether each of the conditions is met is a question of fact that could only be determined after a review of all of the facts relating to the particular situation. The expression "qualified small business corporation share" has the meaning assigned by subsection 110.6(1) of the Act.

We would also note that this situation would be very rare because the acquisition of shares of a non-arm's length qualified small business corporation would normally result in the application of section 7 of the Act. With the application of section 7, an employer would be denied any deduction for the contribution to the EPSP trust which is used to acquire the shares and the employee would only be taxed on any benefit resulting from such contribution to the EPSP trust at the time that the shares are disposed of. In addition, an EPSP trust would not generally acquire shares of an arm's length qualified small business corporation because of the high risk and the liquidity problems associated with such investments.

We trust the above comments will be of assistance to you.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch