12 August 1998 External T.I. 9814555 - TRANSFER OF INTEREST IN AN EPSP

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:

On the spin off of an operating division of an employer to an arm’s length party, the new employer will create an EPSP for the benefit of the transferred employees. Can a portion of the existing EPSP be transferred to this new EPSP without triggering any capital gains recognition’s.

Position:

The transfer of the property may not result in a “disposition” of the property as that term is defined for purposes of the Act in section 54 of the Act, if there is no change in the beneficial interest in the property. This is a question of fact. Any exempt capital gains balance in the existing trust in respect of the employees would likely be lost to the employees.

Reasons:

Application of the relevant portions of the Act.

XXXXXXXXXX 		981455
W. C. Harding

Attention: XXXXXXXXXX 

August 14, 1998

Dear Sirs:

Re: Transfers of property between Employee Profit Sharing Plans (“EPSP’s”)

This is in reply to your letter of June 3, 1998 in which you requested our views on whether any capital gains would be recognized on the transfer of property from one EPSP to another in a situation where employees are transferred between employers on the transfer of a business between arm’s length employers.

Since your letter appears to deal with a factual situation, we are unable to address your specific concerns in a general letter of opinion. Proposed transactions may only be considered when they are presented in the form of a request for an advance income tax ruling and only where the request is made in the manner set out in the Department's Information Circular 70-6R3. Nevertheless we can provide the following general comments which may be of assistance.

A transfer of property held in a trust governed by an EPSP for the benefit of a group of employees, to another trust for the benefit of the same employees may result in a “disposition” of the property as that term is defined for purposes of the Income Tax Act (the “Act”) in section 54 of the Act, if there is a change in the beneficial ownership of the property being transferred. However, this would be a question of fact and one that could not be considered in the absence of all relevant information.

We would also like to note that, in our opinion, if a capital gains election had been made, any exempt capital gains balance in respect of the employees in the existing trust would not be transferable to the new trust in such a situation. Furthermore, this fact alone could be sufficient to result in a change of beneficial ownership of the property on the transfer.

We trust these comments are satisfactory to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate